Accounting basics

Accounting Basics
Rania A. Azmi
E-mail:
University of Alexandria, Department of Business Administration

1


Financial (Accounting) Statements

• Financial or Accounting statements are
used for reporting corporate activity.

For Stakeholders
2


Financial Statements

• The Balance Sheet
• The Income Statement
• Statement of Cash Flows

3


The Balance Sheet
• The balance sheet is an accountant’s
snapshot of the firm’s accounting value on a
particular date, as though the firm stood
momentary still.

• The balance sheet states what the firm owns
and how it is financed.
4


The Balance Sheet (Cont.)

Assets Liabilities + Stockholders’ equity

5


The Balance Sheet (example)
XYZ Corporation
Balance Sheet 2006 and 2005
Assets

2006

2005

Current Assets:
Cash and equivalents
Accounts receivable
Inventories
Other
Total Current Assets

140
294

269
58
761

107
270
280
50
707

Fixed Assets:
Property, plant, and equipment
Less accumulated depreciation
Net Property, plant, and equipment
Intangible assets and others
Total fixed assets

Total Assets

1423
(550)
873
245
1118

1879

1274
(460)
814

221
1035

1742

Liabilities (Debt) and
Stockholder's Equity
Current Liabilities:
Accounts payable
Notes payable
Accrued expenses
Total current liabilities
Long-term liabilities:
Deferred taxes
Long-term debt
Total Long-term liabilities:
Stockholders' equity:
Preferred stock
Common Stock ($1 par value)
Capital surplus
Accumulated retained earnings
Less treasury stock
Total equity
Total liabilities and stockholders'
equity

2006

2005

213
50
223
486

197
53
205
455

117
471
588

104
458
562

39
55
347
390
(26)
805

39
32
327
347
(20)

725

1879

1742

6


The Income Statement
• The income statement measures
performance over a specific period of time,
say, a year.
• The accounting definition of income is:
Revenue – Expenses Income

7


The Income Statement (example)
XYZ Corporation
Income Statement 2006
Total operating revenues
Cost of goods sold
Selling, general, and administrative expenses
Depreciation
Operating income
Other income
Earnings before interest and taxes (EBIT)
Interest expense

Pretax income
Taxes
(Current: 71, Deferred 13)
Net Income
Retained earnings:
Dividends:

2262
(1,655)
(327)
(90)
190
29
219
(49)
170
(84)
86
43
43

8


Statement of Cash Flows

Uses of Funds

Sources of Funds

Assets

Assets

Liabilities and
Stockholders’
Equity

Liabilities and
Stockholders’
Equity
9


Statement of Cash Flows
• The most important item that can be
extracted from financial statements is the
accounting cash flow of the firm.
• The statement of cash flows helps to explain
the changes in accounting cash and
equivalents…
10


Statement of Cash Flows (Cont.)
• The first step in determining the change in
cash is to figure out cash flow from operating
activities. This is the cash flow that results
from the firm’s normal activities producing
and selling goods and services.

• The second step is to make an adjustment for
cash flow from investing activities.
• The final step is to make an adjustment for
cash flow from financing activities.
Financing activities are the net payments to
creditors and owners (excluding interest
expense) made during the year.

11


Statement of Cash Flows (Cont.)
• The three components of the statement of
cash flows are:1- Cash flow from Operating Activities
2- Cash flow from Investing Activities
3- Cash flow from Financing Activities

12


Statement of Cash Flows (example)
Statement of Consolidated Cash Flows of XYZ Corporation
XYZ Corporation
Statement of Cash Flows
2006

Operations
Net Income
Depreciation
Deferred taxes

Changes in assets and liabilities
Accounts receivable
Inventories
Accounts payable
Accrued expenses
Notes payable
other
Total Cash Flow from Operations

86
90
13
(24)
11
16
18
(3)
(8)
199

Investing Activities
Acquisition of fixed assets
Sales of fixed assets
Total Cash Flow from Investing Activities

(198)
25
(173)

Financing Activities

Retirement of debt
Proceeds of long-term debt
Dividends
Repurchase of stock
Proceeds from new stock issues
Total Cash Flow from Financing Activities
Changes in cash (on the balance sheet)

(73)
86
(43)
(6)
43
7
33

13


Quiz
• What three things should be kept
in mind when looking at a
balance sheet?

14


• When analyzing a balance sheet,
the financial manager should be
aware of three concerns:1- Accounting liquidity

2- Debt versus equity
3- Value versus cost
15


Quiz

• What are three things to keep in
mind when looking at an income
statement?

16


• When analyzing an income
statement, the financial manager
should keep in mind the followings:1- GAAP
2- Noncash items
3- Time and Costs
17


Some observations (Cash Flow)

• Several types of cash flow are relevant to
understanding the financial situation of the
firm.
• Net income is not cash flow.
(cash flow is more revealing)
18