Notes On Notes Accounting

Submitted By johnfrankos
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Pages: 7

Notes Accounting
Balance Sheet – What do we own and what do we owe. Does not take into annual depreciation, but it does take into account cumulative depreciation (value from all years)
Liability – What we owe - (current and non current is important)
Equity – (stockholder’s equity) What’s left after liability is taken out of your assets.
Asset – Positive thing that the company owns ex. Prepaid insurance can be seen as an asset for years in the future – not the current year though (that would be an expense) Stock, treasury stock, and retained earnings are all assets.
A balance sheet can help us determine profitability of a company. The balance sheet is also cumulative and can show what has happened in the past.
Income Statement – an annual compilation of revenues earned and expenses incurred. The net of those two items is net income. Only measures a discrete period of time (could be a month or 6 months)
Basically measures for a given period of time –-> what were the revenues and what were the expenses. Revenue shown must actually be earned. Even if you have a debt owed to you, if you have a legal right to the money, it counts as an asset. You own that money – even if it will not be paid to you until 5 years later. Revenue cannot reflect gifts or donation.
Example – $300 insurance policy over 3 years. Year 1 = $100 expense, $200 future asset (years 2 and 3). However in year 2 and 3 it counts as $100 expense on each of those years.
Depreciation counts as an expense and is shown on a balance sheet and Income statement.
Reserve accounts threaten the income statement’s legitimacy. Watch out for the “smoothing” of the income statement.
Statement of shareholders equity = Beginning shareholder equity +- Stock +- Current year net income +- other comprehensive income
The statement of shareholders equity is a cumulative account.
Statement of cash flows – what money went in and what money went out. 1) operating cash flows 2) financing cash flows (issuing stocks bonds redeeming stock for cash) 3) Investing
Generally accepted accounting principles – Congress has authority to set accounting standards – SEC has authority to set these standards – SEC authorizes the Financial Accounting Standards Board – And the FASB is the one who puts together the rules.
This is what we could have used to notice the Lehmann Brothers was “burning up cash” . Companies can spend tons of money while also borrowing lots of money resulting in a net positive cash flow

Matching concept – When we generate income we need to also attribute all expenses associated with that income. We need it to all show up.
Annual Report – Includes financial statements, notes to FIS, management analysis (explanations on why things went better or worse than expected) MDNA is very important and gives insights that might be left out of financial statements. Audit reports can contain several opinions. Auditors will put in a “clean” opinion and will state that the statements were prepared appropriately. Some include a qualified opinion and this means that something done by the company didn’t follow generally accepted accounting rules. “Adverse” opinion = badly prepared – Don’t invest in these companies.
IBM 2013 10-k (financial statements and notes) check out IBMS and see what it looks like.
Rules aren’t always implemented the same way when it comes to presenting a companies’ financial information.
When you start a new business you do an income statement every month – maybe even every day.
Interest payment to bank is sort of like the “fee” to the bank in order to “benefit” from access to the money. This represents an exchange of $$ for $$$$
With team put together a balance sheet and statement of cash flows for the ice cream project
Take a look at the financial cockpit case as well by Thursday.
Prepaid expenses are assets.
When a payment is made then the asset is slowly