Accounting & Finance Basics - University of Pittsburgh

Accounting Basics Rania A. Azmi E-mail: [email protected] 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 accountants snapshot of the firms 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 1423 (550) 873 245 1118

1274 (460) 814 221 1035 Total Assets 1879 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 6 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 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 firms 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