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DESCRIPTIONReading & Understanding Basic Financial Statements …make better use of the information in financial statements. Lewis & Knopf CPAs, P.C. AICPA MACPA Builders Association of Metro Flint Flint, Fenton & Grand Blanc Chambers of Commerce West Flint Business Association. - PowerPoint PPT Presentation
Reading & Understanding Basic Financial Statementsmake better use of the information in financial statements
Lewis & Knopf CPAs, P.C.AICPAMACPABuilders Association of Metro FlintFlint, Fenton & Grand Blanc Chambers of CommerceWest Flint Business Association
Lewis & Knopf CPAs, P.C.Services Include:Profitability and Efficiency AnalysisProjections and Business PlansBusiness ValuationsAuditing & AssuranceEstate and Gift PlanningTax Planning and PreparationTraditional Accounting, Bookkeeping and Payroll Services
AgendaPurpose of financial statementsThe Balance SheetThe Income StatementStatement of Retained EarningsStatement of Cash FlowsNotes to the financial statementsFundamental concepts and assumptionsAccrual vs. cash-basis accountingStandards for comparisonTools of analysis
Primary Financial StatementsBasic financial statements:Balance SheetIncome Statement Statement of Retained EarningsStatement of Cash Flows
Primary Financial StatementsPrimary financial statements answer basic questions including:What is the companys current financial status?What was the companys operating results for the period?How did the company obtain and use cash during the period?
Summary of the financial position of a company at a particular dateAssets: cash, accounts receivable, inventory, land, buildings, equipment and intangible itemsLiabilities: accounts payable, notes payable and mortgages payableOwners Equity: net assets after all obligations have been satisfiedThe Balance Sheet
The Balance SheetWhat are the resources of the company?What are the companys existing obligations?What are the companys net assets?
Accounting EquationAssets = Liabilities + Owners EquitySources of FundingCreditorsclaimsagainstresources=+OwnersclaimsagainstresourcesResources
Resources to use to generate revenues
AssetsCash $ 40Accounts receivable 100Land 200 Total assets$340Sample Balance SheetMust Equal
Classified and Comparative Balance SheetsThey distinguish between:Current and long-term assetsCurrent and long-term liabilitiesListed in decreasing order of liquidityComparative so financial statement users can identify significant changes over time. They have more than one year on the Balance Sheet.
Balance Sheet LimitationsAssets recorded at historical valueOnly recognizes assets that can be expressed in monetary terms Owners equity is usually less than the companys market value
The Income StatementShows the results of a companys operations over a period of time.What goods were sold or services performed that provided revenue for the company?What costs were incurred in normal operations to generate these revenues?What are the earnings or company profit?
The Income StatementRevenuesAssets (cash or AR) created through business operationsExpensesAssets (cash or AP) consumed through business operationsNet Income or (Net Loss)Revenues - ExpensesMcGraw-Hill/Irwin, 2003
The Example CompanyIncome StatementFor the Years Ended December 31, 2010 and 2011
20112010Revenues:Sales$100$ 85Other revenue 30 15 Total revenues$130$100
Expenses:Cost of goods sold$ 62$ 58Operating & admin.1612Income tax 20 18 Total expenses$ 98$ 88
Net Income$ 32$ 12
An additional financial statement that identifies changes in retained earnings from one accounting period to the next.Statement of Retained Earnings
Statement of Cash FlowsReports the amount of cash collected and paid out by a company in operating, investing and financing activities for a period of time.How did the company receive cash?How did the company use its cash?Complementary to the income statement.Indicates ability of a company to generate income in the future.
Statement of Cash FlowsCash inflowsSell goods or servicesSell other assets or by borrowingReceive cash from investments by owners
Cash outflowsPay operating expensesExpand operations, repay loansPay owners a return on investment
Match Classification ofCash FlowsOperating activities Transactions and events that enter into the determination of net income.Investing activities Transactions and events that involve the purchase and sale of securities, property, plant, equipment, and other assets not generally held for resale, and the making and collecting of loans.Financing activities Transactions and events whereby resources and obtained from, or repaid to, owners and creditors.
Operating ActivitiesCash InflowSale of goods or services Sale of investments in trading securitiesInterest revenueDividend revenueCash OutflowInventory paymentsInterest paymentsWagesUtilities, rent Taxes
Investing ActivitiesCash InflowSale of plant assetsSale of securities, other than trading securitiesCollection of principal on loansCash OutflowPurchase of plant assetsPurchase of securities, other than trading securitiesMaking of loans to other entities
Financing ActivitiesCash InflowIssuance of own stockBorrowingCash OutflowDividend paymentsRepaying principal on borrowingTreasury stock purchase
CASH OUTFLOWSCASH INFLOWSStatement of Cash Flows
Statement of Cash Flows AnalysisOperatingInvestingFinancingGeneral ExplanationBuilding up pile of cash,Possibly looking forAcquisition
Operating cash flow beingUsed to buy fixed assetsAnd pay down debt
Operating cash flow and sale of fixed assets being used to pay down debt.
Operating cash flow and borrowed money being used to expand1.
Statement of Cash Flows AnalysisOperatingInvestingFinancingGeneral ExplanationOperating cash flow problems covered by sale of fixed assets, borrowing and owner contributions.
Rapid growth, short falls in operating cash flow; purchase of fixed assets.
Sale of fixed assets is financing operating cash flow shortages.
Company is using reserves to finance cash flow short falls.5.
The Example CompanyStatement of Cash FlowsDecember 31, 2011Cash Flows From Operating Activities:Receipts 48 Payments (43)5
Cash Flows From Investing Activities:Receipts0 Payments(4)(4)
Cash Flows Used By Financing Activities:Receipts10 Payments (6) 4 Net Cash Flow5
Balance Sheet 12/31/10Cash $ 80,000Other 4,550,000 Total $4,630,000
Liabilities $2,970,000Cap. stock 900,000R/E 760,000 Total $4,630,000
Cash $ 110,000Other 4,975,000 Total $5,085,000
Liabilities $2,860,400Cap. stock 1,000,000R/E 1,224,600 Total $5,085,000
Balance Sheet 12/31/11R/E 12/31/10 $ 760,000Net income 864,600Dividends (400,000) R/E 12/31/11 $1,224,600Stmt of Retained Earnings
Notes to the Financial StatementsNotes are used to convey information required by GAAP or to provide further explanation.
Notes to the Financial StatementsFour general types of notes:Summary of significant accounting policies: assumptions and estimates.Additional information about the summary totals.Disclosure of important information that is not recognized in the financial statements.Supplementary information required by the FASB or the SEC.
Separate Entity ConceptArms-Length TransactionsCost PrincipleMonetary Measurement ConceptGoing Concern AssumptionWhat Are The Fundamental Concepts and Assumptions?
Entity The organizational unit for which accounting records are maintained.
Separate entity concept The activities of an entity are to be separate from those of its individual owners.ProprietorshipPartnershipCorporationSeparate Entity Concept
The Cost PrincipleAll transactions are recorded at historical cost.Historical cost is assumed to represent the fair market value of the item at the date of the transaction because it reflects the actual use of resources by independent parties.
The Monetary Measurement ConceptAccountants measure only those economic activities that can be measured in monetary terms.Listed values may not be the same as actual market values:InflationMeasurement issues
The Going Concern AssumptionAn entity will have a continuing existence for the foreseeable future.
Why Use Accrual Accounting?GAAP Generally Accepted Accounting PrinciplesBusiness requires periodic, timely reportingAccrual-basis accounting better measures a firms performance than does cash flow data.
The Time Period ConceptThe life of a business is divided into distinct and relatively short time periods so the accounting information can be timely, generally 12 months or less.
Define Accrual AccountingA system of accounting in which revenues and expenses are recorded as they are earned and incurred, not necessarily when cash is received or paid.Provides a more accurate picture of a companys profitability.Statement users can make more informed judgments concerning the companys earnings potential.
Revenue RecognitionRevenues are recorded when two main criteria are met: Cash has either been collected or collection is reasonably assured.The earning process is substantially complete
The Matching PrincipleAll costs and expenses incurred in generating revenues must be recognized in the same reporting period as the related revenues.This process of matching expenses with recognized revenues determines the amount of net income reported on the income statement.costs and expensesrelated revenues