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Good Accounting Summary IBA
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SUMMARY ACCOUNTINGPart I - Financial Accounting
3 statements:
- Balance sheet: assets and liabilities
- Profit and Loss statement: influences the equity on the balance sheet
- Cash flow statement: influences the cash on the balance sheet
Accruals: difference between cashflow and profit (e.g. revenues that are not yet receipts)
Revenue: cash receipts, increase other asset, decrease liability
Expense: cash expenditure, decrease other asset, increase liability
Retained earnings: revenue - expenses - dividend Inventory
1/9 500
Ledger: simplified balance sheet for one element of the balance sheet (T-format)
2/9 200 B/S 700
Debit: increase in asset, decrease in liability, decrease in equity (expenses)
Credit: decrease in asset, increase in liability, increase in equity (revenue)
Trial balance: overview of all net debits and credits of all accounts
Accounting principles:
- Revenue Recognition Principle: recognise revenues (profit) only when realised
- Matching Principle: expenses are recognised in the come statement in the same period
as the revenues to which these expenses relate
- Prudence Principle: recognise losses when foreseen, recognise gains only when realised
- Going Concern Principle: measure assets and liabilities based on the assumption that te
business will be continued
Inventory measurement:
- Individual identification: purchase price X = cost sales item X
- Allocation formula: total purchase value / total # of units
- Inventory cost flow assumption: FIFO, LIFO
Costs of goods sold = (beginning inventory + purchases) - ending inventory
Costs of goods available for sale = beginning inventory + purchases
Weighted-average unit cost = costs of goods available for sale / total units available for sale
FIFO: most current balance sheet measurement
LIFO: most current amount costs of goods sold
REALIZED AND UNREALIZED VALUE CHANGES?
How to approach losses on receivables:
- Write off receivables directly when we think we will not get them
Write-off receivables x
Receivables x
- Valuation Allowance: the moment you sell something, you estimate if a part of it is
uncollectible
Doubtful receivables-expenses x
Allowance for doubtful receivables x
1/5
, Area 1 Area 2 Area 3
5
Managers can influence timing of revenue recognition
because of a bonus that shareholder can grant:
- Area 1: no bonus, if close to start bonus > increase
earnings, otherwise > lower (low accruals)
- Area 2: bonus increases with earnings, increase
earnings to increase bonus (high accruals) 0
- Area 3: maximum bonus, lower earnings > if you do
not recognise now, next period more earnings (low
accruals)
Fixed assets (non-current) are used for a long period
- Allocate costs to different periods in which you use the asset to make profit ( =matching)
- Using an asset over time causes loss in value
- Closing carrying amount = opening carrying amount + investments - depreciation
- 3 factors: original costs, salvage value, estimated life
Depreciation methods:
- Straight-line: costs equally distributed over the period (straight-line)
- Accelerated: book value decreases faster in beginning > 2x straight-line %
- Units-of-activity: per unit (product, machine hour, km); estimate the total number that can
be used, determine the cost per unit, allocate depending on production in the period
Example: original cost = 1000, useful life = 10 years, residual value = 100
- Straight-line: (1000 - 100) / 10 = 90 per year
- Accelerated: e.g. 20.5% of carrying amount
- Y1: 1000 * 0,205 = 205
- Y2: (1000-205) * (0,205) = 163
Intangible assets: long term value assets like patents, license, software
R&D?? GOODWILL??
3 way partition of cash flow statement:
- Operating cash flow: generate day-to-day business (incl interest)
- Investing cash flow: needed to keep the business going (lending, acquiring non-current
assets, investments)
- Financing cash flow: related to long term financing of the company (changes in
shareholders’ equity and liabilities, dividends)
Free cash flow = operating cash flow + investing cash flow (shows the value of the business)
= net operating cash flow - capital expenditures - cash dividends
Methods to prepare cash flow statement:
1. Direct method
- Derive directly from the ledger accounts
2. Indirect method
- Derive from balance sheet and income statement
- Cash flow = profit - assets. + liabilities + net receipts shareholders
- This shows a clear link between cash and profit
- Start with profit and then make adjustments
How to go from net income to cash flow from operating activities
- Add back expenses that are not a cash flow (depreciation)
- Add back losses, deduct gains on disposal of property, plant and equipment
- Correct for changes in current assets:
- Deduct increases (in e.g. inventory)
- Add back decreases
- Correct for changes in current liabilities
- Add increases in liabilities
- Deduct increases in liabilities
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