Day 1-Accounting Basic Formulas & Definitions PDF

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Basic Accounting Formulas...

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Accounting)Basics-Formulas)&)Definitions) )

3 Key Financial Statements: 1) BALANCE SHEET Balance Sheet Equation: Assets = Liabilities + Equity Assets • • • •

Cash Accounts Receivable (payment due from customer) Inventory Fixed Assets (laptops, machinery & equip)

= • •

Liabilities Accounts Payable (payment owed to suppliers) Notes/Bonds Payable (loans)

+ • •

Equity Stock Retained Earnings

2) INCOME STATEMENT Income Statement Equations: Service Company: Revenue - Expenses Net Income (Loss)

Manufacturing Company: Revenue - Cost of Goods Sold (COGS) Gross Profit - Operating Expenses Net Income (Loss)

Revenue Calculations: Service Company Revenue = # of Hours Worked for Customer * Hourly Rate (i.e. Revenue for home repair = 5 hours * $10/hour = $50 in Revenue) Manufacturing Company Revenue = Quantity of Product Sold * Price of Product (i.e. Revenue for t-shirts = 100 t-shirts sold * $10/shirt = $1,000 in Revenue) Examples of Operating Expenses: • Salaries Expense • Rent Expense • Telephone/Utilities Expense 3) STATEMENT OF CASH FLOWS Cash Receipts (CASH IN) and Cash Disbursements (CASH OUT) categorized into 3 major activities: 1) Operating 2) Investments 3) Financing

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Accounting)Basics-Formulas)&)Definitions) ) REVENUE - is the value of what is received for goods sold, services rendered, and other financial sources of revenue, such as rents earned, interest earned, etc. COSTS OF GOODS SOLD - is a measure of the cost of merchandise sold or cost of raw materials and supplies used for producing items for resale GROSS PROFIT - is how much a company earned by buying (or making) and selling merchandise = Revenue minus COGS NET INCOME - is revenue left over after all costs and expenses, including taxes, are paid. OPERATING EXPENSES - are costs involved in operating a business, such as rent, insurance, utilities, and salaries. DEPRECIATION - (also an operating expense) is the systematic write-off of the cost of a tangible asset over its estimated useful life. (such as equipment and machinery). BALANCE SHEET - the financial statement that reports a firm’s financial condition at a specific time and is composed of three major accounts: assets, liabilities, and owner’s equity. THE FUNDAMENTAL ACCOUNTING EQUATION- Assets = Liabilities + Owner’s Equity ASSETS - Economic resources owned by a firm. Items can be tangible or intangible. LIQUIDITY - Ease with which assets can be converted into cash. LIABILITIES - What the business owes to others - its current or long-term debts. ACCOUNTS PAYABLE - Current liabilities a firm owes for merchandise or services purchased on credit. OWNERS’ EQUITY - The amount of the business that belongs to the owners minus any liabilities of the owners (includes Retained Earnings) RETAINED EARNINGS - Accumulated earnings from the firm’s profitable operations that are reinvested in the business. STATEMENT OF CASH FLOWS - Reports cash receipts and cash disbursements related to the three major activities of a firm: 1) Operations 2) Investments 3) Financing LIQUIDITY RATIOS - measure the company’s ability to turn assets into cash to pay its short-term debts, which are expected to be repaid within one year LEVERAGE RATIOS - measure the degree to which a company relies on borrowed funds in its operations. PROFITABILITY RATIOS - measure how effectively a company is using its various resources to achieve profits and are vital measurements of company growth and management performance.

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