Day 3 – Accounting (BUS 600)

1. Accounting system records a given company’s financial status on asset it own, liabilities it owe, its operation performance, its financial situation and its cash flow.  Fundamental accounting rules are in the areas for entity, cash and accrual accounting, objective, conservatism, going concern, consistency and materiality.
2. There are three key financial statements. They are the balance sheet, the income statement and the statement of cash flow. 
3. Balance sheet covers company’s asset, liability and owner’s equity.  They have the relation represented by a fundamental accounting equation:

Assets (A) = Liabilities (L) – Owner’s Equity (OE)

4. Accounting uses journal double entry system which is easier to check and verify the account data. In typical accounting entry, people use  left ( Debit) and right (Credit) in T-table format. For a company, a net working capital is defined as the current assets subtracting the current liabilities.
5. Income statement shows the “flow” of activities and transactions over a specific period. The income comes from the Revenue subtracting the Expenses. Key terminologies on this front include Gross Margin (=Sales – COGS), Cost of Good Sale (COGS = Beginning inventory + Net Purchases – Ending Inventory), Operation Profit (the earnings before interest and tax (EBIT)), and Net Income (The pure income after tax and all other cost).
6. The Statement of Cash Flow gives the financial status and transaction flow. It covers operation activities, investment activities, and financial activities.
7. The accounting statements can be interpreted by using ratios. Liquidity ratios give measure for the cash on hand that can be converted to pay all the bills (LR = Asset/Liability).  Capitalization ratios give the measure for company’s liabilities, investor’s financing and funding. It includes the Financial Leverage (= (Total liabilities + Owners’ Equity)/OE) and Long-term Debt to Capital (= long term debt/(liabilities + OE) ).  Activity Ratios give the measure for how actively the firm’s assets are being deployed. It includes Assets Turnover per period (= Sales / Total Assets), Inventory Turns per Period (= COGS/Average Inventory Held During the period), Days Sale in Inventory (= Ending Inventory / (COGS/365) ).  The Profitability ratios provide the measure for how profitable the company is in the relation to the assets and sales. They are the Return on Sales (ROS = Net Income / Sales), and Return of Equity (ROE = net Income / Owner’s equity).
8. Company’s operating results can be analyzed and managed using variances, such as Purchase Price Variance, Material or Labor Efficiency Variance, Material Price Variance, and Material Efficiency Variance.