Mimi’s MBA Accounting Notes

by   |  July 15, 2014
Mimi's MBA Accounting Notes

I thought it would be helpful for other non-traditional MBA students like me to have access to my accounting notes. Here they are!

As a non-traditional MBA candidate, I am learning accounting the summer before my program starts.   I thought it would be helpful to publish these notes for people like me to reference as they learn accounting.

I find it extremely helpful to reference other people’s notes when studying new material, and I will update these notes as I go along.

Accounting Cycle / Process


1)           Identify economic events = transactions

2)           Measure in standardized units (dollars, etc)

3)           Record transactions

4)           Classify & summarize them

5)           Report in form of financial statements

Cash vs. Accrual Accounting

Cash Accrual
Recorded when cash paidTracks when cash changes hands Revenues recorded when goods / services deliveredExpenses recorded when expense matches revenues or when it’s used up

The chart below is one of my recent favorites.   In trying to understand the relationship between the balance sheet, income statement and statement of cash flows, observe how the other two statements help bridge the gap between a beginning year balance sheet and an end of year balance sheet.   The statement of cash flows illustrates what happened to the cash between those two periods, while the income statement shows the changes in the owner’s equity.   Cool!Relationship of Accounting Statements

 

Balance Sheet

St. of Financial Position

 

 

Income Statement

St. of Operations

 

 

Cash Flow

St. of Retained Earnings

Snap shot = everything from dawn of time UNTIL NOWA = L + OE Revenue flow over a period of time ( R – expenses) – Shows gross margins, retained earnings & how dividends distributed- GAAP demands CF every time a company issues $ statements
Retained Earnings in OE contains Income Statement in different form! BS(IS) – Accrual, not cash (??)- ALL the information contained in Retained Earnings Account – Discloses cash to & from firm- Summarizes sources where cash came from & purposes they were applied to- Helps people know how trustworthy income streams are
Net worth = Equity = A – L 1)           Revenue / Net Sales / Retained Earnings
2)           Cost of Goods Sold margin
Sales – COGS = Gross MarginMinus ExpensesNet IncomePlus Retained EarningsLess Cash Dividend= Total Retained Earnings

Purpose

– Show financial position at one point in time- Demonstrate balance of ALOE – Evaluate company performance over a period of time- Illustrate inflows & outflows – Shows how much of retained earnings distributed to owners- Links net income from income statement to change in retained earnings on balance sheet

Convention

At the top: Name of firm, name of statement, & date

 

Date = one point in timeSnapshot Date = period of timeQuarter, month, week, etc. Date = Fiscal Year ending 20XXOne specified fiscal year

Capital expenditure ““ total $ spent on equipment

Cost of goods sold ““ cost of raw materials to produce the sold item

 

Balance Sheet as of March 26, 2014

 

Assets

  • Cash
  • Valuables
  • Real Estate – $120,000
  • Accounts Receivable – $800

Total Assets – $120,800

Liabilities

  • Accounts Payable – $40,000
  • Credit Card Balance – $800

Total Liabilities – $40,800

Owner’s Equity – $80,000

Total Liabilities + Equity = $120,800

Accounting Partial ImageIt’s good to understand how to do the “old school” way of recording transactions.   While software programs automate everything these days, learning the old school way will help you know where on earth the numbers are coming from.   In homework assignments, this understanding will help you solve “accounting mysteries” the professor makes up to ensure you understand the concepts.

Accruals ““ Liabilities and / or non-cash assets

 

Ordering the Balance Sheet: A = L + OE

 

 

Asset

 

 

Liability

 

Owner’s Equity

Includes

Accounts ReceivableCashPrepaid InsuranceInventoryPlant & EquipmentInvestments Accounts PayableBonds PayableUnearned Revenues Capital StockRetained Earnings(Sales – Cost of Goods Sold, Salaries Expense, Interest Expense)
Cash, stuff that can be liquidated Loans, IOU’s Net worth, profit, A-L, “Equity”, Revenue ““ Expenses, “bottom line”

Liquidity Order

Current AssetsCashCertificate of Deposit (CD)Accounts ReceivableAccrued Interest ReceivableInventory (Office Supplies, etc.)

Prepaid Insurance

Total Current Assets = X

Notes Receivable

Plants & Equipment

Machinery

Building

Land

Total P&E = X

Total Assets = X

 

Current LiabilitiesAccounts PayableWages PayableIncome Tax PayableInterest PayableTotal Current Liabilities = X

Long-Tern Liabilities

Notes Payable

Mortgage Payable

Total Long-Term Liabilities = X

OE

Owner’s EquityCapital StockRetained EarningsTotal Liabilities & OE = X  (Market’s valuation different; price / share * # shares outstanding)

Current = Within 1 Year

Accounts Receivable, Accrued Interest Receivable, Cash, Office Supplies, Prepaid Expenses Rent payable, accrued salaries payable (???), trade payables
                                                                                                                                                Long-Term = More than 1 Year
Machinery, Notes Receivable, Property

 

 

Translation & Application

Cash = coins, dollars, checks to be deposited, BAFAccounts Receivable = Pay check, Renters’ checksAccrued Interest Receivable = BAF?, Interest on loan to familyNotes Receivable = loan to family Accounts Payable = utilities, CapitalOne, WendyWages Payable = FranIncome Tax Payable = taxesNotes Payable = Mortgage Retained Earnings = Margin on rent checks (can take the form of ANY asset account: cash, inventory, accounts receivable, property, equipment, etc.)

Increase

Decrease

Decrease

Increase

Decrease

Increase

+

+

+

Debit

Credit

Debit

Credit

Debit

Credit

 

More on Debits & Credits

 

Asset

Liability

Owner’s Equity

Usually Debit Usually Credit Usually Credit

When It’s Opposite

Deducting CashDepreciation                               ExpensesCOGS

Contra Accounts

Accumulated DepreciationAllowance for Doubtful Accounts Sales Discounts, Returns & Allowances                               Purchase Returns, Discounts & AllowancesTreasury Stock

Depreciation ““ distribute cost of large assets evenly over useful life

(Deduct cost from cash, add back depreciation amount?)

Amortization ““ same thing as depreciation but for intangibles

Straight-line ““ depreciates at a constant rate over its useful life

Sum of the years; digits & Double-declining balance ““ Asset depreciates faster in early life and slower in later years

**Changes are always ++ or — unless they’re done in the same category (A, L or OE) +- or -+

 

Income Statement

 

Net Sales

Cost of Good Sold

Gross Margin

Expenses

Wages Expense

Administration Expense

Utilities Expense

Depreciation Expense

Total Expenses

Income Before Taxes

Income Tax Expense

Net Income = XRetained Earnings 20WW

Add: Net Earnings for 20XX

Less: Dividends

Retained Earnings for 20XX

 

Asset Contra Account ““ Balance either credit (negative / be subtracted ) zero

Accumulated Depreciation

Sales = Revenue

Cost of Goods Sold = Expense

 

 

Stocks: Growth vs. Value

 

Growth

Value

Higher risk Lower Risk
Pay larger proportion of dividend to shareholders Reinvest larger proportion of retained earnings
Company whose goal is aggressive growth More stable, wanting to maintain what it has and please shareholders, giving back to them
Examples: Examples: P&G

 

Retained Earnings = Net income ““ Dividends

Income Statement for March 26, 2014

 Revenue

  • Sales Revenue – $800
  • Service Revenue – $400
  • Interest – $20

Total Revenue – $1,220Expenses

  • Advertising – $5
  • Cost of Goods Sold – $5
  • Other – $10

Total Expenses – $20Net Income – $1,200

 

 

Cash Flow

 

Created from comparative balance sheet and / or income statement

 

Net income + Depreciation for the Period

 

Net Income + Noncash Expense ““ Noncash Revenue

 

Noncash Expense = Amortization of intangibles, depreciation of plan assets, depletion of natural resources Noncash Revenue = accrued rev not yet collected (often depreciation expense only one reported)

 

Increase or Decrease?

Increase ↑

Cash Flow Into Business

“Source”

Decrease ↓

Cash Flow Out of Business

“Use”

↑ Cash

↓ Cash

↓ Noncash A

 

↑ L

↑ OE↑ Noncash A

↓ L

↓ OE

Classifying Different Activities

Operating

Investing

Financing

OA

IA

FA

Internal activities, Inventory, etc.Property, P&E, LT Investments & noncurrent assetsLong-term debt

 

Common stock

DividendsUses info from income statement + current accounts from balance sheetUses info from noncurrent asset section of balance sheetUses info from retained earnings, long-term debt + stockholder’s equity on BSReceivables, Inventory, Other Current Assets, Payables & Accruals, Taxes  Notes payable, stock

Two Cash Flow Methods

Direct

Indirect

Preferred by FASB

 

Shows more detail about cash payments

Starts with net income & shows changes to convert it to cashShows cash collected from customers & paid to suppliers, employees, interest & taxes

Positive cash flows = revenues

Negative cash flows = expenses

 

Ratios

Profitability

Liquidity

Financial

Efficiency in generating profits Ability to pay off debts Stability of capital structure
Investors Creditors
Profit Margin = Return on Sales

Gross Sales

Return on Assets

Return on Equity

Asset Turnover

Earnings / Share

Price-Earnings

Payout

Times Interested Earning

 

 

Profitability Ratios

 

 

Abbreviation

How to Calculate

What It Measures

Ideal

ROS

NI / NS Ability to turn sales into profits

GM

GM / NS Relates COGS to Sales

ROA

NI / Avg A Earning power of A

ROE

NI / Avg OE Earning power of OE

A/T

NS / Avg A Productivity of A

EPS

NI / Avg # ShOut Earnings / share of stock

P/E

MP / EPS Value of earnings in marketplace

PO

Div / NI Share of earnings that owners receive

X/I

PBIT / IE Coverage of interest charges

 

 

Liquidity Ratios

 

Abbreviation

How to Calculate

What It Measures

Ideal

WC

CA – CL Excess funds available

Cur

CA / CL Short-term debt payment ability

Quick

Quick A / CL ST liquidity

R/T

NS / Avg Rec Reasonableness of A/R level

ACP

Avg Rec / Daily S or NS Effectiveness of collections

I/T

COGS / Avg Inv Effect. Of inventory investment

AIP

Avg Inv / Daily COGS Ability to control inventory

OC

Avg Rec + Avg Inv Time required from production to cash

 

 

Financial Ratios

 

Abbreviation

How to Calculate

What It Measures

Ideal

D/A

L / A % of A financed by debt

E/A

OE / A Protection to creditors

D/E

L / OE Relationship b/w borrowing & capital

D/C

LT Debt / LTD + OE % of permanent debt in firm

 

 

More on: Business, Insights, MBA
About the Author:

Mimi West is a consummate entrepreneur, brand and marketing expert. This retired opera singer and Founder of My Dream Teacher is now pursuing her MBA at the University of Virginia Darden School of Business Administration. You can follower her on Twitter: @MimiGuynnWest.
Publshed: July 15, 2014  | 
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