Dynasty warriors 8 empires free alliances version ps4 customer's cash payment for goods in no way changes the Income Statement. Manufacturing variances: what financial statements thomas ittelson pdf free download go wrong, what can go right. All the earnings of the company that have been retained, that is, not paid out as dividends to owners. Because fixed assets financial statements thomas ittelson pdf free download a long productive life, you can expense only a portion of their purchase price each year as you use them.">
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Page xv Section C. A Journal is a book or computer memory in which all financial events are recorded in chronological order. A ledger is a book of accounts. An account is simply any grouping of like-items that we want to keep track of.
Ratio Analysis Often in judging the financial condition of an enterprise, it is not so much the absolute amount of sales, costs, expenses and assets that are important, but rather the relationships between them.
Alternative Accounting Policies Various alternative accounting policies and procedures are completely legal and widely used, but may result in significant differences in the values reported on a company's financial statements. Some people would call this chapter's topic ''creative accounting. Cooking the Books "Cooking the books" means intentionally hiding or distorting the real financial performance or financial condition of a company. Cooking is most often accomplished by incorrectly and fraudulently moving Balance Sheet items onto the Income Statements and vise versa.
Outright lying is also a favorite technique. I interviewed a young womanjust out of schoolfor the job and asked her why she wanted to become an accountant. Her answer was a surprise to all of us, "Because accounting is so symmetrical, so logical, so beautiful and it always comes out right," she said. We hired her on the spot, thinking it would be fun to have almost-a-poet keeping our books. She worked out fine. I hope you take away from this book a part of what my young accountant saw.
Knowing a little accounting and financial reporting can be very satisfying. Yes, it does all come out right at the end and there is real beauty and poetry in its structure. But, let's discuss perhaps the real reason you've bought and are now reading this book.
My bet is that it has to do with power. You want the power you see associated with knowing how numbers flow in business. Be it poetry or power, this accounting and financial reporting stuff is not rocket science. You've learned all the math required to master accounting by the end of the fourth grademostly addition and subtraction with a bit of multiplication and division thrown in to keep it lively. The specialized vocabulary, on the other hand, can be confusing. You will need to learn the accounting definitions of revenue, income, cost and expense.
You'll also need to understand the structure and appreciate the purpose of the three major numeric statements that describe a company's financial condition. Here's a hint: Watch where the money flows; watch where goods and services flow. Documenting these movements of cash and product is all that financial statements do. It is no more complicated than that. Everything else is details. But why is it all so boring, you ask?
Well, it's only boring if you do not understand it. Yes, the day-to-day repetitive accounting tasks are boring. However, how to finance and extract cash from the actions of the enterprise is not boring at all. It is the essence of business and the generation of wealth. Not boring at all. If you think "inventory turn" means rotating stock on the shelf, and that "accrual" has something to do with the Wicked Witch of the East.
Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Statements is designed for those business professionals: 1 who know very little about accounting and financial statements, but feel they should, and 2 who need to know a little more, but for whom the normal accounting and financial reporting texts are mysterious and unenlightening.
In fact, the above two categories make up the majority of all people in business. You are not alone. Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Statements is a transaction-based, business training tool with clarifying, straightforward, real-life examples of how financial statements are built and how they interact to present a true financial picture of the enterprise.
We will not bog down in details that get in the way of conceptual understanding. Just as it is not necessary to know how the microchip in your electric calculator works to multiply a few numbers, it's not necessary to be a Certified Public Accountant CPA to have a working knowledge of the "accounting model of the enterprise.
We will sell stock to raise money, buy machinery to make our product, and then satisfy our customers by shipping wholesome applesauce. We'll get paid and we will hope to make a profit. Each step along the way will generate account "postings" on AppleSeed's books. We'll discuss each transaction to get a hands-on feel for how a company's financial statements are constructed.
We'll learn how to report using the three main financial statements of a businessthe "Accounting is a language, a means of communicating among all the segments of the business community. It assumes a reference base called the accounting model of the enterprise. While other models of the enterprise are possible, this accounting model is the accepted form, and is likely to be for some time.
Accounting is a fundamental tool of the trade. Goals My goal in writing this book is to help people in business master the basics of accounting and financial reporting. This book is especially directed at those managers, scientists and salespeople who should know how a Balance Sheet, Income Statement and Cash Flow work. Your goal is to gain knowledge of accounting and finance, to assist you in your business dealings.
You want the power that comes from understanding financial manipulations. You must know how the score is kept in business. You recognize, as Gordon Baty says, you must "feel intuitively comfortable with the accounting model" to succeed in business.
This book is divided into three main sections, each with a specific teaching objective: Section A. Section B. Section C. Then finally we will touch on how to "cook the books," why someone would want to, and how to detect financial fraud. People think I'm joking, but I'm not. You should love the mathematics of business. Olsen, founder and former CEO, Digital Equipment Corporation Page 5 With your newly acquired understanding of the structure and flow of money in business, you will appreciate these important business quandaries: How an enterprise can be rapidly growing, highly profitable and out of money all at the same time.
Why working capital is so important and which management actions lead to more, which lead to less. The difference between cash in the bank and profit on the bottom line and how the two are interrelated. When in the course of business affairs a negative cash flow is a sign of good things happening.
Limits of common product costing systems and when to apply and, more importantly, when to ignore the accountant's definition of cost. Why a development investment made today must return a much greater sum to the coffers of the company in later years.
How discounts drop right to the bottom line as lost profits and why they are so dangerous to a company's financial health. To be effective in business, you must understand accounting and financial reporting.
Don't become an accountant, but do "speak the language" and become intuitively comfortable with the accounting model of the enterprise. Read on. Don't feel bad if you fall into this category. My guess is that 95 percent of all nonfinancial managers are financially illiterate when it comes to understanding the company's books. Let us proceed toward some enlightenment.
This section is about financial statement structure and about the specialized vocabulary of financial reporting. We will learn both together. It's easier that way. Much of what passes as complexity in accounting and financial reporting is just specialized sometimes counterintuitive vocabulary and basically simple reporting structure that gets confusing only in the details. Vocabulary In accounting, some important words may have meanings that are different than what you think.
The box below shows some of this confusing vocabulary. It's absolutely essential to use these words correctly when discussing financial statements. You'll just have to learn them. It's really not much, but it is important. Look at these examples: 1. Sales and revenue are synonymous and refer to the top line of the Income Statement; the money that comes in from customers.
Profits, earnings and income are all synonymous and mean the "bottom line," or what is left over from revenue after all the costs and expenses spent in generating that revenue are subtracted.
Note that revenue and income have different meanings. Revenue is the "top line" and income is the "bottom line" of the Income Statement. Got that? Costs are money spent making a product. Expenses are money spent to develop it, to sell it, to account for it and to manage this whole making and selling process.
Sales and revenue mean the same thing. Profits, earnings and income mean the same thing. Now, revenue and income do not mean the same thing. Costs are different from expenses. Expenses are different from expenditures. Sales are different from orders but are the same as shipments. Profits are different from cash. Solvency is different from profitability.
Page 10 4. Both costs and expenses become expenditures when money is actually sent to vendors to pay for them. Orders are placed by customers and signify a request for the future delivery of products. Orders do not have an impact on any of the financial statements in any way until the products are actually shipped. At this point these shipments become sales. Shipments and sales are synonyms. Solvency means having enough money in the bank to pay your bills.
Profitability means that your sales are greater than your costs and expenses. You can be profitable and insolvent at the same time. You are making money but still do not have enough cash to pay your bills.
Financial Statements Once you understand the specialized accounting vocabulary, you can appreciate financial statement structure. For example, there will be no confusion when we say that revenue is at the top of an Income Statement and income is at the bottom. In this section we will learn vocabulary and financial statement structure simultaneously.
Then follows a chapter on each one of the three main financial statements: the Balance Sheet, the Income Statement and the Cash Flow Statement. To end the section we'll discuss how these three statements interact and when changing a number in one necessitates changing a number in another.
Chapter 1 will lay some ground rules for financial reportingstarting points and assumptions that accounting professionals require to let them make sense of a company's books.
In Chapter 2 we'll discuss the Balance Sheet. Then next in Chapter 3 comes the Income Statement reporting on the enterprise's product selling activities and whether there is any money left over after all these operations are done and accounted for.
The last statement, but often the most important in the short term, is the Cash Flow discussed in Chapter 4 Look at this statement as a simple check register with deposits being cash-in and any payments cash-out.
Chapter 5 puts all three financial statements together and shows how they work in concert to give a true picture of the enterprise's financial health. Page 11 Chapter 1 Twelve Basic Principles Accountants have some basic rules and assumptions upon which rests all their work in preparing financial statements. These rules and assumptions tell accountants what financial items to measure and when and how to measure them.
As you'll see by the end of this discussion, it is important to have at least an appreciation for these rules and assumptions. So, following are 12 very important ones: 1. We will deal with each in turn. This principal states that there is a "business entity" separate from its owners. Obviously this assumption can not be verified and is hardly ever true. But, this assumption does greatly simplify the presentation of the financial position of the firm and aids in the preparation of financial statements.
Accounting only deals with things that can be measured and quantified. This assumption leaves out many very valuable company "assets. A set of financial statements contains only measures of assets what the business owns , liabilities what the business owes and the difference between the two equaling owner's equity. Results of any foreign subsidiaries are translated into dollars for consolidated reporting of results. As exchange rates vary, so do the values of any foreign currency denominated assets and liabilities.
This assumption can greatly understate the value of some assets purchased in the past and depreciated to a very low amount on the books. Why, you ask, do accountants demand that we obviously understate assets? Basically, it is the easiest thing to do. You do not have to appraise and reappraise all the time. Page 12 6 Materiality Materiality refers to the relative importance of financial information.
Here accountants don't sweat the small stuff. But all transactions must be reported if they would materially effect the financial condition of the company. Remember, what is material for a corner drug store is not material for IBM lost in the rounding errors. Materiality is a straightforward judgment call. Estimates and judgments must often be made for financial reporting. It is okay to guess if: 1 that is the best you can do and 2 the expected error would not matter much anyway.
You should use the same guessing method for each period. Be consistent in your guesses. You could do it this way or that way, depending upon preference. The principal of consistency states that each individual enterprise must choose a single method of reporting and use it consistently over time.
You cannot switch back and forth. Measurement techniques must be consistent from one fiscal period to another. For example, losses are recorded when you feel that they have a great probability of occurring, not later, when they actually do occur.
Conversely, the recording of a gain is postponed until it actually occurs, not when it is only anticipated. What is so special about a month, quarter or year? They are just convenient periods; short enough so that management can remember what has happened, long enough to have meaning and not just be random fluctuations.
These periods are called "fiscal" periods. For example a "fiscal year" could extend from October 1 in one year till September 30 in the next year. For example, an equipment lease that is "Lines" are perhaps not as important as principals, but they can be confusing if you don't know how accountants use them in financial statements.
Financial statements often have two types of lines to indicate types of numeric computations. Single lines on a financial statement indicate that a calculation addition or subtraction has been made on the numbers just preceding in the column.
The double underline is saved for last. That is, use of a double underline signifies the very last figure in the statement. Note that while all the numbers in the statement represent currency, only the top line and the bottom line normally show a dollar sign. This rule states that if it's a duck. Accountants translate into dollars of profit or loss the moneymaking or losing activities that take place in a fiscal period.
In accrual accounting, this documentation is accomplished by matching for presentation: 1 the revenue received in selling product and 2 the costs to make the specific product sold. Fiscal period expenses such as selling, legal, administrative and so forth are then added. Key to accrual accounting is: 1 when you may report a sale on the financial statements, 2 matching and then reporting the appropriate costs of the sale, and 3 using a systematic and rational method of allocating of all the other costs of being in business for the period.
We will deal with each point separately: Revenue Recognition In accrual accounting, a sale is recorded when all the necessary activities to provide the good or service have been completed regardless when cash changes hands.
A customer just ordering a product has not yet generated any revenue. Revenue is recorded when the product is shipped. Matching Principal In accrual accounting the costs associated with making products Cost of Goods Sold are recorded at the same time the matching revenue is recorded.
Allocation Many costs are not specifically associated with a product. These costs must be allocated to fiscal periods in a reasonable fashion. For example, each month can be charged with one-twelfth of the general business insurance policy even though the policy was paid in full at the beginning of the year. Other expenses are recorded when they arise period expenses. Note that all businesses with inventory must use the accrual basis of accounting.
Other businesses may use a ''cash basis" if they desire. Cash basis financial statements are just like the Cash Flow Statement or a simple checkbook. We'll describe features of accrual accounting in the chapters that follow. Who Makes These Rules? Financial statements in the United States must be prepared according to the accounting profession's set of rules and guiding principals called the Generally Accepted Accounting Principals, GAAP for short.
Other countries use different rules. GAAP is a series of conventions, rules and procedures for preparing financial statements. These exalted individuals, are specially trained in college, and have practiced auditing companies both public and private for a number of years.
In addition, they have passed a series of exams testing their clear understanding of accounting principles and auditing procedures. Page 16 The Basic Equation of Accounting The basic equation of accounting states: "What you have minus what you owe is what you're worth. So, if you add an asset to the left side of the equation, you must also increase the right side by adding a liability or increasing worth.
Two entries are required to keep the equation in balance. Page 17 The Balance SheetA Snapshot in Time The Balance Sheet presents the financial picture of the enterprise on one particular day, an instant in time, the date it was written.
Assets are everything you've gotcash in the bank, inventory, machines, buildingsall of it. Assets are also certain "rights" you own that have a monetary value. Assets are valuable and this value must be quantifiable for an asset to be listed on the Balance Sheet. Everything in a company's financial statements must be translated into dollars and cents. Page 19 Grouping Assets for Presentation Assets are grouped for presentation on the Balance Sheet according to their characteristics: very liquid assets cash and securities productive assets plant and machinery assets for sale inventory Accounts receivable are a special type of asset groupthe obligations of customers of a company to pay the company for goods shipped to them on credit.
Assets are displayed in the asset section of the Balance Sheet in the descending order of liquidity the ease of convertibility into cash. Cash itself is the most liquid of all assets; fixed assets are normally the least liquid. Page 20 Current Assets By definition, current assets are those assets that are expected to be converted into cash in less than 12 months. Current asset groupings are listed in order of liquidity with the most easy to convert into cash listed first: 1.
Cash 2. Accounts receivable 3. Inventory The money the company will use to pay its bills in the near term within the year will come when its current assets are converted into cash that is, inventory is sold and accounts receivable are paid. Page 21 Current Assets: Cash Cash is the ultimate liquid asset: on-demand deposits in a bank as well as the dollars and cents in the petty cash drawer.
When you write a check to pay a bill you are taking money out of cash assets. Like all the rest of the Balance Sheet, cash is denominated in U. Page 22 Current Assets: Accounts Receivable When the enterprise ships a product to a customer on credit, the enterprise acquires a right to collect money from that customer at a specified time in the future.
These collection rights are totaled and reported on the Balance Sheet as accounts receivable. Accounts receivable are owed to the enterprise from customers called "accounts" who were shipped goods but have not yet paid for them. Credit customersmost business between companies is done on creditare commonly given payment terms that allow 30 or 60 days to pay. Page 23 Current Assets: Inventory Inventory is both finished products for ready sale to customers and also materials to be made into products.
A manufacturer's inventory includes three groupings: 1. Raw material inventory is unprocessed materials that will be used in manufacturing products. Work-in-process inventory is partially finished products in the process of being manufactured. Finished goods inventory is completed products ready for shipment to customers when they place orders. As finished goods inventory is sold it becomes an accounts receivable and then cash when the customer pays. Prepaid expenses are things like prepaid insurance premiums, prepayment of rent, deposits paid to the telephone company, salary advances, etc.
Prepaid expenses are current assets not because they can be turned into cash, but because the enterprise will not have to use cash to pay them in the near future. They have been paid already. Page 25 Current Asset Cycle Current assets are said to be "working assets" because they are in a constant cycle of being converted into cash. The repeating current asset cycle of a business is shown below: More Asset Types In addition to a company's current assets, there are two other major asset groups listed on the Balance Sheet: Other assets and fixed assets.
These so-called "non-current assets" are not converted into cash during the normal course of business. Other assets is a catchall category that includes intangible assets such as the value of patents, trade names and so forth.
Page 26 Fixed Assets Fixed assets are productive assets not intended for sale. They will be used over and over again to manufacture the product, display it, warehouse it, transport it and so forth. Fixed assets commonly include land, buildings, machinery, equipment, furniture, automobiles, trucks, etc. Fixed assets are normally reported on the Balance Sheet as net fixed assetsvalued at original cost minus an allowance for depreciation.
See the depreciation discussion following. Page 27 Depreciation Depreciation is an accounting convention reporting on the Income Statement the decline in useful value of a fixed asset due to wear and tear from use and the passage of time. Depreciating an asset means spreading the cost to acquire the asset over the asset's whole useful life. Accumulated depreciation on the Balance Sheet is the sum of all the depreciation charges taken since the asset was first acquired.
Depreciation charges taken in a period do lower profits for the period, but do not lower cash. Cash was required to purchase the fixed asset originally. Page 28 Net Fixed Assets The net fixed assets of a company are the sum of its fixed assets' purchase prices ''fixed assets cost" minus the depreciation charges taken on the Income Statement over the years "accumulated depreciation".
The so-called book value of an assetits value as reported on the books of the companyis the asset's purchase price minus its accumulated depreciation. Note that depreciation does not necessarily relate to an actual decrease in value. In fact, some assets appreciate in value over time. However, such appreciated assets are by convention still reported on the Balance Sheet at their lower book value.
Page 29 Other Assets The other asset category on the Balance Sheet includes assets of the enterprise that cannot be properly classified into current asset or fixed asset categories. Intangible assets a major type of other assets are things owned by the company that have value but are not tangible that is, not physical property in nature.
For example, a patent, a copyright, or a brand name can have considerable value to the enterprise, yet these are not tangible like a machine or inventory is. Intangible assets are valued by management according to various accounting conventions too complex, arbitrary and confusing to be of interest here.
Page 30 What are Liabilities? Liabilities are economic obligations of the enterprise such as money that the corporation owes to lenders, suppliers, employees, etc.
Liabilities are categorized and grouped for presentation on the balance sheet by: 1 to whom the debt is owed and 2 whether the debt is payable within the year current liabilities or is a long-term obligation.
Shareholders' equity is a very special kind of liability. It represents the value of the corporation that belongs to its owners. However, this "debt" will never be repaid in the normal course of business. Page 31 Current Liabilities Current liabilities are bills that must be paid within one year of the date of the Balance Sheet. Current liabilities are a reverse of current assets: current assets.