m3l3 - Fall 2010 Module 3 Accounting & Finance Lecture...

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David Robinson © D. Robinson, 2010 Fall 2010 Module 3 Accounting & Finance Lecture 3: Public Accounting Income Statement
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Accounting & Finance Accounting Managerial Financial Finance Auditing How investors use their money How firms raise money Three financial statements Forms of business Income St. Balance Sheet St. Cash Flows
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Financial Accounting I • “Public” accounting • Introduction to Financial Accounting 2 • Accrual accounting • The risk of fraud by lying about timing • Income Statement
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Why do we need “public” accountants? • Who owns Starbucks? r Cisco, or Apple? Or Cisco, or Apple?
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Public Accounting • Conquers the “Adam Smith” problem: • Distant investors, corporations • Does most of the work of the Securities and Exchange Commission (SEC) There’s much more to say about Auditing we’ll come back to it
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For public companies, the accounts are, well, public!
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Public Companies have to file financial statements with the SEC • Now publicly available online (and very quickly) through EDGAR • + pretty good summary on Yahoo! Finance • Quarterly statements (unaudited) “10-Q” • Annual statements (audited) “10-K”
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“Annual Reports” t • Aren’t very useful— usually a self- congratulatory “puff piece” • Come out so late (6 to 9 months later) no serious investor would rely on them
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From Cash Basis to Accrual Accounting
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Introducing Financial Accounting b In the last lecture we calculated “Break Even” and profit at our simple hirt business, on what accountants would 16 t-shirt business, on what accountants would call a cash basis ” . ..
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Cash basis: Making and selling one order of 24 T-shirts • Suppose our selling price is $14.00 • We know FC = $90, VC = $9.00 If we make and sell 24 t-shirts: • Sell 24 at $14, Revenue = 24 X $14 = $ 336 • Costs are $90 + (24 X $9) = ($ 306) • Profit (loss) = $ 30 profit We make $30 profit on a “cash basis”
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Introducing Financial Accounting
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m3l3 - Fall 2010 Module 3 Accounting & Finance Lecture...

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