3. Purchasing More Inventory

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From the course by IESE Business School

Accounting: Principles of Financial Accounting

566 оценки

IESE Business School

Accounting: Principles of Financial Accounting

566 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]

At the end of the first year of operations of the campus bookstore year X1.

I met again with Christina to in other to make a list

with all the transactions that took place.

You can download these lists from the website of the course, so

that you can fill a much better the transactions we're going to account for.

To account for

these new transactions we're going to follow the balance sheet approach.

Remember that everything is in the balance sheet.

So all the accounts are there.

And therefore any transaction that we'll record

is going to affect the balance sheet.

So I'm going to take the balance sheet at the end of last year.

It's the same balance sheet as in the beginning of the year x1.

And now I'm going to make a little bit of a space with some abbreviations in order

to have a space to account for the rest of the transactions.

Let's start warming up with a transaction that you have already seen before.

So during year x1, the campus bookstore purchasing inventory on credit for

a total amount of 130,000 Euros.

How would you account for this?

How is this transaction going to affect the balance sheet?

The campus bookstore has purchased inventory for

a total amount of 130,000 Euros.

We already own this inventory, these books.

The books are in the hands of the campus bookstore.

And therefore, we can recognize an increase in the inventory.

So the first part of the transaction, we increase inventory.

Now second part of the transaction, we have not paid for this inventory.

So cash is going to remain the same.

Now we are purchasing on credit.

Therefore we need to recognize a new source of capital.

So accounts payable is going to increase by the same amount, $130,000.

After this transaction the balance sheet will look like this.

So from now on I'm going to add all the numbers so

that we only have the ending balance before each transaction.

In this way you have more space to account for the rest of the transactions.

Remember that in each transaction, at least two accounts are involved.

In this way the Basic Accounting Identity will hold.

So, for example, if an asset goes up, another asset will go down, or

maybe a liability will go up.

The thing is that, at the end of the day,

this equality that you see here has to hold.

Talking about the Accounting Identity, if we rearrange this expression here,

we can isolate owner's equity.

And owner's equity is going to be equal to total assets minus liabilities.

So whatever is left of your assets, once you have returned

all your liabilities is the value that is left for the shareholders.

So we call this owner's equity, which is the net worth of the shareholders.

Many times it is called the book value of the company.

That is the accounting value, the value of that company in the books,

in the accounting books.

In the campus book store,

the book value coincides with the capital contributed by the shareholders.

However, in the next few videos we are going to see how

this book value can change, thanks to the operations.

If we sell at a profit, if you sell at a price higher than the cost,

at the end we are going to generate an increase in owner's equity and

the net worth of the shareholders.

[MUSIC]

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