Lectures 3 and 4_WEBCTfinan

Lectures 3 and 4_WEBCTfinan - Click to edit Master subtitle...

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Unformatted text preview: Click to edit Master subtitle style 9/18/11 LECTUREs 3 & 4 The accounting cycle 9/18/11 Agenda Understanding the basic accounting equation Accrual Accounting vs. Cash Accounting Analyzing transactions and understanding their effect on the basic accounting equation Profitability Ratios Cash flow analysis 9/18/11 Basic Accounting Equation Remember that the above equation must ALWAYS balance! When increase one side, the other side must be increased by the same amount ASSETS = Liabilities + Shareholders Equity 9/18/11 REMINDER: Definition of an Asset An asset is: A resource controlled by an entity Company expects future economic benefits from the use or sale of the resource Event that gave the company control of the resource has already happened. 9/18/11 REMINDER: Definition of a Liability A liability has the following characteristics Will require the probable future sacrifice of a economic benefit (cash, good exchange or service to be rendered) The event giving rise to the obligation has already occurred The company has little or no chance to avoid the obligation 9/18/11 Accrual vs. Cash Accounting Accrual Accounting : l Expenses are recorded when they are incurred / consumed l Revenues are recorded when they are performed Cash Accounting: l Expenses are recorded when the cash for the expense is disbursed l Revenues are recorded when the cash for 9/18/11 Accrual vs. Cash Accounting Example Today, Sept 15th is pay day. You receive $2,000 in your bank account for your work over the past 2 weeks. On Sept 7th, you went on an all inclusive Sept 1 Sept 30th $2,000 Cash inflow Today Sept 15th Sept 7th $2,500 went on a trip $2500 Paid credit card 9/18/11 Accrual vs. Cash Accounting Cash basis is NOT acceptable under IFRS. Accrual basis must be used by companies preparing financial statements Accrual basis paints a better picture of the standing of a company at any given point in time....
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Lectures 3 and 4_WEBCTfinan - Click to edit Master subtitle...

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