Sunday, September 7, 2008
Tying up all the loose ends, how to put everything together
1. Need cash from last year's Balance Sheet and post to the Statement of Cash Flows (I mistakenly wrote Cash Flow Statements on the Image, sorry) as BEGINNING CASH.
2. Do the Income Statement and post NET INCOME to the STATEMENT OF R/E Net Income Box.
3. Post R/E from last year's Balance Sheet into the first box of the Statement of R/E.
4. Post the results from the Statement of R/E into the current Balance Sheet.
5. Post the Ending Cash into the Cash column to the current Balance Sheet.
Hope this was helpful, I will post a video to my YouTube channel http://www.youtube.com/lseexternal
If you have any questions, please leave a comment or feel free to email me
Joon Kang
Balance Sheet, Statement of Cash Flow
Balance Sheet aka Statement of Financial Position
It is the summary of the financial position of a company at a particular date.
Format:
Joon Kang, Inc.
Balance Sheet
December 31, XXXX
Note: It doesn't always have to be year-end, it can be done monthly, quarterly, twice a year, etc. Balance sheet is always of a specific date because cash position can change daily depending on how much money is taken out or deposited.
This statement reports three of the following: Assets, Liabilities, Owner's Equity.
- Asset: Cash, Accounts Receivables (A/R), Inventory, Land, Buildings, Equipment, and Intangible Items (such as company good will, brand name value, trademark.
- Liquidity – How fast you can turn an asset into cash (current assets). Examples are cash (most liquid), always listed first, and followed by marketable securities, short term investments, A/R & inventory. This is the order current assets should be listed on the Balance Sheet.
- Plant, property and equipment aka Long Term Assets: In place to help company generate revenues.
- Equipment – For example, I need a printing press to print books, and need this asset for more than a year. Not a current asset, not looking to sell it right away, need it to generate revenue.
- Equipment – For example, I need a printing press to print books, and need this asset for more than a year. Not a current asset, not looking to sell it right away, need it to generate revenue.
- Other assets aka intangible assets, copyrights, patents, trademarks, goodwill, items you can't touch physically.
- Liquidity – How fast you can turn an asset into cash (current assets). Examples are cash (most liquid), always listed first, and followed by marketable securities, short term investments, A/R & inventory. This is the order current assets should be listed on the Balance Sheet.
- Liabilities aka Company's obligations. Accounts Payable (A/P), Salaries payable, taxes payable, unearned sales revenue, notes payable and mortgage payable (you can omit payable for most of these): Liabilities/Obligations are broken up into two terms, current (paid off in a year or less) and long term (paid off in over a year). Can be listed by amount or alphabetically, none the less they are separated by 2 sections.
- Current Liabilities vs. Long Term Liabilities:
- Unearned sales revenue vs. Sales revenue.
- Unearned sales revenue: Anything with the word "Unearned" will always be a liability. Will show up on balance sheet as an obligation to perform a future service or provide a product for sale, in other words you already received money for a product or service you offer and you haven't performed the service yet, until that obligation is fulfilled you can't claim the revenue.
- Sales Revenue will show up on the income statement. Obligation has been fulfilled, so the income/revenue can be claimed.
- Unearned sales revenue: Anything with the word "Unearned" will always be a liability. Will show up on balance sheet as an obligation to perform a future service or provide a product for sale, in other words you already received money for a product or service you offer and you haven't performed the service yet, until that obligation is fulfilled you can't claim the revenue.
- Salaries (payable): Current liabilities, people want their paycheck ASAP, monthly (very common in Asia), bi-weekly (most common in the USA), or weekly (common in most union shops in the USA).
- Accounts Payable (A/P): Normally a 30 day promise to pay the supplier (in most cases) for services/products offered. Very informal.
- Notes (Payable): It can be long term liability or a current liability (short term), It can be a 90 day note (current) or a 3 year note (long term), more formal, will have interest attached to it
- Mortgage (Payable): Mostly long term, 15 to 30 years. For example:
- Year 1: Current Liability
- Years 2 and more = Long Term Liability.
So, it's possible to see Mortgage payable to be split, what's due this year may be posted in current liabilities and years 2 and on to be listed on long term liabilities.
- Year 1: Current Liability
- Net Assets = Total Assets – Total Liabilities = Net Assets (aka Owner's Equity).
- Owner's Equity = The net assets after all obligations have been satisfied.
- Owner's Equity = The net assets after all obligations have been satisfied.
- The Accounting Equation:
Assets = Liabilities + Owner's Equity
This is also known as Double Entry Accounting
It is a system of recording transactions in a way that maintains the equality of the accounting equation. (Precursor to Debits & Credits).
In other words, the left side should equal the right side.
Statement of Cash Flow: Reports the amount of cash collected and paid out by a company in operating, investing, and financing activities. In other words Cash inflow and cash outflow.
- Cash Inflow: How did the company receive cash?
- Sell goods or services.
- Sell other assets or by borrowing. Sell old equipment or assets no longer needed.
- Receive cash from investments by owners. Selling of securities.
- Cash Outflow: How does the company utilize its cash.
- Pay operating expenses. Rent, utilities, etc.
- Expand operations, repay loans. Building a new factory or upgrading.
- Pay owners a return on investment. Dividends.
It's the attempt of quantifying Cash flow.
- Types of Activities:
- Operating Activities: Day to day activities. (Inventory, taxes, loan interest, rent, utilities, sales)
- Investing Activities: Buying and selling long-term assets. (Property and equipment, long term assets from Balance Sheet)
- Financing Activities: Cash is obtained from or repaid to owners and creditors. (Payment of principles of loan, dividends, selling securities).
Hope this helps you out, happy studying and if you have any questions please feel free to email me.
Joon
Saturday, September 6, 2008
Retained Earnings Statement Notes
Retained Earnings Statement
This is a statement that identifies additional financial changes in retained earnings from one accounting period to the next. (In other words, it's a cumulative process over the life of the business).
Example:
Year 1 RE = 1,000,000
Year 2 RE = 750,000
Total RE = 1,750,000
Beginning RE (Retained Earnings) + Net Income – Dividends = RE
Retained Earnings Statement Format:
Company Name
Retained Earnings
For the Year Ended Dec 31, XXXX
Beginning Retained Earnings+Net Income-Dividends = Ending Retained Earnings Dec 31, XXXX
So it would look like this:
Joon Kang Inc.
Retained Earnings
For the Year Ended Oct 31, 2009
Beginning Retained Earnings+Net Income-Dividends = Ending Retained Earnings Oct 31, 2009
If you noticed in the example I used the Fiscal Year and in the format example, I used the calendar year
Hope this was a little helpful
Joon
Income Statement Notes
Income statement format
At the very top, it'll be the company name:
Joon Kang Company
Then, it'll state the name of the statement:
Income Statement
Finally, the time period it's referring to:
For the year ended Dec 31, XXXX
So put all together, it'll look like this at the top:
Joon Kang Company
Income Statement
For the year ended Dec 31, XXXX
This is for most business, but there are two types of years:
Calendar Year:
This is a straightforward Jan 1, Yr1 to Dec 31, Yr 2, e.g. Jan 1, 2008 to Dec 31, 2008.
Fiscal Year:
Not all businesses operate on a calendar year, due to peak season, for example (in the retail industry), so they may want to close their books at the end of that season. If, for example, the Fiscal year ends at the end of October: Nov 1, Yr1 to Oct 31, Yr2 (the reason it's year 2, is because it goes into the next calendar year). For example, the NBA basketball season starts around November or so and ends in May or June, so they refer to the season as the 2002/2003 season.
The main question for Income Statements: Is there a net profit or net loss?
Revenue - Expenses = Net Income or (Net Loss) -> Net loss always placed in parenthesis.
If Income > Expenses = Net Profit
If Expenses > Income = Net Loss
I know it's simple but...
Hope this was a little helpful
Joon
Accounting Video Lectures From Indiana University
List of Accounting Classes (Video Lectures)
Monday, September 1, 2008
Principles of Accounting Course from Indiana University
The lecture/classes