11. Recap of Week 2 and Conclusions

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From the course by IESE Business School

Accounting: Principles of Financial Accounting

593 оценки

IESE Business School

Accounting: Principles of Financial Accounting

593 оценки

Course 1 of 5 in the Specialization Foundations of Management

Financial Accounting is often called the language of business; it is the language that managers use to communicate the firm's financial and economic information to external parties such as shareholders and creditors. Nobody working in business can afford financial illiteracy. Whether you run your own business, work as a manager or are just starting your career, you want to understand financial information and be able to interact with accountants, controllers, and financial managers. You want to talk business! This course will provide you with the accounting language's essentials. Upon completion, you should be able to read and interpret financial statements for business diagnosis and decision-making. More importantly, you will possess the conceptual base to keep learning more sophisticated accounting and finance on your own. Do not forget that, as with any other language, becoming proficient with accounting requires constant practice.

From the lesson

Week 2: The Income Statement

Now that you are familiar with the balance sheet, in week two we'll learn how to account for a variety of transactions. In addition, I'll introduce you to another key financial report: the income statement. Course objectives: To be able to recognize a broader range of transactions on the balance sheet and to become familiar with the income statement.

1. Introduction to Week 21:01

2. Recap of Week 11:52

3. Purchasing More Inventory3:26

4. Sales and Cost of Goods Sold7:04

5. Selling, General and Administrative Expenses4:43

6. Some Collections and Payments of Cash3:58

7. Depreciation and Amortization8:29

8. Interest from Bank Loan and Taxes3:46

9. Preparing the Balance Sheet3:51

10. Introducing the Income Statement6:59

11. Recap of Week 2 and Conclusions3:56

Meet the Instructors

Marc Badia
Assistant Professor
Accounting and Control

[MUSIC]

Now it's time for a recap to conclude the second week of the course.

Remember that accounting is the process that records the business transactions

that take place, in this case in the campus bookstore in our example.

Classifies them under different accounts and produces summary reports for

the shareholders of the company and other external users.

So far, we have introduced two financial statements, the balance sheet and

the income statement.

The balance sheet is the first and

most important financial statement, everything is there.

Any single transaction that takes place in the business is going to effect

the balance sheet.

Remember, each transaction effects at least two accounts.

This is the way that the basic accounting equality always calls.

So assets equal owner's equity plus liabilities.

So the balance sheet is a summary, where you have all the sources of capital,

liabilities was these an external source of capital.

And owners' equity, when this capital contributed by shareholders or

generated by the firm with the profit and loss account.

And on the other hand, you have the users of capital.

In this case we call them assets.

And you classify the assets under current assets or noncurrent assets.

Current assets are cash, or they're going to become cash in the short run,

like accounts receivable, that w'd expect to collect soon.

Or inventories that we'd expect to sell and then collect.

And noncurrent assets that we have there for the long term.

And remember that today we have introduced depreciation.

So these noncurrent assets will decrease in value over time,

because they have a limited useful life.

But it's important to have in mind always,

is that we're talking about the same amount of money.

On the right hand side we have ownership and liabilities.

Those have the sources of capital,

so the prices lies from the point of view of where is the money coming from?

On the left hand side, the same prices lies from the point of view of,

where is the money now?

So the different assets that you have in the business.

So at the end of the day,

we are talking about the same amount of money from two points of view.

Now, we said that the balance sheet is a picture at the point in time

where you just see the ending balance of each one of the accounts.

So it has it's limitations.

And I asked you, which of these accounts would you like to know more about?

And today we started with the P and L account.

The profit and

loss account gives us information about the operations of the business.

How are we incrementing the net worth of the shareholders with operations?

And so, we want to know more about it.

So instead of just having a picture at a point in time,

we would like to have the full movie of the year.

The income statement is the second financial statement that provides this

information.

So it takes all the revenues and expenses from these P and L accounts and

organizes them in a sort of analytical way.

And so, we start with revenues minus the cost of what's sold.

We get the gross margin minus SG&A minus depreciation, we get the operating

profit and then below, financial expenses and tax expenses to get the net income.

And so, this net income, we can compare it to the sales,

we can compare it to the investment in the company,

in order to extract information about the profitability of the business.

And one last idea.

We said, well,

take into consideration that profit is not the same as the change in cash.

Why? Because there are many revenues that have

not been collected yet.

Or maybe they are prepayments that you have not recognized as an expense,

as in prepaid rents.

Or you have expenses that you have recognized as an expense but

you have not paid yet.

So there is a mismatch in time between profits and cash.

And so the next week, we're going to talk about another financial statement

that will take care of cash that will analyze the generation and

consumption of cash in the business.

So I'm looking forward to seeing you next week in order to discuss the cash

flow statements.

[MUSIC]

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