Fnec 140: Goodyear

Front 1

Financial Accounting

Back 1

accounting for external users and public at large

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Annual Report

Back 2

required report published for all publicly traded companies

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Annual Report Components

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letter from chairman; comparative income statements, balance sheets, and statements of cash flow; footnotes; auditor's (independent) opinion statement

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Tax Accounting

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accounting for the IRS (preparing tax returns, etc.)

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Balance Sheet

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photograph of a company's financial position at a particular date in time (cumulative)

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Assets =

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Assets = Liabilities + Shareholders' Equity

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Income Statement

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statement presenting operations for the year with revenues and expenses

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Net Income =

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Revenues - Expenses = Net Income

Net Income is "closed out" to Retained Earnings on BS at end of accounting period.

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Statement of Cash Flow

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measures how much cash changed between two balance sheets and why

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Assets

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BS - resources a company has to use to do business and make money; listed in order of liquidity

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Liabilities

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BS - the debt of a company; listed in order of when obligations are due

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Shareholders' Equity

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BS - the owners' claim on the assets after liabilities have been paid; includes capital contributed for stock, retained earnings, and treasury stock

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Revenues

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IS - moneys earned for the provision of services or products sold

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Expenses

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IS - costs incurred in generating revenues

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Operating Cash Flow

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SCF - cash flow generated (+ or -) from normal day to day operations; (Inventory, A/P, A/R, Revenues, CGS, Taxes Payable, Interest Expense)

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Investing Cash Flow

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SCF - cash flows generated from assets other than those in operations; (PPE, STMS)

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Financing Cash Flow

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SCF - cash flows generated from liabilities or shareholders' equity other than those in operations; (Stock, Note Payable, Shareholder Dividends)

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SEC

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Securities and Exchange Commission - has ultimate authority over all financial reporting; delegates rule making to FASB

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FASB

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Financial Accounting Standards Board - a group of individuals who set rules followed in the preparation and presentation of annual reports

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GAAP

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Generally Accepted Accounting Principles - rules used in preparation and presentation of annual reports

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Purpose of Audit

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to ensure proper record keeping and proper internal controls are in place; to attest to financial statements for reasonableness and conformity to rules

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Audit Opinions

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issued by independent CPAs; allows investors and potential investors to rely upon statements; very time-consuming and expensive

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Audit Opinion Types

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Unqualified (best), Qualified, Adverse, Disclaimer (audit could not be performed)

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Steps in Accounting System

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process by which financial information ultimately ends up in the financial statements

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Footnotes

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notes to the financial statements in the annual report which explain many relevant items (ie. accounting policies, contingent liabilities, etc.)

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Earnings per Share

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how much each share of common stock earned during the period based upon Net Income; good analysis tool in comparing companies to themselves and to other companies

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Earnings per Share =

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EPS = (Net Income - Preferred Dividends) / (Weighted Avg. # of Shares of Common Stock Outstanding During Period)

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Corporate Structure

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Shareholders --(elect)--> Board of Directors --(appoint)--> C-Suite

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Revenue

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amount earned by a company for providing a service or selling a product; must be mutual benefit before revenue can be recognized as "earned"

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Cost of Goods Sold

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cost of the product being sold

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Salaries

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amount paid to employees

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Insurance

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amount for insurance

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Depreciation

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expensing PPE

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Amortization

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expensing of intangible assets

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Interest

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expense associated with loans

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Income Taxes

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tax amount related to current period income statement (always the last expense)

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Net Income/Loss/Profit/Earnings of Company

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revenues - ALL expenses = "bottom line"; is not equal to cash (may not have collected all revenues or paid all expenses)

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Accounts Receivable

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money owed to a company due to the extension of a credit sale

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Allowance for Doubtful Accounts

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contra-asset which shows an estimate of what receivables will not be collected

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Prepaid Expenses

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expenses that are paid in advance and considered an asset until time elapses and they become real expenses on the income statement

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Marketable Securities

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investments a company makes in stock or bonds of another company; made to make money; short-term = <1 year, long-term = >1 year

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Inventory

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what is purchased and intended to be resold; an asset on BS until it is sold and then becomes CGS expense which is matched with revenues on the IS

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PPE

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tangible assets held in business in order to do business but not for resale; expensed through depreciation expense over life of the asset; (Raw Land is never depreciated)

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Accumulated Depreciation

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contra-asset that represents amount of depreciation that has been taken on assets on the income statement to date (how soon will PPE need to be replaced)

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Net Intangible Assets

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assets that have bene paid for but which have no physical substance; expensed over their useful life (amortization expense); ie. patents, franchises, leases, etc.

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Contingent Liabilities

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liabilities that do not have to be paid yet; not recorded except perhaps in footnotes

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Accounts Payable

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when a company purchases inventory on account (charges it)

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Notes Payable

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when a company borrows money from a bank and signs a note for repayment

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Preferred Stock

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stock which receives dividends before common shareholders may and preference in case of liquidation; do not vote on stockholder issues

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Common Stock

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true owners of the company as they vote on policies and elect the board of directors who make all corporate decisions; dividends are not fixed; riskiest investment but has potential for greatest reward

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Stock at Par

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legal minimum amount that companies may sell their stock for to outsiders (fairly meaningless)

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Additional Paid in Capital

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APIC - represents the amount that a company receives for the sale of its stock over and above par (Sale - Par = APIC)

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Treasury Stock

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when a company buys its own stock on the market; 1) buy it back and resell it for profit; 2) need more to give to employees for stock option plans

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Dividends

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return on owner's investment (in cash or stock) that comes out of retained earnings; NEVER EXPENSED on IS

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Retained Earnings

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Beginning Balance + Net Income OR - Net Loss - Dividends = Retained Earnings

cumulative earnings of a company since inception minus any losses and minus any dividends paid