9. Preparing the Balance Sheet

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Из курса от партнера IESE Business School

Accounting: Principles of Financial Accounting

721 оценки

IESE Business School

Accounting: Principles of Financial Accounting

721 оценки

Курс 1 из 5 — 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.

Из урока

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

Познакомьтесь с преподавателями

Marc Badia
Assistant Professor
Accounting and Control

[MUSIC]

There is one last accounting entry that companies do every year end accounting.

It's called the closing entry.

In the closing entry,

what we we do is to move all the ending balance of the profit and loss account,

that is the net profit for the year, to another account called, retained profits.

Retained profits is an account where we accumulate

all the profits from previous years.

In this way In the following year we are going to start the P&L account from zero.

I mean, this way we don't confuse the profits from one year

with the previous years.

In our case, this is the first year of corporations.

So, the only profits that are going to show under retain profits are going to be

the profits from year X1.

So what we do is we trace the profit and loss account by 8400 euros.

So we leave it at zero.

And we move these profits to the retained profits which is retained profits by

8,400 euros.

So it's just a reclassification.

But both accounts are under owner's equity.

We are talking about the net worth of the shareholders.

That doesn't change.

Now we have all the ending balances of each account.

If we classify all of these account properly,

we'll have the following balance sheet as of December 21st, year x1.

As you see the total amount of current assets is 105,000 Euros.

These are cash or other assets that are going to turn into cash in the near term.

Like accounts receivable that we expect to collect For

the inventories that we expect to sell and collect as well.

On the other side you see that we have current liabilities of 4800 euros.

These liabilities are obligations that we need to repay within a year.

So one of the things we have to consider is whether or

not we have enough cash to repay them in the short run.

What we see is by just looking at the cash and the amount of accounts receivable,

we have enough to cover all the current liabilities.

So it looks like we don't have to worry about our short term obligations, the bank

loan is still a long term debt, because we are going to repay it in two years.

If we take a look at noncurrent assets,

we see that they are decreasing in value due to depreciation and amortization.

But still, we don't have to be concerned about the replacement of these assets,

as the percentage of the accumulated depreciation and

amortization over the original costs is still small.

Finally, we see that owner's equity has increased, thanks to the profit and

loss account, thanks to the profits generated by the business.

So we can say now that shareholders,

after the first year of operations, they are richer by 8,400 euros.

However, note the following.

If you look at the cash account, cash has actually decreased.

In the beginning of the year, we had 46,000 euros in cash, and

now it has decreased to 31,400 euros.

So liquidity has gone down.

Yet, profitability has gone up.

Once again liquidity is not the same as profitability.

We set up the balance sheet as a picture at a point in time.

It's a picture where you have the ending balance of all the accounts in

the company.

So you have there all the assets, all the investments you have.

On all the sources of capital, liabilities and owners' equity.

But the only thing you have to gain is the ending balance.

So my question to you is the following.

If you are the shareholder in this company,

is there any of these accounts where you would like to know more.

In addition to the ending balance,

see what has happened in the account during the year.

Answer this question and I'm going to give the response in the next video.

[MUSIC]

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