MOS Lecture NotesLecture 1 (Accounting): January 16th, 2013 Regardless of what you specialize in, accounting is an important aspect of all business degrees. Accounting is the lifeline to any business; without knowledge inaccounting, you cannot succeed in the business! Accounting is a uniersal language, easy to understand een if you don!t speak that particular language! Accounting measures those activities, summarizes that data for us to be able to make decisions, and enables us to communicate these decisions. "nternal users# are in the organization; are we losing business because our pro$t margins are too high or too low% &orth doing a large ad campaign% 'igher (uality, higher price, lower (uality, lower price% )inancial accounting recognizes that we can!t be all things to all people! *+ternal primary users are# inestors ,people who own your company- and creditors; allow them to make good decisions for the future.o Reenue .anada ,ta+ authority- care about how much money a business makes, so they can ta+ more or less! )or e+ample, they regulate the depreciation of an asset.o .ustomers will purchase goods/serices if a company is doing well, want their warranty to last as long as the product does!o 0abour unions look at the appropriate wage amounts. 1he ob2ectie is to cater to the inestors and creditors, and be able to make the right decisions! 3roprietorship,s- keep personal and business transactions separate, easier to summarize $nancial information; howeer, Reenue .anada sees you as a whole, once a company goes down the tube the legal entity and the personal entity are together, but the accounting entity is set separate. 3artnership,s- group together to combine skills, and they keep accounting entities separate, but the legal entities are still together. A partnership can become a limited partnership,that the legal entity remains solely on a separate person or group. .orporation usually re(uires a lawyer to get set up and keeps both the accounting and legal entity, therefore, as a shareholder you would not be on the hook, other than losing shares or the inestment alue. o 1his is a great way to protect owners, and protect inestments.o .an be both publicly or priately traded; )acebook became a publicly traded company 2ust recently. 1he mechanics of accounting does not change with the type of business, but the comple+ity does change. A manufacturing business adds alue to e(uipment and creates aproduct. A merchandising business will sell inentory, but they don!t manufacture it. A serice business proides an intangible ob2ect; inestment inentory is (uite small. *ery single transaction is either a $nancing, inesting, or operating actiity. )inancing# 1his is how we obtain funds to $nance the operations of a business. o 4ebt ,mortgage, long5term bond-o 6hares ,selling or purchasing- "nesting# 1his is obtaining money and inesting in substantial assets that help you generate business in the future, oer the long5term.o 3roperty, plant, and e(uipment.o 3urchase or sale of inestments. 7perating# 1his is the day5to5day, reason why a company in business in the $rst place, and the supporting transactions that keep the business a8oat. o Reenueso *+penseso AR, A3, "nentory &e communicate to users by taking all sales, reenue, and economic information, and summarize it into a formatted document.o "ncome 6tatement 3ro$t 6tatement;, 6tatement of *arnings reenue ande+penses for a specifc period of time are summarized. Reenues are bene$ts inoled during businessactiities. *+penses are the costs inoled during business actiities. 9et *arnings, 9et 0oss. Reenue and *+penses are temporary accounts; ,temporarily accumulates until the $scal year end-. o 6tatement of Retained *arnings Also for a period of time. 'ow much has been accumulated this year, in addition to total accumulated since the start of the business, less diidends.o :alance 6heet 1his is done at a point in time, looks at all assets, liabilities, and shareholders! e(uity. *(uity is considered the net worth of the business. o 6tatement of .ash )low &hy did the cash balance change from one point to another% &here did it come from, where did it go% 1his takes all cash transactions, and categorizes them into di;erent types of transactions, e+plains where cash went! An asset is an economic resource that is e+pected to be a bene$tin the future. 0iabilities are outside claims on our assets; economic obligations. 6hareholders ,7wners!- *(uity represents the insider!s claims; creditors before owners. o Retained *arnings ? 4iidends > Reenues ? *+penses! 1he )low of Accounting "nformation#o @. 3eople make decisionso A. :usiness transactions occuro B. :usinesses report their results. 4oes this decision e;ect our $nancial position% A transaction is an eent that both a;ects the $nancial position of the business entity and can be reliably recorded. 9otes receiable and accounts receiable di;er, as notes are usually long5term, and hae an interest percentage associated within. 3repaid e+pense an increase in the asset, and gradually being deducted out of assets and into e+pense accounts. Accounts payable is resered for enders. Accrued liabilities are for e+penses we!e incurred, but not yet paid ,salaries payable, acation5pay payable, utilities payable-; re8ect true obligations of company. 4eferred reenue is when someone else prepaid you for something ,i.e. purchasing a airplane ticket in adance, business!cash increases, but the reenue account is not increased until the serice has been ful$lled. 3ermanent ,assets, liabilities- accounts, temporary ,reenues, e+penses- accounts. 4ebit ,4R- and credit ,.R-, left and right.o .ertain accounts should always be a debit balance, and others should always be a credit. "nentory will always be a debit, as you cannot sell something that you don!t hae. .ash accounts in credit balance means you owe the bank money! Assets#o 4ebit Increaseso .redit Decreases 0iabilitieso 4ebit Decreaseso .redit Increases *(uitieso 4ebit Decreaseso .redit Increases Debit Increaseso D ividendso E xpenseso A ssetso L osses Credit Increaseso G ainso R evenueo L iabilitieso S hares 1he $nancial statements are a great summary of actiity, how did they do this year% Are they in good shape for the future% )inancial statements relates to a speci$c date or coers a particular period. An income statement answers# 'ow well did the company operate during the period% A statement of retained earnings answers# 'ow did the companies retained earning!s change during the period% A balance sheet answers# &hat is the company!s $nancial position at the end of the period% A cash 8ow statement answers# 'ow much cash can out and in depending on the type of transactions% Relationship# o @. "ncome 6tatement# 9et "ncomeo A. 6tatement of Retained *arnings# Add 9et "ncomeo B. :alance 6heet# Report Retained *arningso C. .ash )low 6tatement# Report .ash :alance from :alance6heet "s it possible to hae total e(uity in a debit balance%o .ontributed .apital ,D@E,EEE, credit balance-o Retained *arnings ,DBE,EEE 5 DFE,EEE = ,DGE,EEE- 1herefore, there would be a ,DCE,EEE- debit balance in total e(uity! Lecture 2 (Accounting): January 23rd, 2013 1he need for a conceptual framework eoled oer a long period of time; oer HEE years old; howeer, changes to assets ,intangibles- and liabilities ,bank loans-. 3roide framework that will proide information to inestors and o;er a way of comparison between two entities. 1he framework guides our choices; accounting is not always black and white ,when do we alue an asset%-; helps us determine what we put in the $nancial statements. Accounting has eoled; capital businesses and market shares soaccounting is catching up. "n the early @IHE!s, the 1rueblood .ommittee was formed to deelop what accounting is used for; proide information that is useful to inestors and creditors;o "nformation is releant if it can help an inestor or creditor make a decision. E (shares, revenue [opening + revenue expense dividends!o &e can!t hide behind a legal contract of the lease, we mustkeep in mind the economic alue. "omparabilit# ,to industry, year to year-; $eri%abilit# ,some things easy, inoice; estimates proide issues, bad debt e+pense,aluation of inentory; would others come to the same consensus-; &imeliness ,information as (uick as possible; (uicker, the more likely for more mistakes-; 'nderstandabilit# ,reasonably informed users, willing to pay to get that knowledge,aerage person cannot $nd these-. 1radeo;s are when we gie up one characteristic to the other ,timeliness and (uality-. .onstraints ,materiality# leaing or including information that may change the 2udgment of a reasonable person; does the cost of proiding the information outweigh the bene$t- Assets#o )uture economic bene$t; right to access ,restriction of use to other parties-, something we own. 0iabilities#o )uture economic obligation; there is a present obligation. *(uityo Residual net di;erences in assets after liabilities hae beenpaid o;. Kains and 0oses#o 6eparate them from ordinary actiities from incidentals. (ecognition and measurement criteria ,'3 purchased a software company, writing o; about HGJ of company as the company was oer5alued; this company recognized reenue too early-; these cause the ma2or troubles and issues. Recognition is the process of putting something on a statement; must ask what kind of element it is, is it probable, reliably measurable. 1he economic entit# assumption distinct from separate personal units; does not deal with legal entity. 1a+es are considered a legal entity. *nron set up 63* ,6pecial 3urpose *ntities-; issued stock to thesebusinesses; loan A/R to 63*!s and they used those inestments to obtain bank loans; *nron did not e+clude this information, as the 63*!s were not publicly traded. .ash :asis Accounting# reenue is recorded when cash is receied, e+penses recorded when occurred. Accrual :asis of Accounting# reenue is recorded when earned, e+penses recorded regardless of when cash is receied or paid ,on accounts, unearned reenue, prepaids- Reenue is recognized when the risk and rewards hae been passed on; measurability was possible; collectability is reassured (revenue recognition!. *+penses are matched with reenue, all costs associated with generating that reenue should be recorded, cause5and5e;ect relationship (matching!. 3eriodicity Assumption refers to reporting within arti$cial time periods.