BMATWT 353 - Business of Building

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Lecture Outline - Ch. 13- Principles of Accounting

I. What is accounting and who uses accounting information?

Defn. Accounting: Comprehensive system for collecting, analyzing, and communicating financial information.

Bookkeeping - recording financial transactions.

Users of financial information: Managers, employees and unions, investors, lenders, tax and government regulatory officials.

II. Who are accountants and what do they do?

A. Financial vs. managerial accounting

Financial accounting - Data for external users: investors, consumers, government agencies, uniions.

Managerial accounting - Data for internal users: managers, engineers, marketing and sales, purchasing agents.

B. Certified public accountants (CPAs)

Certified Public Accountant (CPA) - licensed by each state after passing the AICPA Exam.

40,000 CPA firms in US, 4 (Deloitte Touche, Ernst and Young, KPMG, and Price WaterhouseCoopers) generate half of the total revenues.

Services of Accountants

1) Auditing -

Defn. - Audit - Systematic examination of the accounting system to determine whether financial statements fairly represent operations.

GAAP ( Generally Accepted Accounting Principles) - "rules" governing how financial statements are presented.

2) Tax services

3) Management advisory services (consulting)

C. Private accountants

Not licensed

III. Tools of the accounting trade

A. The accounting equation

Assets - Liabilities = Owners Equity

i. Assets and liabilities

Defn. Assets - Economic resources OWNED by the firm.

Defn. Liabilities - Debt OWED by the firm.

ii. Owners' equity - Amount of money that owners of the firm would receive if they sold off all assets and paid back all liabilities

B. Double-entry accounting

Examples:

Buy inventory - Debit (Increase) $10,000

Pay with cash - Credit (decrease) $10,000

Buy supplies on account.

Buy supplies - Debit (Increase) $1,000

Increase Accounts Payable - Credit - $1,000

Every transaction affects two accounts.

IV. Financial statements

A. Balance sheets - Statement detailing the assets, liabilities and owners equity of the firm.

i. Assets

1. Current assets - Asset that can easily be converted into cash within 1 year.

Examples: Cash and checking accounts, marketable securities, accounts receivable (less allowance for doubtful accounts), inventory and prepaid expenses.

Liquidity - how easy an asset can be turned into cash.

2. Fixed assets - land, buildings, equipment - long life.

Depreciation - process of distributing the cost of an asset over it's life.

3. Intangible assets - patents, trademarks, and Goodwill

Goodwill - excess amount paid for an existing business beyond the value of it's assets.

ii. Liabilities

1. Current liabilities - must be paid within one year. Example: Accounts payable, bills, wages, taxes

2. Long term liabilities - Debt due over a longer time period than one year.

iii. Owners' equity

1. Common stock
2. Paid-in capital - additional, beyond stock
3. Retained earnings - Net profits retained, not distributed to stockholders in the form of dividends

B. Income statements

Revenues - Expenses = Profit (Loss)

i. Revenues - Funds flowing into the business from sales.
ii. Cost of goods sold (CGS) - Cost of obtainng materials for making the products sold by the firm

Beginning Inventory +

Purchases =

Total Goods available for Sale

- Sales =

Ending inventory

CGS = Total goods available - Ending Inventory

Revenues - CGS = Gross Margin

GMP (Gross Margin Percentage) = Gross Margin / Revenues

iii. Operating expenses - Costs other than CGS - Examples: Selling, General and administrative expenses

C. Statements of cash flows

• Cash flows from operations
• Cash flows from investing
• Cash flows from financing

D. The budget: An internal financial statement forecasting estimated revenues and expenses for a period of time in the future

E. Reporting standards and practices

Examples:

• Text - Revenue Recognition Example,
• Enron - Mark-to-market accounting,
• Ponzi - investment scheme
• Network marketing

V. Analyzing financial statements

A. Short-term solvency ratios - either short term or long term, used for evaluating the risk in investing ina firm.

Liquidity - measures a firm's ability to pay it's immediate debts.

i. Current ratio

Current assets / Current liabilities

ii. Working capital

Current assets - Current liabilities = WC

B. Long-term solvency ratios - How much of the firm's financing is due to debt.

i. Debt-to-owners' equity ratio

Debt / Owner's Equity

C. Profitability ratios - A measure of the firm's potential for earnings.

i. Return on equity - What is the income earned for each dollar invested?

Net income / Total Owner's Equity = ROE

ii. Earnings per share - How big is the dividend that firm's could pay out to shareholders.

Net income / No. of common shares outstanding = EPS

D. Activity ratios - How is the firm using it's assets?

i. Inventory turnover ratio

Cost of Goods Sold / Avg. Inventory =

 

CGS / ((Beg inv. + End inv)/2)

VI. International accounting

A. Foreign currency exchange

Exchange rates vary daily.

Steady or "growing" vs. the dollar indicates that a foreign nation has a "strong" currency.

If highly variable then "weak.

B. International transactions

Actual "cost" or "payment" is calculated on the day that the payment in the foreign currency occurs.

C. International accounting standards

International Accounting Standards Board

 

 

 

 

 

Produced and maintained by David T. Damery
Building Materials and Wood Technology
Department of Natural Resources Conservation
College of Natural Resources and the Environment
University of Massachusetts, Amherst.