At this point in my Accounting 201 class, we are preparing for the end of the semester...which means finals. Since this is an introductory level course, we are only covering certain topics that will be covered in later classes, including Finance and higher level accounting classes. Therefore, our final topics will be cash flow statements and how to analyze other financial statements.
For the subject of this blog post, I will discuss the importance and how to go about producing a report of cash flows. The statement of cash flows reports cash receipts and payments involved in operating, investing, and financing activities. These statements are especially important to a business that is monitoring and analyzing change throughout a business period or deciding whether or not to make a decision. It will help answer the following questions:
What explains the change in the cash balance?
Where does a company spend its cash?
Why do income and cash flows differ?
How much is paid in dividends?
How does a company receive/disperse its cash?
Is there a cash shortage/surplus?
(Questions derived from "Financial and Managerial Accounting: Information for Decisions" by John J. Wild)
The statement of cash flows, as mentioned, are broken into three categories, if you will: Operating, Investing, and Financing.
Operating Activities
Operating activities include transactions that ultimately determine net income. Examples include the production/purchase of inventory, sale of goods and services, and other operating expenditures. When producing this section, the accountant must also consider depreciation expense, loss/gain, current assets, and current liabilities. The majority of these factors can be found in the balance sheet and income statement. The prepared operating statement will be produced as follows:
Net Income (+) or (-)
Depreciation Expense (+)
Loss (+) or Gain (-)
Current Assets Increase (-) or Decrease (+)
Current Liabilities Increase (+) or Decrease (-)
Cash flows from operations..............................net of the above
Investing Activities
Investing activities include transactions that affect long-term assets. Specifically, these activities will be the purchase and sale of short-term investments as well as the lending and collecting of money for notes receivable. In the report, one will generally find the purchase and sale of equipment. This section will be prepared as follows:
Purchase of equipment (-)
Sale of equipment (+)
Cash flows from investing..................net of the above
Financing Activities
The financing activities include transactions that affect long-term liabilities and equity. When a company obtains cash from issuing debt and repays borrowed amounts or receives cash from or disperses cash amongst owners. This section will be prepared as followed:
Issuance of Stocks (+)
Cash Paid to Settle Notes Payable (-)
Cash Paid to Retire Bonds Payable (-)
Dividends Paid (-)
Cash flows from financing..................net of the above
As you can see, the preparation of a statement of cash flows is vital to the success of a business.
There are now only 28 days till Christmas!!!
Sunday, November 27, 2016
Sunday, November 20, 2016
Stocks
Stocks are often thrown around as an easy, sure fire way for anyone to make some easy money. At least, that's what I previously thought about them. In short, a stock grants an individual or group a certain amount of ownership in a corporation. Those who partake in such ownership are known as stockholders. These individuals invest cash or other assets in a corporation in exchange for common stock. The stockholder actually does have significant influence on the success of the corporation in that they elect a board of directors who directly vote on the actions the business will take. A stockholder is also known as an investor because when a corporation issues capital stock, they are seeking to obtain capital as an exchange. Therefore, investors are literally investing assets into the good of the company.
For the sake of this blog post, I won't get too complicated, but stock can be issued in a number of ways depending on the market at that time and the value of certain stock. Stock can be issued based on its par value (an amount assigned per share by the corporation) at par, below par (discount), or above par (premium). The journal entry for such issuances involve the debit of cash or other asset along with the credit of common stock and that of an account known as "Paid-In Capital of Excess of Par Value, Common Stock" OR "Discount on Common Stock". Each of these credited accounts is dependent on the difference between the issuance price and par value. In accordance to the natural laws of accounting, the credits will always equal the credits in the exchange of stock.
Cash x Cash x+y Cash x+y
Common Stock x Common Stock x Common Stock x
Paid-In Capital of Excess of y Discount on Common Stock y
Par Value, Common Stock
Stock can also be issued with a No-Par Value, meaning that the share is not assigned a stated value. Any amount that the corporation receives is legal capital and recorded as common stock. All proceeds from the issuance is credited to a "No-Par Stock" account.
Cash x
Common Stock, No-Par Value x
Lastly, no-par value stock can be issued at a stated value. When received, the proceeds become legal capital and are credited to a stated value stock account. Usually, the stated value stock is issued at an amount in excess of the stated value.
Cash x+y
Common Stock x
Paid-In Capital in Excess of Stated Value, Common Stock y
Stock is issued at par 88% of the time, at no-par 9%, and with a stated value 3% of the time. It is also important to know that a corporation can receive other assets rather than cash in exchange for stock, but it can also assume liabilities on such assets.
That's my brief explanation of the recording of issued stocks. On that note, there are only 3 days till Christmas.
Tuesday, November 15, 2016
Sunday, November 13, 2016
"The name's Bond..."
Another important factor in a business' financial well-being is the issuing of bonds. Investors purchase bonds with cash after they are issued by a corporation. Essentially, a bond creates a long-term debt for a company as they borrow money. Those who purchase the bonds are considered lenders and/or bondholders.
As with most transactions, the issuing and paying off of bonds requires accurate accounting of interest that accrues throughout the bond's life until maturity. Interest is typically paid every six months (semiannually). Thus, if a corporation issues a bond to be paid at maturity in three years, it will make a total of six interest payments. Upon the maturity date of the bond, the issuer will pay the investor its final interest payment as well as the bond's principal amount.
A bondholder's claim to these interest payments is NOT a form of equity; the investor is not granted any form of the corporations ownership. Thus, the corporation that issues the bond does not make any entry to the equity accounts. Rather, upon issuing the bond, it will debit the amount of cash received and debit 'Bonds Payable'. This establishes a liability that will be paid at the bond's maturity date. When interest payments take place, the journal entry will be recorded as such with 'Bond Interest Expense' and 'Bond Interest Payable'.
Bonds can be issued with a Premium or Discount. A Premium is issued when the investor is willing to pay more than the principal amount proposed by the corporation. A discount, therefore, is issued when the investor purchases the bond at a price lower than par value. Both Discounts and Premiums are amortized accordingly at each semiannual interest payment and at the date of maturity.
Straight-Line Amortization and Effective Interest are two useful methods that effectively compute the reduction of a premium or discount throughout the life of the bond.
There is so much more to discuss regarding bonds and why they are so vital to the success of a business. As an aspiring entrepreneur, I have taken significant interest (no pun intended) in the importance of bonds. Lenders and investors are especially important to the success and survival of a start up industry. I have no interest in becoming an accountant, but I have definitely learned a lot of vital information regarding the financial endeavors and management for a business.
As of November 13, we have a new president and 42 days till Christmas.
As with most transactions, the issuing and paying off of bonds requires accurate accounting of interest that accrues throughout the bond's life until maturity. Interest is typically paid every six months (semiannually). Thus, if a corporation issues a bond to be paid at maturity in three years, it will make a total of six interest payments. Upon the maturity date of the bond, the issuer will pay the investor its final interest payment as well as the bond's principal amount.
A bondholder's claim to these interest payments is NOT a form of equity; the investor is not granted any form of the corporations ownership. Thus, the corporation that issues the bond does not make any entry to the equity accounts. Rather, upon issuing the bond, it will debit the amount of cash received and debit 'Bonds Payable'. This establishes a liability that will be paid at the bond's maturity date. When interest payments take place, the journal entry will be recorded as such with 'Bond Interest Expense' and 'Bond Interest Payable'.
Bonds can be issued with a Premium or Discount. A Premium is issued when the investor is willing to pay more than the principal amount proposed by the corporation. A discount, therefore, is issued when the investor purchases the bond at a price lower than par value. Both Discounts and Premiums are amortized accordingly at each semiannual interest payment and at the date of maturity.
Straight-Line Amortization and Effective Interest are two useful methods that effectively compute the reduction of a premium or discount throughout the life of the bond.
There is so much more to discuss regarding bonds and why they are so vital to the success of a business. As an aspiring entrepreneur, I have taken significant interest (no pun intended) in the importance of bonds. Lenders and investors are especially important to the success and survival of a start up industry. I have no interest in becoming an accountant, but I have definitely learned a lot of vital information regarding the financial endeavors and management for a business.
As of November 13, we have a new president and 42 days till Christmas.
Sunday, November 6, 2016
Working on the worksheet
A few weeks ago, my professor assigned us a scenario from our workbook and instructed us to complete a worksheet with it. In the worksheet, we are to provide all of the account titles, an unadjusted trial balance, adjustments, an adjusted trial balance, the income statement, and a balance sheet. At the beginning of this semester, I would have looked at this assignment and notified my parents of my immediate withdrawal from the university. However, I took this project on with great confidence for a few reasons:
1. Accounting is easy.
Yeah. I said it. The stereotype of this career being easy is absolutely true. Literally, all it's about is remembering a few little tips and tricks about manipulation of transactions, grabbing a calculator (or abacus if you prefer), and crunching away at some numbers until you can produce a valid number of statements regarding the business for which you account. In fact, all you really need to do is play around with Microsoft Excel until you've produced a professional looking report with some numbers and lines, and maybe even colors.
I completed this assignment, due at the end of the semester, in a matter of roughly 30 minutes. I spent more time making style adjustments than I did actually computing and organizing data. What's magic about Excel is that it does the work for you.
2. Accounting is fun...relatively speaking.
Who doesn't love playing with numbers. As lame as it sounds, accounting is just a matter of making sure everything matches up (or at least makes sense). This is really cool, especially in that this concept is vital in the coherency and accuracy of a worksheet. For example the debits and credits on the unadjusted and adjusted trial balances had to equal; the difference between total debits and credits on the income statement gives you the net income or loss; and the difference between debits and credits on the balance sheet also gives you net income or loss. [The contrast between balance sheet and income statement net income or loss is that the balance sheet is a reflection of that business' current financial standing as an aggregative report of previous periods' retained earnings and other permanent accounts (see previous posts) while the income statement is more often referred to as the observed result from a period's revenues and expenses.]
So yes, accounts are just professional number crunchers, but I think that's totally cool. Numbers don't make sense to everyone, so if you can get the rules and regulations of accounting down, you can easily earn your CPA and PEOPLE WILL GIVE YOU MONEY to, if relative, have fun playing with numbers!
3. I have confidence in what I have learned about accounting thus far.
I have recently been able to say with complete honesty that I have learned more from this class and my economics class than I did in my four years of high school combined. I'm not just saying this as a typical teen who said "screw high school"; I have legitimately learned so much and feel like the world of business is the place for me and my career. In fact, I have become so eager and excited to take on my own business, that I have neglected to focus on my other, far less important classes such as biology and French culture (in both of which I have an A...no worries) and have immersed myself as fully as I can in everything business.
That being said, this passion that I have developed has made learning very easy. I wouldn't say it's very fun reading my accounting textbook, but I always feel so satisfied when I can put what I've learned into practice and build upon it over time. And because everything builds on everything else, I am pretty much always confident in what I am doing.
So, I'm not telling my group that I've already done the project because I don't want them just taking the answers. But I'll be a good sport and help them out.
The next time I write, we will have a new president. If you read this before November 8, let's vote to make America great again, for the sake of the business world if nothing else.
FYI....49 days till Christmas.
1. Accounting is easy.
Yeah. I said it. The stereotype of this career being easy is absolutely true. Literally, all it's about is remembering a few little tips and tricks about manipulation of transactions, grabbing a calculator (or abacus if you prefer), and crunching away at some numbers until you can produce a valid number of statements regarding the business for which you account. In fact, all you really need to do is play around with Microsoft Excel until you've produced a professional looking report with some numbers and lines, and maybe even colors.
I completed this assignment, due at the end of the semester, in a matter of roughly 30 minutes. I spent more time making style adjustments than I did actually computing and organizing data. What's magic about Excel is that it does the work for you.
2. Accounting is fun...relatively speaking.
Who doesn't love playing with numbers. As lame as it sounds, accounting is just a matter of making sure everything matches up (or at least makes sense). This is really cool, especially in that this concept is vital in the coherency and accuracy of a worksheet. For example the debits and credits on the unadjusted and adjusted trial balances had to equal; the difference between total debits and credits on the income statement gives you the net income or loss; and the difference between debits and credits on the balance sheet also gives you net income or loss. [The contrast between balance sheet and income statement net income or loss is that the balance sheet is a reflection of that business' current financial standing as an aggregative report of previous periods' retained earnings and other permanent accounts (see previous posts) while the income statement is more often referred to as the observed result from a period's revenues and expenses.]
So yes, accounts are just professional number crunchers, but I think that's totally cool. Numbers don't make sense to everyone, so if you can get the rules and regulations of accounting down, you can easily earn your CPA and PEOPLE WILL GIVE YOU MONEY to, if relative, have fun playing with numbers!
3. I have confidence in what I have learned about accounting thus far.
I have recently been able to say with complete honesty that I have learned more from this class and my economics class than I did in my four years of high school combined. I'm not just saying this as a typical teen who said "screw high school"; I have legitimately learned so much and feel like the world of business is the place for me and my career. In fact, I have become so eager and excited to take on my own business, that I have neglected to focus on my other, far less important classes such as biology and French culture (in both of which I have an A...no worries) and have immersed myself as fully as I can in everything business.
That being said, this passion that I have developed has made learning very easy. I wouldn't say it's very fun reading my accounting textbook, but I always feel so satisfied when I can put what I've learned into practice and build upon it over time. And because everything builds on everything else, I am pretty much always confident in what I am doing.
So, I'm not telling my group that I've already done the project because I don't want them just taking the answers. But I'll be a good sport and help them out.
The next time I write, we will have a new president. If you read this before November 8, let's vote to make America great again, for the sake of the business world if nothing else.
FYI....49 days till Christmas.
Tuesday, November 1, 2016
Economists vs Accountants (profit)
I am an economics student at the University of Louisville. Why? Because I love business. Well, actually, because I disliked the idea of becoming an engineer. See, I originally went to UL as a mechanical engineer major, but about 2 months before classes started, I gave my future a little thought and decided that these hands weren't made to be an engineer. Rather, I have been given the mind to pursue business and entrepreneurial endeavors. That being said, understand that although I have a bias towards the practice of economics, the following is not a persuasive argument about which practice is better. Instead, I am just going to give you a few examples of how they are slightly (very) different in their ways of analyzing business.
Profit is calculated in a way that yield very different results, usually with accounting recognizing an overstatement of profit due to an understatement of expense. Expenses can be broken down into two primary categories: EXPLICIT and IMPLICIT. Explicit costs are the more obvious, cash/asset-related expenditures that the company partakes in order presumably to increase revenue. Implicit costs, however, is generally known as OPPORTUNITY COST, what you give up in order to produce x number of units. If you have looked into either accounting or economics at least a little, it should be clear based on these definitions which practice analyzes which costs. Well, accounting only uses explicit, monetary, costs in their computation of profit. Economics uses both explicit and implicit. Profit in general is computed by subtracting expenses from your total revenue. The processes for both practices are as follows:
Economics Profit = Total Revenue - Explicit Costs - Implicit Costs
Accounting Profit = Total Revenue - Explicit Costs
This difference will, more often than not, produce recorded profits that are strikingly different. For example, assume Company A had a good year of sales and made $200,000 in total revenue. Throughout the year, they purchased $150,000 worth of equipment (an explicit cost), but had observed an opportunity cost of $60,000 (an implicit cost). Well, the accounting profit would be $50,000 and the economic profit would be -$10,000. As you can see, these numbers are totally different, as the economic profit was actually negative, meaning the company lost money.
Here's another example, assume Company A had total revenue of $200,000 and that they noted $170,000 worth of explicit costs and $30,000 of implicit costs. The accounting profit would be $30,000 while the economic profit would be $0. Typically, a profit of $0 seems bad, but this is actually considered a success in the business world and is known as NORMAL PROFIT, meaning you didn't lose anything. Good job, Company A.
Many other differences exist, but when it comes down to it, comparing accountants and economists is like comparing apples to oranges; they both provide a way to examine and manipulate business strategies based on statistics and trends over a certain financial period. Both are important (utterly vital) to the life of a company and must be utilized efficiently in order to guarantee survival in the world of business.
To close, I'd like to note that Christmas is only 54 days away as of November 1.
Profit is calculated in a way that yield very different results, usually with accounting recognizing an overstatement of profit due to an understatement of expense. Expenses can be broken down into two primary categories: EXPLICIT and IMPLICIT. Explicit costs are the more obvious, cash/asset-related expenditures that the company partakes in order presumably to increase revenue. Implicit costs, however, is generally known as OPPORTUNITY COST, what you give up in order to produce x number of units. If you have looked into either accounting or economics at least a little, it should be clear based on these definitions which practice analyzes which costs. Well, accounting only uses explicit, monetary, costs in their computation of profit. Economics uses both explicit and implicit. Profit in general is computed by subtracting expenses from your total revenue. The processes for both practices are as follows:
Economics Profit = Total Revenue - Explicit Costs - Implicit Costs
Accounting Profit = Total Revenue - Explicit Costs
This difference will, more often than not, produce recorded profits that are strikingly different. For example, assume Company A had a good year of sales and made $200,000 in total revenue. Throughout the year, they purchased $150,000 worth of equipment (an explicit cost), but had observed an opportunity cost of $60,000 (an implicit cost). Well, the accounting profit would be $50,000 and the economic profit would be -$10,000. As you can see, these numbers are totally different, as the economic profit was actually negative, meaning the company lost money.
Here's another example, assume Company A had total revenue of $200,000 and that they noted $170,000 worth of explicit costs and $30,000 of implicit costs. The accounting profit would be $30,000 while the economic profit would be $0. Typically, a profit of $0 seems bad, but this is actually considered a success in the business world and is known as NORMAL PROFIT, meaning you didn't lose anything. Good job, Company A.
Many other differences exist, but when it comes down to it, comparing accountants and economists is like comparing apples to oranges; they both provide a way to examine and manipulate business strategies based on statistics and trends over a certain financial period. Both are important (utterly vital) to the life of a company and must be utilized efficiently in order to guarantee survival in the world of business.
To close, I'd like to note that Christmas is only 54 days away as of November 1.
Sunday, October 23, 2016
Liabilities: accounting yourself accountable
In the world of business, many companies will accept payments before providing service or delivery. Likewise, some may accept a good or service before they submit a payment. In both of these cases, the party acquiring unfulfilled obligations would partake in the recording of what is known as a LIABILITY.
A liability is basically obligations held by a company. It can also be referred to as a creditor's claim on an asset; a source of the company's assets; or even a creditor's claim against the assets currently held by the company. Nonetheless, a company must record each liability acquired within an accounting period as it directly affects the balance sheet at any point in time. It is relevant now to refer to the accounting equation:
Assets = Liabilities + Equity ----------> Liabilities = Equity - Assets
Note that an increase in liabilities yields an increase in assets as is reflected in the balance sheet.
Liabilities have a normal credit balance, thus are decreased when recorded as a debit. There are many different forms of liabilities, but many can be spotted by two key words: "UNEARNED" and "PAYABLE". Other common liability accounts include, but are not limited to, the following:
Notes Payable
Accounts ""
Wages ""
Salaries ""
Notes ""
Interest ""
Unearned Revenue
Fees Unearned
It is pretty easy to spot a liability on a balance sheet, and this is to the benefit of all entities involved in a particular transaction. The sooner one party fulfills its obligations/liabilities to another, the sooner both can resume normal business practices.
As liabilities are accrued, they are recorded as a credit. Inversely, as they are fulfilled, they are reduced by being recorded as a debit. An example of this is provided:
Assume that on May 4, Company X buys a TV at a cost of $500 on credit from Tele Co. Company X would record the transaction in the journal as follows:
May 4 Television 500
Accounts Payable - Tele Co 500
Now assume that on June 1, Company X pays the $500 in cash to Tele Co. (and that Tele made this sale in on Craigslist where no sales tax or interest rates applied). Company X would record the transaction as follows:
June 1 Accounts Payable - Tele Co. 500
Cash 500
The ledger for the ACCOUNTS PAYABLE account would appear as follows:
Accounts Payable In this case, since the account payable is completely fulfilled, the balance
500 | 500 in the account as of June 1 is $0.
| 0
On the flip side, a company can receive payment before providing service. This case is presented below:
Assume that on Jan. 1, Company X receives $500 cash for a tutoring service that is to take place over the next 5 months ($100/month) and is to start immediately. Company X would prepare this journal entry on Jan. 1:
Jan. 1 Cash 500
Unearned Tutoring Fees 500
On March 1, Company X has provided 2 months of service (worth $200) and will record the following journal entry:
March 1 Unearned Tutoring Fees 200 Note that revenue is recorded
Tutoring Revenue 200 when earned!!!
As a result of this entry, the company can recognize that 2 months' worth of tutoring revenue has been earned. Also, by analyzing an u[dated ledger, it will assure that 3 more months of service must be provided in order to earn the full revenue of $500.
A final note, business would not exist without liabilities... think about that this week.
Another final note...63 days till Christmas!
A liability is basically obligations held by a company. It can also be referred to as a creditor's claim on an asset; a source of the company's assets; or even a creditor's claim against the assets currently held by the company. Nonetheless, a company must record each liability acquired within an accounting period as it directly affects the balance sheet at any point in time. It is relevant now to refer to the accounting equation:
Assets = Liabilities + Equity ----------> Liabilities = Equity - Assets
Note that an increase in liabilities yields an increase in assets as is reflected in the balance sheet.
Liabilities have a normal credit balance, thus are decreased when recorded as a debit. There are many different forms of liabilities, but many can be spotted by two key words: "UNEARNED" and "PAYABLE". Other common liability accounts include, but are not limited to, the following:
Notes Payable
Accounts ""
Wages ""
Salaries ""
Notes ""
Interest ""
Unearned Revenue
Fees Unearned
It is pretty easy to spot a liability on a balance sheet, and this is to the benefit of all entities involved in a particular transaction. The sooner one party fulfills its obligations/liabilities to another, the sooner both can resume normal business practices.
As liabilities are accrued, they are recorded as a credit. Inversely, as they are fulfilled, they are reduced by being recorded as a debit. An example of this is provided:
Assume that on May 4, Company X buys a TV at a cost of $500 on credit from Tele Co. Company X would record the transaction in the journal as follows:
May 4 Television 500
Accounts Payable - Tele Co 500
Now assume that on June 1, Company X pays the $500 in cash to Tele Co. (and that Tele made this sale in on Craigslist where no sales tax or interest rates applied). Company X would record the transaction as follows:
June 1 Accounts Payable - Tele Co. 500
Cash 500
The ledger for the ACCOUNTS PAYABLE account would appear as follows:
Accounts Payable In this case, since the account payable is completely fulfilled, the balance
500 | 500 in the account as of June 1 is $0.
| 0
On the flip side, a company can receive payment before providing service. This case is presented below:
Assume that on Jan. 1, Company X receives $500 cash for a tutoring service that is to take place over the next 5 months ($100/month) and is to start immediately. Company X would prepare this journal entry on Jan. 1:
Jan. 1 Cash 500
Unearned Tutoring Fees 500
On March 1, Company X has provided 2 months of service (worth $200) and will record the following journal entry:
March 1 Unearned Tutoring Fees 200 Note that revenue is recorded
Tutoring Revenue 200 when earned!!!
As a result of this entry, the company can recognize that 2 months' worth of tutoring revenue has been earned. Also, by analyzing an u[dated ledger, it will assure that 3 more months of service must be provided in order to earn the full revenue of $500.
A final note, business would not exist without liabilities... think about that this week.
Another final note...63 days till Christmas!
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