ClassChapter02.pdf;JSESSIONID=l9KJLG1Wffhxk7dhpcjbjthVLVTl4hctL0TLjjgfxJX9jMvsGmrK!-1653588525!mycou

ClassChapter02.pdf;JSESSIONID=l9KJLG1Wffhxk7dhpcjbjthVLVTl4hctL0TLjjgfxJX9jMvsGmrK!-1653588525!mycou

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1 McGill Faculty of Engineering MIME 310 Engineering Economy Section 2: How well is a business doing? • Analysis of Financial Statements Section 3: What is depreciation? • Definition and Basic Principles • Depreciation Methods Outline Section 1: How businesses keep financial records • Basic Principles in Accounting • Financial Statements - Income Statement - Balance Sheet - Cash Flow Statement Accounting, the source of all financial information to the business world Chapter 2 – Principles of Accounting
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2 McGill Faculty of Engineering MIME 310 Engineering Economy Section 1: Basic Principles in Accounting First Shareholders’ Equity = Assets - Liabilities Assets Goods owned by a business… e.g. cash, inventory, real estate, machinery and patents Liabilities Items owed by a business… e.g. accounts payable, taxes payable, bank loans and mortgages Shareholders’ Equity Net worth of the business to its owners; consists of: - amount raised by issuing shares, “capital stock” - past profits reinvested in the business, “accumulated retained earnings” Basic Equivalences Accounting is the systematic recording of all of a business’ transactions (for future reference).
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3 McGill Faculty of Engineering MIME 310 Engineering Economy From the business’ point of view, equity is a liability as well, because: • Capital obtained by issuing shares belongs to the shareholders • Accumulated retained earnings represent the business’ profits that have been reinvested; these belong to the shareholders as well Section 1: Basic Principles in Accounting Basic Equivalences
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4 McGill Faculty of Engineering MIME 310 Engineering Economy Example of a Balance Sheet Section 1: Basic Principles in Accounting Current Assets Current Liabilities Cash 5 400 Account payable 35 200 Accounts receivable 9 000 Taxes payable 4 800 Inventory 37 600 Total 40 000 Total 52 000 Long-term Liabilities Fixed Assets Long-term debt 22 000 Land 37 000 Total Liabilities 62 000 Plant and equipment 110 000 Less Acc. Depreciation 27 000 83 000 Shareholders' Equity Total 120 000 Capital stock 100 000 Retained earnings 26 000 Other Assets 16 000 Total 126 000 TOTAL ASSETS $188 000 TOTAL LIABILITIES & SHAR. EQUITY $188 000 ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY E N G I N E E R I N G S E R V I C E S L I M I T E D Balance Sheet 31 December, 2000
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5 McGill Faculty of Engineering MIME 310 Engineering Economy Second Profits = Revenues - Operating Expenses Revenues Generated from the sale of products and/or services, and income from other sources Operating Expenses Expenses incurred in fabricating products and/or providing services to appropriate markets Profits Net amount available for - distribution to shareholders as “ dividends” and/or - reinvesting in the business, i.e. retained earnings Section 1: Basic Principles in Accounting Basic Equivalences
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6 McGill Faculty of Engineering MIME 310 Engineering Economy Example of an Income Statement Section 1: Basic Principles in Accounting Sales 264 000 Expenses Cost of goods sold 119 000 Depreciation 9 200 Administrative expenses 70 000 Other expenses 13 800 212 000 Operating Profit 52 000
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ClassChapter02.pdf;JSESSIONID=l9KJLG1Wffhxk7dhpcjbjthVLVTl4hctL0TLjjgfxJX9jMvsGmrK!-1653588525!mycou

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