Accounting Basics

Rania A. Azmi
E-mail: rania.a.azmi@gmail.com University of Alexandria, Department of Business Administration

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Financial (Accounting) Statements

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

For Stakeholders
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Financial Statements

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

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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.
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The Balance Sheet (Cont.)

Assets

Liabilities + Stockholders’ equity

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The Balance Sheet (example)
XYZ Corporation Balance Sheet 2006 and 2005 Assets Current Assets: Cash and equivalents Accounts receivable Inventories Other Total Current Assets Fixed Assets: Property, plant, and equipment Less accumulated depreciation Net Property, plant, and equipment Intangible assets and others Total fixed assets 2006 140 294 269 58 761 2005 107 270 280 50 707 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 213 50 223 486 2005 197 53 205 455

1423 (550) 873 245 1118

1274 (460) 814 221 1035

117 471 588

104 458 562

39 55 347 390 (26) 805 1879

39 32 327 347 (20) 725 6 1742

Total Assets

1879

1742

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

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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

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Statement of Cash Flows

Uses of Funds
Assets Liabilities and Stockholders’ Equity

Sources of Funds
Assets Liabilities and Stockholders’ Equity
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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…
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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.

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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
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Statement of Cash Flows (example)
S tatem of C ent onsolidated C ash Flow of X Z C s Y orporation X ZC Y orporation Statem of C ent ash Flow s 2006

O perations
N Incom et e D epreciation D eferred taxes C hanges in assets and liabilities A ccounts receivable Inventories A ccounts payable A ccrued expenses N otes payable other Total C ash Flow fromO perations 86 90 13 (24 ) 11 16 18 (3) (8) 199 (198 ) 25 (173 ) (73 ) 86 (43 ) (6) 43 7 33

Investing A ctivities
A cquisition of fixed assets S ales of fixed assets Total C ash Flow fromInvesting A ctivities

Financing A ctivities
R etirem of debt ent P roceeds of long-termdebt D ividends R epurchase of stock P roceeds fromnew stock issues Total C ash Flow fromFinancing Activities C hanges in cash (on the balance sheet)

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

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• 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
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Quiz

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

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