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Accounting Workshop: Understanding Accounting Equation, U.S. GAAP, and Financial Reports, Exercises of Accounting

Scotland's Rural University College (SRUC)Accounting

An overview of accounting concepts, focusing on the Accounting Equation, U.S. GAAP, and financial reports such as the Balance Sheet, Income Statement, and Statement of Cash Flows. Key topics include stock vs flow, cash vs accrual, debits vs credits, and the differences between IAS and other accounting standards. A sample exercise and footnotes on investment decisions are also included.

Typology: Exercises

2021/2022

Uploaded on 09/12/2022

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Workshop II: Accounting
Workshop II: Accounting
The Accounting Equation
Key Concepts
• Stock vs Flow
• Cash vs Accrual
• Debits vs Credits
U.S. GAAP
• Balance Sheet
• Income Statement
• Statement of Cash Flows
Sample Exercise
Footnotes and Investment Decisions
Questions
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Partial preview of the text

Download Accounting Workshop: Understanding Accounting Equation, U.S. GAAP, and Financial Reports and more Exercises Accounting in PDF only on Docsity!

Workshop II: Accounting

Workshop II: Accounting

ƒ The Accounting Equation ƒ Key Concepts

  • Stock vs Flow
  • Cash vs Accrual
  • Debits vs Credits ƒ U.S. GAAP
  • Balance Sheet
  • Income Statement
  • Statement of Cash Flows ƒ Sample Exercise ƒ Footnotes and Investment Decisions ƒ Questions

Accounting Equation

ƒ Assets = Liabilities + Stockholders Equity

  • Assets: Something of value a company owns
  • Liabilities: Something the company owes to somebody else
  • Equity: What owners are entitled to after creditors are paid off ƒ Must ALWAYS balance. ƒ Debits vs Credits
  • Not confusing: Debit -> left hand side, Credit -> right hand side. ƒ Historical Cost Accounting
  • Conservative
  • Objective / Verifiable
  • Going Concern

Accounting Concepts

ƒ Cash vs Accrual

  • Accrual records revenues and expenses in periods which they occur and matches expenses with the period in which the revenue is earned
  • Cash accounting records revenues and expenses as cash is received / paid out
  • Trade Credit: Accounts Receivable and Accounts Payable
  • Capital Expenditures and Depreciation… o Depreciation: Non cash charge to allow matching of a ‘big ticket asset’ to the periods that it is used in. - Land not depreciated

US G.A.A.P.

ƒ Highest level of transparency required in the world ƒ Differs from IAS and other countries accounting standards ƒ Requires publication of various financial reports

  • 10-K
  • 10-Q
  • 8-K
  • Schedule 13 ƒ Components of 10-K’s and 10-Q’s are
  • Income Statement
  • Balance Sheet
  • Statement of Cash flows

Income Statement

Balance Sheet

Cash Flow Statement

Free Cash Flow to the Firm

ƒ The cash flow available to equityholders and debtholders after all other cash expenses.

ƒ We use this in our Discounted Cash Flow Valuations.

ƒ FCFF: EBIT * (1-t) + D&A – Capex – Change in Net Working Capital

ƒ FCFF: Net Income + Interest Expense + D&A – Capex – Change in Net Working Capital

ƒ FCFF: Net Cash from Operations + Net Cash from Investing + Interest Expense

Return on Capital

ƒ Return on Capital – Profit divided by total invested

ƒ Return on Capital versus Return on Equity

  • Return on equity is calculated with net income and total equity
  • Return on capital is calculated with net income plus interest, and debt plus equity ƒ Firm A has net income of $15, interest expense of $5, debt of $50, and equity of $
  • Return on Equity = $15 / $50 = 30%
  • Return on Capital = ($15 + $5) / ($50 + $50) = 20% ƒ A good investment has higher return on capital than cost of capital

Questions?

Workshop I: Financial Markets

Workshop II: Financial Accounting

Workshop III: Market Based Valuation

Workshop IV: Intrinsic Discounted Cash Flow Valuation

Workshop V: Analyzing Companies

Workshop VI: Effective Presentations

Additional Workshops: Options, Alternative Investments, Excel Modeling, Efficient Markets, Investing Strategies