Accounting system- - Financial accounting reports - Managerial reports Ways to finance your business- - Organically grow business by having more revenue than expenses - Equity investors (equity refers to ownership): Owners- for a corporation, these are the stockholders Hope to receive dividends and for the stock price to increase but they have no guarantee of either Public vs private - Debt investors- Creditors of the business such as a bank Principal must be repaid Interest must be paid 3 categories of business activities- - Operating: everyday business transactions (including interest expense, dividend revenue) - Investing: transactions involving long-term assets and investments - Financing: transactions involving long term liabilities, stock, dividend payments Current assets- assets the business expects to use within a year Long-term assets- assets the business expects to use beyond 12 months (example- equipment) Securities and Exchange Commission- established in 1934, applies to public companies and they file: - Form 10-K (annually) - Form 10-Q (quarterly) - These are annual financial statements audited by an independent auditor Independent auditor: - Independent of the company they are auditing - Held responsible to investors - Examine financial statements prepared by management and issue their opinion of the financial statements to give assurance to investors (like stockholders, creditors, etc) - Decide whether or not they were prepared fairly and how credible they are Financial statement- Financial snapshot of the company
Generally Accepted Accounting Principles (GAAP)- - Used by all companies based in the US - These standards give the statements credibility and allow reports of different companies to be comparable International Financial Reporting Standards (IFRS)- Accounting standards used in more than 100 countries Companies generally utilize a combination of IFRS and GAAP principles Objective of financial reporting to external users- - To provide financial information about the reporting entity that is useful to existing and potential investors and lenders - What does useful mean- relevant and faithful representation, compatibility, verifiability (done by auditors), timeliness, understandability Financial Accounting and Reporting Conceptual Framework- Assumptions - Going concern- there are no issues such as bankruptcy foreseeable for the company - Separate entity- the information being reported is of one single entity - Monetary unit- everything reported is in one common monetary unit - Time periods- must be explicitly stated Important terms: Dividends- payments made by a corporation to its shareholders Debt- borrowing money from investors or banks Creditors- those who loan money to a company 3/20/2023 Financial statements: 1. Income Statement 2. Statement of Retained Earnings 3. Balance Sheet 4. Statement of Cash Flows Income Statement: Revenue - COGS = Gross Profit - All the other expenses =Net income from operations
+/- Gain or loss on sale of other assets =Net income Why is it important to know the portion of net income that is not from operations: to evaluate a company's real performance Statement of retained earnings: Beginning retained earnings + Net income -Dividends paid Ending retained earnings * Ending retained earnings becomes the next term's beginning retained earnings. * Note: Dividends are NOT an expense. Balance Sheet - A snapshot of the financial position of the company at a particular point in time, NOT for a period of time. - Assets = Liabilities + Stockholder Equity - For retained earnings, ALWAYS use the ending retained earnings from the statement of retained earnings. Cash Flow Statement: Beginning cash +/- Cash flows from operations +/- Cash flows from investing +/- Cash flows from financing = Ending Cash
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