Finance

Balance sheet

Common stockholders  paid in capital affected

Purchased on open account  accounts payable affected
Collects account receivable  retained earnings
Inventory sold  retained earnings
Payment of accounts payable  affected – accounts payable and affected
cash
Signed promissory notes  + notes payable
Employees’ wages and sales commissions were all paid in cash  -34
cash and -34 retrained earning (wages expense)
Depreciation expense recognized of equipment  -1000 retained earnings
and -1000 equipment and fixtures
Expiation of an appropriate amount of prepaid rental services was
recognized  -2 rent expense and -2 retained earnings

Assets = liabilities + owner’s equity

You invested 80,000 cash in your new company. Cash goes up and paid in
capital. Paid in capital is the money originally invested by the owner.
Everything seen as an investing it affects the paid in capital.

If something happens on open account  means you are not paying yet 
so it becomes a liability on accounts payable.

Promissory note  promise to pay the amount of money later  so notes

payable when notes are signed.

You exchange equipment that cost 4000 in transition 4 with another

wholesaler. However, the equipment received, which is almost new, is
smaller and is worth only 1500. Therefore, the other wholesaler also pays
you 2500 in cash. You recognize no gain or loss on the transaction.
Transaction 4: you acquired equipment for 15000 in exchange for a 5000
cash down payment and 10000 promissory notes.
 cash goes up by 2500
 +2500 equipment

If it is company cash it would reduce cash, but if you use personal cash, it
will affect paid in capital.
Balance Sheet
March 31, 20x1

Assets Liabilities
Cash Accounts payable
Inventory Notes payable
Equipment Paid in capital
Total Assets Total liabilities +
owners’ equity

Issues 1,000,000 shares of common stock to employees for cash, $30. If a

company issue shares  that means cash increases  because they print
shares  they sell the shares to investors  and the investors who buy it
are investors to the company  affects the cash and paid in capital

To disbursed cash on account  means to spent

Income statement is where you calculated the company profit.

Income statement:

Sales revenue
Cost of goods sold
__________________ _
Gross margin (profit) XXX

Operating expenses.
Salaries
Rent
Electricity
Depreciation
Marketing
_________________ _
Total operating expense XXX
______ _

Operating income XXX (income before taxes/earnings

before taxes
Taxes XXX
______ _

Net income XXX (income after taxes/earnings

after taxes

From the net income the firm pats 4000 to the owners (dividend).
This leaves 12000-4000=8000 behind in the company. This becomes
finance from e.g. A new machine, a larger inventory, etc. This ‘new’
finance is part of owner’s equity. It is called retained earnings.
So, from now on, owner’s equity will contain two elements: paid in capital
AND retained earnings.

Retained means to keep a part of the profit is kept in the company itself.
And the company uses that for buying for example new equipment.

Retained earnings at the end of the year  retained earnings begin + net
income – dividends

Paid in capital at the end of the year  paid in capital beginning of the
year + additional investment/issues shares

Issue shares/investment by stockholders increases paid in capital

Liabilities at the begin of the year  assets = liabilities + owner’s equity

Dividends at the end of the year  PIC begin + additional investment by

stockholders

Liabilities at the end of the period  assets at the end of the year =
owner’s equity at the end

If there is no additional investment by stockholders, the paid in capital

doesn’t change.

Assets-liabilities=stockholder’s equity

Stockholders’ equity = paid in capital – retained earnings

If sales increase, that will also increase a part of stockholder’s equity  so

retained earnings
So, if there are sales use 2 lines on the balance sheet to analyse the
transactions. The first line focus on the effect when customers buy
something of you. Promises to pay for example.
Second step delivering your goods that means that inventory goes down
and retained earnings.

Depreciation on equipment goes down by 1000  equipment goes down

by 1000. Retained earnings goes down (depreciation expense)

Declared and paid cash dividends of 15000. Cash goes down by 15000.
Retained earnings goes down.

Montero signed a 1-year lease on a warehouse, paying 48 000 cash in

advance for occupancy of 12 months. Cash goes down, another asset
prepaid rent will increase.

Has been tabulated  Add It up, calculated

Employee wages and sales commissions were all paid in cash  Cash
goes down and retained earnings goes down.

Depreciation expense  equipment goes down and retained earnings

goes down. Every time the words expense  LOWER RETAINED EARNINGS

If the expiration of an appropriate amount of prepaid rental services was

recognized  prepaid rent goes down and retained earnings goes down.

Depends on the benchmark. What benchmark? Compared with different

companies.

Ketchup carried in inventory at a cost of $4 was sold for cash for $3 and
on open account of $8, for a grand total of $11.  the first transaction: +3
cash +8 accounts receivable +11 retained earnings  the second
transaction: inventories go down by -4 and shareholders’ equity goes
down by -4 (cost of goods sold).

Whenever they talk about expenses retained earnings goes down. If you
pay administrative expenses cash goes down. Other assets are not
affected.

Prepaid expenses and insurance expired  retained earnings

What is a fiscal year?  It is a 12-month period but it hasn’t have to start

on January it can also start in April or May.

Collections from customers: Sales + Beginning Accounts Receivable -

Ending Accounts Receivable

Cash paid to inventory purchased:

Cost of Goods Sold+Ending Inventory−Beginning Inventory

Cash paid to suppliers of inventory: inventory purchased+ beginning

accounts payable – ending accounts payable

Cash paid for supplies:

Supply Expense+Beginning Supplies Payable−Ending Supplies Payable

Cash paid to operating expense: operating expense – depreciation

Cash paid to income taxes: Income Tax Expense + Beginning Taxes

Payable - Ending Taxes Payable

Cash paid to salaries: Wage Expense + Beginning Wages Payable -

Ending Wages Payable
Cash paid to general expense: general expense + prepaid general
expenses

Cash paid for purchase of fixed assets; ending fixed assets- beginning
fixed assets

net cash flow from investing activities:

Cash from Sale of Fixed Assets (if any)−Cash Paid for Purchase of Fixed As
sets (from Q8) Since the exercise assumes no fixed assets were sold, the
net cash flow from investing activities is just the cash outflow for
purchasing fixed assets.

Cash paid to dividends: Net income + beginning retained earnings –

ending retained earnings

Cash flows from operating activities

 cash flows from day-to-day business. They affect current assets and
current liabilities in the balance sheet.

Cash flows from investing activities

 these collections and payments have to do with selling (disposal) or
buying (acquisition) of fixed assets (including securities). Financial
securities are things like shares of another company, they make a loan to
another company.

Cash flows from financing activities

 these collections (proceeds) and payments (disbursements) have to do
with the collection or repayment of long-term debts, the
issuance/repurchases of shares (stock) or the payment of divided by the
firm.

We only use the direct method of the cash flow.

Additions to property, plant, and equipment

Proceeds (collections) from long term debt
Increase in accounts receivable
Proceeds from the disposal of assets (you sold)
Dividends to shareholders
Acquisitions, net of cash acquired
Depreciation and amortization of property and intangibles
Purchases of investments
Sales of investments
Other (primarily purchases of intangibles)

Cash flows from Investing activities

Additions to property, plant, and equipment

$(2,893)
Proceeds from the disposal of assets 1,342
Acquisitions, net of cash acquired (2,797)
Purchases of investments (29,882)
Sales of investments (30,396)
Other (primarily purchases of intangibles) (778)

Net cash used for investing activities (4,612)

Capital expenditures for property and equipment (1,710)

Receipt from customers 9,455
Interest paid, net (190)
Repurchase of common stock (193)
Sales of marketable securities 191
Retirement of long-term debt (160)
Payments to suppliers and employees (7,499)
Issuance of common stock for employee stock plans 251
Dividend payments (17)
Issuance of long-term debt 135
Other investing activity 134
Taxes paid 167

Cash flow statement

Cash flow from operating activities

Collections from customers $9455

Payment to suppliers and employees (7499)
Payment of interest (190)
Taxes paid (167)
Net cash from operating activities 1,599

Cash flow from investing activities

Capital expenditures for property and equipment (1,710)

Sales of marketable securities 191
Other investing activity (134)
Net cash from investing activities (1,653)

Cash flow from financing activities

Repurchase of common stock (193)

Retirement of long-term debt (160)
Issuance of common stock for employee stock plans. 251
Dividend payments (17)
Issuance of long-term debt 135
Net cash from financing activities 16

Total change of cash during this half year

Revenues increase retained earnings
Expenses decreases retained earnings
Collections increase cash
Payments decrease cash

Depreciation is an expense  you lose money  so stated on income

statement

Plummet = goes down

Total sales reached $115000 of which $70000 was on open account.

 +$70,000 accounts receivable +$45 cash + $115 retained earnings
The cost of the inventory sold was $60,000
 $-60,000 inventory and $-60,000 retained earnings

Expense ALWAYS RETAINED EARNINGS

Cash flow from operating activities are always:

- increasing/decreasing the long-term loans
- increasing the paid in capital by issuing shares
- decreasing paid in capital by buying back shares
- paying dividends

Bought common stock for $100,000 cash is a financing activity  issue of

common stock.
Borrowed $55,000  proceeds from bank loan

Payment of interest is an operating activity

Depreciation doesn’t belong to the cash flow because it is not a payment.

Interest received and dividends and distributions received are operating

activities form the cash flow.

Assets=liabilities and stockholder’s equity  account format

Assets
Liabilities and stockholders ‘equity  report format

Performance of a company: profitability, liquidity (which means if they

can pay the bills).

Profitability ratios:
- Return on assets (ROA): net income/average assets (assets begin
+ assets end/2) x 100%
- Return on equity (ROE): net income/average stockholder’s equity
x 100%
 - Return on sales (ROS): net income/sales revenue x 100%
- Gross profit%: gross profit/sales revenue x 100%
-
You need a benchmark to access a company performance.

Liquidity ratios:
- Current ratio: current assets/current liabilities
- Quick ratio: current assets – inventories/current liabilities
- Working capital: current assets-current liabilities, the higher the
better.

Retained earnings end=retained begin + net income – dividends

Management accounting=internal decision making

Financial accounting=external decision making

Revenues are increases in net assets as a result of consuming recourses in

the process of providing services to a customer.

Expenses are decreases in net assets as a result of consuming resources

in the process of providing services to a customer.

Buying something on credit or open account is Accounts payable

Whenever you have a sale  cash increase, accounts receivable and

retained earnings increase with the amount of the sale revenue
Second phase: when you look at the inventory decreases and also the
retained earnings also decrease.

$1,200 of prepaid rent expired  -1200 prepaid rent and -1200 retained
earnings