7/27/2019 STCh21e

1/11

Introduction To Business 16BUS101

CHAPTER 21: ACCOUNTING FUNDAMENTALS

Layout of Chapter:

1. What is Accounting

2. Types of Accountants

3. The Accounting Cycle

4. The Accounting Equation

5. Analyzing Financial Statements

1. WHAT IS ACCOUNTING

The process of identifying, measuring and communicating economic information to permitinformed decisions by users of the information.

2. TYPES OF ACCOUNTANT

Based on the type of Certification:

CPA (Certified Public Accountant) (i.e. chartered accountant of Bd)

CMA (Certified Management Accountant)

also classified as:

Public Accountant

Private Accountant

3. ACCOUNTING CYCLE

The steps - analyzing, recording, posting and preparing records - by which the results of the

business transactions are communicated.

Journal Account General Ledger Financial Statement

4. THE ACCOUNTING EQUATION

Assets = Liabilities + Owners Equity

This indicates a companys financial position at any point in time.

1

7/27/2019 STCh21e

2/11

Introduction To Business 16BUS101

East West University

INCOME STATEMENT

For the year ended December 31, 2003

Details $ $

Gross Sales 1000

Less: Sales discounts 25

Sales returns 35

( 60)

Net Sales 940

Less: Cost of Goods Sold (COGS) (345)

Gross profit 595

Less: Selling and Administrative expenses

(Advertising, salary, rent, utility, insurance, depreciation, transportation) (165)

EBIT (Earning Before Interest and Tax) 430

Less: Interest expense ( 85)

EBT (Earning Before Tax) 345

Less: Tax (100)

Net Income/ (Loss) 245

2

7/27/2019 STCh21e

3/11

7/27/2019 STCh21e

4/11

Introduction To Business 16BUS101

a) Current Ratio measures the firms ability to pay off current liabilities from its current

assets.

sLiabilitieCurrent

AssetsCurrentRatioCurrent =

b) Quick Ratio

sLiabilitieCurrent

AssetsQucikRatioQuick =

*Where quick asset = Total Current Assets Inventory{When Ratio is 1:1 then it is adequate}

2. Activity Ratio:

Measure of how efficiently assets are being used to generate revenue.

a) Accounts Receivable Turnover

ceivableAccountsNet

SalesNetTurnoverceivableAccounts

Re

Re =

b) Number of Days Sales in Receivable.

TurnoverceivableAccount

YearinDaysof

ceivableinSalesDays

Re

#

Re#

=

3. Profitability Ratio:

Financial Performance

a) Return on Sales

%Re ==

SalesNet

IncomeNetSalesonturn

(Average is 5%)

b) Return on Equity

%Re ==EquityIncomeNetEquityonturn

4

7/27/2019 STCh21e

5/11

Introduction To Business 16BUS101

This Ratio measures the return company earns on every taka of shareholders (owners)

investments.

4. Debt Ratio:

Ability to pay long-term debts.

a)

AssetsTotal

sLiabilitieTotalEquityRatioAssetsTotaltoDebt =

b)

ExpenseInterest

EBITEarnedInterestTime =

EBIT = Earnings before Interest & Tax

5

7/27/2019 STCh21e

6/11

Introduction To Business 16BUS101

PRACTICE ACCOUNTING PROBLEM

1. Dhaka Ltd. exports CK shirts to USA.

Use the following information to prepare

a) An Income Statement for the year ended on 31 December 2001;

b) A Balance Sheet as on 31 December 2001.

(All figures are in Bangladeshi Taka)

Advertising expense 1,500 Building 30,000

Utility 5,000 Capital stock 80,000

Income Tax 1,600 Rent 3,600

Accounts payable (A/P) 12,000 Salary 6,000

Cost of goods sold 15,000 Sales returns 1,000

Retained Earnings (Dec. 31) 1,500 Insurance 600

Transportation 1,300 Wages 2,000

Interest Expense 2,400 Cash 60,000

Accounts receivable 15,000 Inventory 17,500

Land 50,000 Notes payable 20,000

Machinery 20,000 Gross Sales 60,000

Long-term loan 40,000 Short-term loan 19,000

Answer:

Net Income Tk. 20,000

Total Assets Tk.1,92,500

Total Liabilities & Owners Equity Tk.1,92 ,500

6

7/27/2019 STCh21e

7/11

Introduction To Business 16BUS101

Not all the information is required for various calculations. One has to identify which bit of

information is required for what calculation.

For Income Statement, only the information which is directly related to Revenue,

Expenses, Interest and Tax is needed.

For Balance Sheet, you need to isolate the data regarding Assets (Current & Fixed),

Liabilities (Short-term & Long-term), and Equity Capital & Retained Earnings.

(Figures needed in Income Statement)

Gross Sales 60,000

Sales returns 1,000

Cost of goods sold 15,000

Advertising expense 1,500

Utility 5,000

Rent 3,600

Salary 6,000

Insurance 600Transportation 1,300

Wages 2,000

Interest Expense 2,400

Income Tax 1,600

(Figures needed in Balance Sheet)

Cash 60,000Accounts receivable 15,000

Inventory 17,500

Land 50,000

Machinery 20,000

Building 30,000

Accounts payable (A/P) 12,000

Short-term loan 19,000

7

7/27/2019 STCh21e

8/11

Introduction To Business 16BUS101

Notes payable 20,000

Long-term loan 40,000

Capital stock 80,000

Retained Earnings (Dec. 31) 1,500

8

7/27/2019 STCh21e

9/11

Introduction To Business 16BUS101

Dhaka Ltd.

INCOME STATEMENT

For the year ended Dec. 31, 2003

Gross Sales 60,000

Less: Sales returns (1,000)

Net Sales 59,000

Cost of goods sold (15,000)

Gross Profit 44,000

Less: Selling & Administrative ExpensesAdvertising expense 1,500

Utility 5,000

Rent 3,600

Salary 6,000

Insurance 600

Transportation 1,300

Wages 2,000

(20,000)EBIT (Earnings before Interest & Tax) 24,000

Less: Interest Expense (2,400)

EBT (Earnings before Tax) 21,600

Less: Income Tax (1,600)

Net Profit 20,000

9

7/27/2019 STCh21e

10/11

Introduction To Business 16BUS101

Dhaka Ltd.

BALANCE SHEET

At Dec. 31, 2003

ASSETS

Current Asset

Cash 60,000

Accounts receivable 15,000

Inventory 17,500

Total Current Asset 92,500

Fixed AssetLand 50,000

Machinery 20,000

Building 30,000

Total Fixed Asset 100,000

Total Assets 192,500

LIABILITIES

Short-term Liability

Accounts payable (A/P) 12,000

Short-term loan 19,000

Total Short-term Liability 31,000

Long-term Liability

Notes payable 20,000

Long-term loan 40,000

Total Long-term Liability 60,000

Total Liabilities 91,000

OWNERS EQUITY

Capital stock 80,000

Retained Earnings (Dec. 31) 1,500

Add Net Profit 20,000

21,500

Total Owners equity 101,500

Total Liabilities & Owners Equity 192,500

10

7/27/2019 STCh21e

11/11

Introduction To Business 16BUS101

Analyzing Financial Statement of Dhaka Ltd.

1. Current Ratio

98.2000,31

5000,92===

sLiabilitieCurrent

AssetsCurrentRatioCurrent

2. Quick Ratio

41.2000,31

000,75===

sLiabilitieCurrent

AssetsQucikRatioQuick

*Where quick asset = Total Current Assets Inventory

{When Ratio is 1:1 then it is adequate}

3. Return on Sales

%89.333389.000,59

000,20Re or

SalesNet

IncomeNetSalesonturn ===

4. Return on Equity

%70.191970.500,101

000,20Re or

Equity

IncomeNetEquityonturn ===

This Ratio measures the return company earns on every taka of shareholders (owners)

investments.

5. Debt to Assets Ratio

%27.474727.500,192

000,91or

AssetsTotal

sLiabilitieTotalEquityRatioAssetsTotaltoDebt

==

=

6. Time Interest Earned

times

ExpenseInterest

EBITEarnedInterestTime 10

400,2

000,24===

11