Accounting Fundamentals Course Presentation, Lecture notes of Corporate Finance

Download Accounting Fundamentals Course Presentation and more Lecture notes Corporate Finance in PDF only on Docsity! Accounting Fundamentals People CRA) Constructing a Balance Sheet corporatefinanceinstitute.com 01. corporatefinanceinstitute.com The balance sheet Total Assets Total liabilities & equity Non-current assets Last more than a year e.g. property, plant and equipment, technology, patents, trademarks Current assets Used within one year e.g. cash, inventory, accounts receivable Current liabilities Due within one year e.g. accounts payable Shareholders’ equity e.g. common shares and retained earnings Non-current liabilities Due in more than a year e.g. long-term debt corporatefinanceinstitute.com Balancing the balance sheet A balance sheet must always balance Assets Liabilities & Equity To ensure this is the case, all transactions are recorded in the balance sheet in two places. Double Entry Accounting corporatefinanceinstitute.com Balancing the balance sheet Two options: 01. Record the transaction on both sides of the balance sheet 02. Record the transaction twice on the same side of the balance sheet as both positive and negative number Assets Current assets Cash Non current assets (100) Total Assets (100) Liabilities & Shareholders’ Equity Current liabilities Short-term debt (100) Non current liabilities Shareholders’ equity Total Liabilities & SE (100) Assets Current assets Cash Non current assets Equipment (100) 100 Total Assets 0 Liabilities & Shareholders’ Equity Current liabilities Non current liabilities Shareholders’ equity Total Liabilities & SE 0 corporatefinanceinstitute.com Taking out a 4 year bank loan Assets Current assets Cash [100 + 50] 150 Non current assets Total 150 Liabilities & Shareholders’ Equity Current liabilities Non current liabilities 50 Shareholders’ equity Common stock 100 Total 150 corporatefinanceinstitute.com Buying a property for 80 Assets Current assets Cash [100 + 50 ]– 80] 70 Non current assets Equipment 80 Total 150 Liabilities & Shareholders’ Equity Current liabilities Non current liabilities 50 Shareholders’ equity Common stock 100 Total 150 corporatefinanceinstitute.com Buying inventory for 60 Assets Current assets Cash [100 + 50 – 80 Inventory 10 60 Non current assets Equipment 80 Total 150 Liabilities & Shareholders’ Equity Current liabilities Non current liabilities 50 Shareholders’ equity Common stock 100 Total 150 ]– 60] corporatefinanceinstitute.com Paying interest of 3 Assets Current assets Cash [100 + 50 – 80 – 60 + 90 – 20 Inventory [60 – 60] 77 0 Non current assets Equipment 80 Total 157 Liabilities & Shareholders’ Equity Current liabilities Non current liabilities Bank loan 50 Shareholders’ equity Common stock Retained earnings Revenues Cost of sales Salaries Interest Total shareholders’ equity 100 7 90 (60) (20) (3) 107 Total 157 corporatefinanceinstitute.com Defining accounts receivable and payable Assets Current assets Cash [100 + 50 – 80 + 90] Inventory [60 – 60] 01 Non current assets Equipment 80 Total 180 Liabilities & Shareholders’ Equity Current liabilities Non current liabilities Bank loan 50 Shareholders’ equity Common stock Retained earnings Revenues Cost of sales Total shareholders’ equity 100 30 90 (60) 130 Total 180 0 ]– 60 corporatefinanceinstitute.com Defining accounts receivable and payable How would our balance sheet look different if the company… Accounts receivable – amounts owed by customers to the company Accounts payable – amounts owed by the company to suppliers • Bought inventory for 60 on credit rather than using cash? • Sold all the inventory for 90 on credit rather than for cash? Constructing an Income Statement corporatefinanceinstitute.com 02. Session objectives corporatefinanceinstitute.com 01. Explain the format of the income statement 03. Prepare a simple Income statement 02. Record transactions In this session we will: corporatefinanceinstitute.com The role of the income statement In principle, it is only necessary for a company to produce a balance sheet. However in practice, the detailed items that make up the retained earnings for the year are shown in the income statement. Income Statement Statement of Operations Statement of Profit and Loss corporatefinanceinstitute.com Creating a full income statement Balance sheet extract Shareholder equity Common stock Retained earnings Revenues Cost of sales Salaries Interest 100 9 0 (60 ) (20) (3) 7 Income statement Revenues Cost of sales 90 (60 ) Gross profit SG&A expenses 30 (20) Operating profit Interest expenses Tax 10 (3) (0) Net profit 7 corporatefinanceinstitute.com Recording income and expenses How much insurance would be included in the income statement? The income statement includes only the revenues and expenses that relate to the accounting year. Example During the last month of the year the company buys insurance for 12 months at a cost of 12,000. corporatefinanceinstitute.com Prepayments What happens to the remaining 11,000? One month of insurance expense on the income statement is 1,000 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | Month 1…. …Month 12 Balance sheet - current asset • Prepaid expense 11,000 Prepayments result if payments are made in advance corporatefinanceinstitute.com 01. Click on the file “Luton Inc. exercise” with instructions Accrual and prepayment exercise 02. Once you’ve had a go, open the file “Luton Inc. solution” Now it’s your turn… corporatefinanceinstitute.com Depreciation Assets Current assets Cash [100 + 50 – 80 – 20 – 3] Accounts receivable Inventory [60 – 60] 4 7 9 0 0 Non current assets Equipment 80 217 Liabilities & Shareholders’ Equity Current liabilities Accounts payable 60 Non current liabilities Bank loan 50 Shareholders’ equity Common stock Retained earnings Revenues Cost of sales Salaries Interest 100 7 90 (60 ) (20) (3) 217 corporatefinanceinstitute.com Depreciation We record an expense called “depreciation”. How would we account for the reduction in value of the equipment as we use it in our operations? Let’s assume that the useful life of this equipment is 4 years, that we can allocate that usefulness evenly over the years of use, and that after 4 years the equipment has a scrap value of 30. Year 1 | Year 2 | Year 3 | Year 4 corporatefinanceinstitute.com Different depreciation methods There are various depreciation methods companies can use: Straight-line Double Declining Balance Units of Production Cost – Salvage value Useful life of asset = 100% x 2 Useful life of asset x Beginning period book value = # of units produced Lifetime # of units x (Cost – Salvage value) = corporatefinanceinstitute.com Different depreciation methods Straight-line approach: an equal amount of depreciation is applied every year for the asset’s useful life. Depreciation Expense = Cost – Salvage value Useful life of asset corporatefinanceinstitute.com Different depreciation methods Double Declining Balance approach: a form of accelerated depreciation where the depreciation expense is greater in the first few years and smaller in the later years. Depreciation Expense = 100% Useful life of asset x 2 x Beginning period book value