Choirunnisa Arifa
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WHAT IS ACCOUNTING?
Accounting Identifying
A system
for:
Recording
Financial Information:
• Relevant
Communicating • Reliable
• Comparable
used for
ECONOMIC
DECISION
MAKING
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The Balance Sheet is a financial statement that
shows the firm’s assets and liabilities at a
particular time.
Why is it useful?
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Current Assets Current Liabilities
• Cash & Securities • Payables
• Receivables • Short-term Debt
• Inventories +
+ Long-term Liabilities
Fixed Assets
• Tangible Assets = +
• Intangible Assets
___________________
Shareholders’ Equity
Total Assets ____________________
Total Liabilities &
Shareholders’ Equity
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Assets represent the uses of a firm’s funds
i.e. Assets show what the firm “owns”
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Which of the following Which of the following is
assets is typically a current asset?
considered most liquid?
Least liquid? • Property that a firm
owns
Marketable securities
• A firm’s production
Accounts receivable
equipment
Inventories
• Unsold inventories
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• Tangible Assets
• Intangible Assets
• Goodwill
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Which of the following represent tangible
assets? Intangible assets?
Property
Production Facilities
Patents
Production Equipment
Trademarks
Copyrights
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Liabilities represent the sources of a firm’s funding.
(i.e. Liabilities represent what a firm “owes.”)
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Which of the following is a current liability?
• Bond debt that matures in 3 years
• A bank loan that is due in 24 months
• An obligation to pay a supplier within 6 months
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In the balance sheet below, what was the value of net working capital in 2008? 2009?
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All balance sheet items are expressed as a
percentage of total assets.
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Note the changes from 2008 to 2009.
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Book Value
Value of assets or liabilities according to the
balance sheet.
Values recorded at their historical cost adjusted
for depreciation
Market Value
The value of assets or liabilities were they to be
resold in a market
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Suppose that Home depot borrows $500 million by
issuing new long-term bonds. It places $100 million of
the proceeds in the bank and uses $400 million to buy
new machinery.
What item (s) of the balance sheet would change?
Would shareholders’ equity change?
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Income Statement: a financial statement that
shows the revenues, expenses, and net income
of a firm over a period of time.
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All items on a common-size income
statement are expressed as a percentage of
revenues.
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what was the value of Home Depot’s EBIT in 2009?
Common
Size
Income
Statement
(right column)
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Differences between profits & cash flow:
Depreciation
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Consider a firm that spends $200 to produce goods
in period 1. in period 2 it sells half of those goods for
$150, but it doesn’t collect payment until one period
later. In period 3, it sells the other half of the goods
for $150, and it collects payment on these sales in
period 4.
Calculate the profits and the cash flows for this firm
in period 1 to 4.
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Period 1 2 3 4
Sales 0 150 150 0
Cost of goods sold 0 100 100 0
Net Income 0 50 50 0
Change in Account Receivable 0 -150 150 150
-150
Change in Inventories -200 100 100 0
Net Cash Flows -200 0 150 150
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The Statement of Cash Flows shows the firm’s cash
receipts and cash payments over time.
Why is it useful?
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Structure:
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Net income for your firm was $10,000 last year. The depreciation
expense was $2,500; accounts receivable increased $1,250;
accounts payable increased $800; and inventories increased by
$2,000.
What was the total cash flow from operations for the period?
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Most managers say that accounting earnings is
the single most important number reported to
investors.
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Grey areas for financial managers:
Revenue recognition
Cookie-jar reserves
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Additional grey areas for financial managers:
Mark-to-market accounting
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Both have a progressive structure (the higher the
income, the higher the marginal tax rate).
Corporations
Rates begin at 15% and rise to 35% for corporations
with income over $10 million.
Also subject to state tax (around 5%).
Individuals
Rates begin at 10% and rise to 38.6% for individuals
with income over $307,050.
May be subject to state tax.
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Interest paid – tax deductible for corporations (paid out of pre-
tax income), but usually not for individuals (interest on home
loans being the exception).
Interest earned – usually fully taxable (an exception being
interest from a (muni”).
Dividends paid – paid out of after-tax income.
Dividends received – taxed as ordinary income for individuals
(“double taxation”). A portion of dividends received by
corporations is tax excludable, in order to avoid “triple
taxation”.
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In the United States, corporations pay tax on their income.
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How about in Indonesia?
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When a corporation issues a dividend, each dividend
dollar is effectively taxed twice:
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Construct a balance sheet for sophie’s sofas given
the following data. What is shareholders’ equity?
Cash balances = $10,000
Inventory of sofas = $200,000
Store and Property = $100,000
Accounts receivable = $22,000
Accounts payable = $17,000
Long-term debt = $170,000
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Cost of goods sold = $8,000
Income taxes paid (20%) = $2,000
Administrative expense = $3,000
Interest expense = $1,000
Depreciation = $1,000
From the above data:
a. What was EBIT?
b. What was the firm’s net income?
c. What must have been the firm’s revenues?
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The year-end 2013 balance sheet of brandex inc.
Listed common stock and other paid-in-capital at
$1,100,000 and retained earnings at $3,400,000. the
next year, retained earnings were listed at
$3,700,00.the firm’s net income in 2014 was $900,000.
there were no stock repurchases during the year.
What were the dividends paid by the firm in 2014?
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