The Basics of Business Accounting

1. Introduction: Hello. Welcome to the manufacturing Academy. My name is Ray Harkins, and this is the introductory video to the skill share class titled The Basics of Business Accounting. Thank you so much for stopping by and if you're anything like me. Before I studied of business finances, accounting, I generally regarded myself, is an intelligent person. I had a lot of business experience. I had a lot of academic training, but I never took the time to really study accounting. So whenever I sat in maybe a board meeting or a staff meeting or a project management meeting and the financials came out, I mean, I I understood some of the terminology I could do math. But I just really didn't understand the full message that these financial statements were trying to communicate. And I certainly didn't understand how these statements were connected to each other. I didn't realize they were connected to each other, You know, by the time I started, like figuring a couple things out of my head, the meeting moved on because the people that do understand accounting saw what they needed to see. They got their questions answered and they moved on, and I was I didn't know what was going on. So anyway, I took it upon myself to learn accounting, business, finance to learn managerial county toe, learn these skills. And I hope that's why you're here Today is to get a basic understanding of Business County . And that is exactly what I'm gonna deliver to. I'm gonna give you ah foundational understanding of the four major financial statements, the balance sheet, the income statement, the casual statement and the statement of owners equity. Those four documents are what every single company publicly held privately have. Big, small whatever. All of them have those four financial statements I'm also going to review with you really? The cornerstone of all of accounting. It's called the fundamental accounting equation. Every document, every financial statement. Everything ties back to that equation. How, ah, business is structured financially. That's what the fundamental accounting equation explains. And then the third major section of accounting topics that I'm a talked about are the some of the major accounting principles things like the revenue recognition principles or the entity principle, or the time based principal things like this that are the ground rules for how accountants and project managers and CFO's assembled their financial statements and make decisions about what goes on those reports and what doesn't. So, anyway, you're gonna get. By the time you're done with this class, you're gonna have a wealth of new information that's going to give you that basic, that foundation, that first floor of a county knowledge and you could build on it and you can. It'll be handing enough. You can use it to understand some of these financial statements in your next project meeting in next board meeting. So all of that is yours. And then at the end of this class, there's gonna be a project for you. There's gonna be an opportunity for you to experiment and practice some of your newly learned skills at the end of this class in the class project section, I give you two things. One. I give you all the slides that are related to the accounting principles those years for your reference, read um, study and think about him. Think about how they might apply at your work place. Anything would give us all these spreadsheets that we looked at in this class, and they're all live spreadsheet. The formulas of building and I'm gonna show you some questions, some scenarios that you could put together in your head and give you an opportunity to step through those. But once you have the spreadsheets, you can use those in your own application at your job site. Or you could just use them as a as a learning tool so you can play with some of the formulas and adjust revenue and cost of goods sold and dividend. Adjust summers and see what the effect is on the bottom line. So anyway, all of that is yours. If you're a member of skill share already. Go ahead, take the class. I mean, you have nothing to lose your already part of the family. If you are not a member of skill share by signing up for this class, you get a two month all access subscription or free from skill share, and you get my classroom free. So it's just a matter of sign up. Four Skill share. You get the two months you get this class, the basics of business accounting, and you get to explore the wealth of classes and opportunities. That skill share has to offer no strings attached so anyway, Sign up Whether you're a part of skill share today or not. Sign up for my class. You have nothing to lose. You can only gain. So thank you so much. If you are about to start your journey of gaining accounting skills, you've come to the right place. Click on the class, go ahead and watch the videos. Do the class project at the end. And as always, if you know anything about me I love interacting with fellow learners and students of my courses. So shoot me a note through skill share. I'd love to hear from me and I'll do the best I can to help you so thank you so much for checking out this class. I'd love to see yeah in the class and interact with you. Have a wonderful day. Thank you. 2. Getting Started: Well, welcome to the basics of business accounting. I'm so thankful that you signed up for this class, as I promised in the introductory video. I'm gonna start right at the beginning. I'm not going to assume that you have any accounting knowledge coming into this, But I do promise you I'm gonna load you up with information. We're going to take it step by step and cover a ton of territory. By the time you're done with this course, you will have a firm grasp on many of the basic concepts and principles related to business accounting. Throughout the course of this class, you are gonna learn the four main financial statements that you'll see across business whether the company's air publicly held privately held smaller, large. You're going to find these four main financial statements over and over again. It's the balance sheet, the income statement, the cash flow statement and the statement of owners Equity. These statements can be very complex for large international companies, but you're gonna have a grasp on the basics, and you're gonna have at least some good sense of how to interpret each of these financial statements. We're also gonna look at six of what are called generally accepted accounting principles. I've listed a few out there the cost principle of monetary unit assumption. These are the rules that accountants go by no matter what organization, what type of its manufacturing if its service industry, larger, small accountants are gonna follow these principles. Getting a grasp on these principles and those previous four financial statements will give you a very good grasp on the basics of accounting. So buckle in. It's gonna be a great ride. I'm gonna share with the all sorts of information, and you'll get a chance to have all these slides at the end. So if you want to review these again in your own time, feel free. That's why I'm giving you the information. If you have ever have any questions. Like I said in my introductory video, just send an email to me. I'd be glad to help you along the way 3. Economic Entity Principle: now, even before we start to build any financial statements or add a penny numbers, we're going to talk about the first and probably the most foundational of all the accounting principles. It's called the economic entity principle on, and I'm going to explain this through a little case study. So let's take, for example, this gentleman. His name's Bob Smith. Now Bob earns a paycheck. He pays taxes. He files a tax return. He owns a home. He owns a car. He makes utility payments every month. He has a savings account. He is a standalone economic entity. Now imagine one day he decides to start a business called the Bob Smith Carwash Company. By starting a business, you are actually forming a separate economic entity. That isn't the Bob Smith, but it's the Bob Smith Carwash Company, and these entities are separate. So let me explain what this might look like in a given week or month. Bob Smith, I'm sure, pays his cable bills is utility bills around the house. He buys food, he eats lunch, he spends money on his Children, and he's looking at a new hunting rifle. Thes air. The types of things that Bob Smith spends his money on. Now Those are very different purchases than the Bob Smith Carwash Company, because the car wash company probably buy soap and water and occasionally needs toe by new scrub brushes and pays for their maintenance and service technicians and pays property taxes for the building. So, just as you wouldn't expect Bob Smith to pay his salaries at the car wash and to buy those new scrub brushes. Likewise, you don't expect the Bob Smith Carwash Company to cover Bob Smith cable bills and pay for his lunch every day. It's because these air separate entities and the the purchases of Bob Smith, the person have nothing to do with the purchases of Bob Smith, the car wash company. They are separate now because of this economic and two D principle. We are going to identify the name of the entity on the top of every single financial statement, and you can look far and wide from the biggest Fortune 500 companies to the smallest company right up top there, listing. Who is the entity? Who are we talking about? We talk about intel. Are we talking about the Bob Smith Carwash Company Who is this? We want to know who the economic entity is. We're gonna put that on the top of every single financial statement. Now there's two areas that I see that the economic entity principle is most commonly violated. And the first is during the start up of a new organization, as the owners and shareholders air coming together to finance the purchase of equipment or property or building or a website. Oftentimes the owners money gets entangled with the companies or the organization's money. It's very important, especially from the beginning, to keep those separate entities clear, and the other is in a business organization called a sole proprietorship. That business is it's a simple structure, and and it's One person owns the business, and they're fully responsible for the liabilities, that company and they are entitled to receive the net worth of that company as well, even though that one person is fully responsible for the company. From an accounting standpoint, it's still vitally important that they're maintained a separate entities 4. Balance Sheets, Pt 1: we're going to talk about the first of four main financial statements. It's called the balance sheet, and the balance sheet is a summary of the organization's financial position at a specific point in time. And we're gonna unpack this slowly, starting with the three major categories that are listed on the balance sheet called Assets Liabilities and Owner's Equity. Sometimes Owners equity is called shareholders equity, but it's really the same thing. So let's take a look at assets first. Assets or things that the company owns were obtained through a financial transaction and are expected to provide future economic benefit. For something to be called an asset, it has to meet each of these three criteria. For instance, if a if a company rents a building or rents a piece of equipment, it's not an asset because it doesn't own that equipment. It's on Lee renting it, and it has to be obtained through a financial transaction, and actually, we're gonna talk about this later, But the value of that asset is recorded at the price paid for that asset. Sometimes you'll hear things by well meaning executives. Will those say something like, You know, our people, our most valuable asset. Well, your people aren't assets because one you don't own them and to you obtained their time through a financial transaction. You paid them. But you didn't obtain the people through the financial transaction. Sometimes they talk about teamwork and and, ah, brand name recognition. And things like this is assets. Those aren't assets. From an accounting perspective, they may be quite valuable, but they're not assets when we're talking about the balance sheet and the third item is expected to provide future benefit, maybe you own something that you obtained through a financial transaction. But its value went to zero because the product went obsolete or something happened where it was devalued substantially. Now it's not worth anything. So you can't listed on your balance sheet as an asset if it's not expected to provide future benefit. So here's some examples. The structure of the company, all this stuff, land buildings, equipment, machinery, thes air, all assets. They're often called fixed assets because they have very long value. But these air assets another example would be the inventory. If you're especially if you're a manufacturing company of any kind, you're gonna have raw materials that are transformed into finished goods. You're gonna have working process, you're gonna inventory, you own it. You bought it and it's expected to bride future benefit thes air assets. We're also gonna have financial accounts. Cash, for instance. Obviously, cash is an asset. These air different examples. Prepaid expenses. Imagine, for instance, that you purchase a year's worth of property insurance, building insurance, fire and property damage and things like this, and you pay up front. You pre pay a year's worth of insurance. While that prepaid insurance expense is an asset because one you paid for you own that policy duration. You paid for it number two, but it's it's providing future benefit. For the rest of that year. You're going to obtain insurance coverage, so a prepaid expense is considered an asset and accounts receivable. This is money where it is owed to you by customers for product that you've shipped to them . Think of your own credit card. Maybe you have a credit card. The credit card company. It has provided this credit service to you. Now you owe them money. It's your credit card balance. Your credit card company looks at your credit card balance as a an account receivable. To them, The money you owe them is an asset. It's a little confusing. If you haven't dealt with accounts receivable before, we're gonna talk about that more in a second. And then there's other intangible assets, so tangible things you can touch and feel intangible. You can't feel them. They don't have material substance, intellectual property, these patents, trademarks, licenses, different property rights. These are things that are purchased that a company owns. You can't really touch them, though, and they're expected to provide future economic benefit. Pharmaceutical companies, for instance, own the patents for their different drugs, and that patent has a tremendous amount of value. While the patent is valid after the patent expires, really, it's value goes down and nothing because it doesn't provide them. The protection doesn't provide future economic benefit to them because they're no longer the exclusive manufacturer that truck. So that and there's a lot of other, um, obscure intangible assets. But those air some important ones. So the second major category on the balance sheet is a liability liabilities, a debt or obligation OD'd to creditors for past transactions. Okay, so what do we have here? It includes long term debt on buildings and other major investments. Think of if it was your home, Think about your mortgage. It's a long term debt. You owe that money back to the bank or the mortgage company includes accounts payable. So this is money that you owe, but you haven't paid yet. It's a liability, generally shorter term debts. Let's just think again. Think about your own home A lot of times in most parts of the country, property taxes are actually paid by the homeowner far after their do. So maybe at the beginning of 2019 you're paying property taxes for the first half of 2018. So even though you didn't pay the money, you owed the money. So in accounts payable is money that a company owes but hasn't yet paid yet. Wages employees work, and then they get a paycheck after they work. So the company records that is an account payable wages, payable taxes, raw material. This happens all the time. A company takes delivery of some I don't know what if your ah plastics injection molding company, you receive resin pellets that you're gonna feed into your injection molding machines and you don't pay for that. Maybe for 30 days or 60 days, Will that money you owe your supplier is called a accounts payable for that raw material. And then this third example I give This is a kind of an obscure idea if you haven't studied accounting before, but it's unearned revenue. Now, I'm gonna give you an example right now, and I'm gonna push your thinking right here. If you can understand this example, you'll really begin to think like an accountant. So let's talk about unearned revenue. I'm going to give you an example in the United States N B A basketball. Other sporting events are very popular. But think about basketball for a second and imagine that you were a season ticket holder. So a season ticket, which means you get a ticket one seat for every single home game. So let's just imagine that this season ticket is 2400 and $60 you get 41 home games and that money is due by October 1st, it comes out to about $60 per game. Well, on November, the first game isn't until November 1st, so you pay 2400 and $60 upfront, but the basketball team hasn't delivered to you any games on October 1st. It delivers the first game on November 1st a month later, so it has as a revenue $60 because it had. It still has an obligation to deliver 40 more games to you. So as each game is played through the season, they can recognize another $60 until the last game, somewhere around April 30th is the 41st game. Then they have recognized or earned the full 2400 and $60 prior to April 30th. They haven't earned that money. It's still unearned revenue. So let's look at it in this summary. October 1st when you bought the season ticket. The basketball team has $2460 of unearned revenue and zero revenue on November 1st, they have $2400 of unearned revenue, $60 of revenue and then at the end of the season, April 30th. They have zero unearned revenue, $2460 of revenue. So the unearned revenue account decreases by $60 per game all the way through the season until it goes down to zero. Okay, this idea is summarized in accounting principle. Number two called the revenue recognition principle, and it basically says that revenue is not recognized when the cash is received, but it's recognize when the good or service is delivered so in the account. So we previously we're talking about accounts receivable. So when you ship a product to your customer, you can recognize that as revenue on what we're gonna talk about later, which is called the Income Statement. But it's recognized as revenue, and it becomes an asset on the balance sheet called accounts receivable. If your cousin before even get to this point if your customer just pays you cash immediately, well, that is revenue and its cash right, So on your balance sheet, it's recognized this cash on your income statement, which we're going to talk about more later. It's it's considered revenue. So the second point here, the money that the customer paid you for a product you have not shipped, is now a liability called unearned revenue. So it's not revenue until the good or service is delivered. I know it's a little complicated. You might want to re listen to this. It's a complicated principle, but once you get it. You're really going to start thinking like an accountant. Okay, third, major section of the balance sheet Owners Equity sometimes is called shareholders equity, and it's simply the total assets minus the total liabilities. If you could imagine, uh, liquidating all your assets, selling all your inventory, selling your land, selling your building, selling it all, using all of that money to pay off whatever debts you have. Liabilities a short termed at long term debt accounts pail pale that off the money that would be left is called owner's equity. So we're going to dig in owner's equity a lot more in the next video when we start building our spreadsheet and looking at examples, and then we're going to start digging into revenue a little bit down the stream. When we start talking about the income statement 5. Balance Sheets Pt 2: Now let's slow down just a little bit to put into practice a few the concepts and principles we've learned so far, and we're gonna do that by starting to build our first balance sheet. So here's a initial start the framework, you might say to a balance sheet and notice that we call it a balance sheet. It's very important to identify the financial statements, so it's clear to the reader what they're looking at. Secondly, we have in compliance with the economic entity principle. We have the name of the economic and t the Bob Smith carwash coming. It's not Bob Smith. It's not some other company, but it's clearly stated who this balance sheet is describing. And then the date. So a balance sheet, as we mentioned, is a snapshot. It's a specific point in time, so the balance sheet draws together the full value, the assets, the liabilities, the network, all of that of a company at a particular moment. So it's important to know what that moment is, and in this case, December 31st 2018 and then we have our three major categories. We talked about assets, liabilities, owners equity, and they are typically not always but typically placed on the balance sheet so that assets is on the left and then liabilities and owner's equities on the right. Sometimes you see liability and owner equity below assets. A lot of times you see them side by side and again, sometimes owners equity is called shareholders equity, so we're gonna add some more concepts, and they're going to keep building this balance sheet as we learn more. 6. Balance Sheets, pt 3: Now we're gonna talk about the cornerstone of financial accounting. It's called the Fundamental accounting equation. If you understand this and can adeptly use this equation, you will have a very good grasp on at least the major concept of accounting. Let's take a look at this. It's called the Fundamental accounting equation, and it's simply states. It's not all that complicated. Assets equals liabilities, plus Owner's equity again. Sometimes it's a shareholder's equity, but its liabilities plus equity. Now we've talked about some of these already assets, anything the company owns. It obtained through a financial transaction and is expected to provide future economic benefit. The fixed assets like furniture and machinery and inventory and intellectual property and cash, of course, thes air. The things the company owns that are worth money. Okay, so then the question is, Well, how did they get him? Who paid? How did they finance thes assets? Well, the answer is either through liabilities or through owner's equity, so liability is essentially borrowed. Money, mortgages, short term notes, long term debt. Maybe we're borrowing from our vendors. It's it's money that it's other people's money that we've borrowed or it's the owners money that they've provided to the company, and we haven't talked much about thes categories, but their stock and something called a pick or additional paid in capital retained earnings comes from the sale of revenues minus expenses. It's it's the what's left over from selling our products or services. So all of our assets are financed through one of these two means either bar someone else's money or our money. So I like to think about, ah, this in terms of a house most people are familiar with. Homes either own a home or their parents own a home. And let's imagine that this is a balance sheet and I just use. This is a picture. It helps stick with me. So let's say we agree to buy this home for $100,000. That is the value of this asset. Now how are we going to pay for it? Well, the first thing is some of it will pay for with a what we call a down payment. So that's the portion that's my money that I pull out of my savings account or I've been saving up since I was a little kid or whatever I'm doing. But there's a down payment that's the owner's equity. Will the rest of the money I have to borrow in the form of a mortgage, and that's a liability. It's a debt that I owe someone else. So thinking about our equations assets $100,000 equals liability, plus Owner's Equity 80 plus 20 and this front door is the equal sign. Assets always equals liabilities, plus Owner's equity. So let's play with this a little bit over time. We're making our monthly payment, and we're paying down our liability. Let's say we're down to 75,000. Well, what what now? What's our owner's equity look like? Well, it's it's more. Now. We're up to 25,000. As we pay down our liabilities, the equity goes up, the assets stay the same. So we're just playing around this side of the equation. Well, how about ah different scenario? Let's say I take more money out of my savings count $15,000 I pay it into my home for the purpose of finishing May upstairs and maybe adding a porch on the side of the house. Well, what just happened then will the value of the asset went up because I paid in capital like paid in more money, and I used it to add to this asset. So again 115,000 equals 75 plus 40. So then I decide to borrow $20,000 so that I can add an extra bedroom again. What does that do? I have a more valuable asset. My I've costed my asset a higher value so you can borrow money to add to an asset you can pay in more money to add to an asset. Well, let's look at a different scenario. Let's say you're sitting at home one day and there's a knock on the door and a license certified ordained home appraiser Sanju a document with a gold seal on the bottom that says that you're home. He just appraised it and your home is actually worth ah, $160,000. Well, does that mean that your owner's equity just went from So there's 60,000. Does it mean you added $60,000 now you have $80,000 owners equity, you got to keep the equation balanced, right? The answer, of course, is no. And unfortunately, a contributing cause to the rising home prices of the just preceding that 7 4008 housing crash in United States. Was appraisers adding value toe homes that really wasn't there. So that leads us to this vitally important accounting principle. Number three called the cost principle on, Basically, in terms of assets. It says that the value of an asset recorded on Mount Sheet is at the cost at which it was obtained. Now, even if ah, fancy appraiser comes by one day and says that your buildings now worth you know twice, a much as used to be it doesn't matter. From an accounting perspective, the general generally accepted accounting practice. It's recorded at the value that it was purchased for. There are exceptions to this rule that you learn more in deeper levels of accounting. But as a general rule, assets air recorded at the value that they were purchase that now an accountant can devalue or lower the value of an asset through various means, depreciation, amortization, writing down the value through ah, basically taking a loss. Maybe a inventory became obsolete or things like that, but you can't but but he or she cannot raise the value of an asset. That's accounting principle number three, the cost principle. So let's keep this, ah, fundamental accounting equation in mind. This is the equal sign. So both halves is just like algebra class. Both sides of the equation have to equal each other, so you can add things to both sides. Equal amount to both sides that keep it in balance. You can. You can take, um, money from owners equity to pay off liabilities. You know you can take cash to buy inventory. You can play around with all these categories. There's a 1,000,000 ways to move money and assets and liabilities and back and forth. But the equation has to be balanced. So we're going to dig into this a little more, and we're going to start filling in our own balance sheet to see how all of this works. 7. Double Entry: next I want to introduce you to this character named Luca Patrol E. He was born in Florence, which is a region in Italy during the middle 14 hundreds, and spent his life traveling and teaching throughout Italy. To say this man was a Renaissance man would be an understatement. Not only was he a Franciscan friar and a mathematician, but it was also magician, juggler, fire eater and personal friends even one time remain with Leonardo da Vinci. Now, the reason I bring this guy up is because he invented what is now known as the double entry bookkeeping system, and this system forms the basis for all modern accounting. He developed this system while working with this merchant family, and he wrote several textbooks on it. And at his time he had balance sheets and merchant accounts and accounts receivable. And so many of the things that we rely on today in our modern accounting system. This development is what earned him the title, the father of accounting. So the basis of this double entry bookkeeping system is that every transaction is composed of it least two equal parts. Sometimes there's more than more than two equal parts but the parts end up equal each other and those air referred to as a debit and a credit. Now, I'm gonna keep this section very simple for this introductory video, but I'm an ad and auxiliary section on debits and credits. It could be a little confusing when you first start working with it. So I at made it a separate section in this section in this beginner introductory section. I just want you to know that for every transaction, there are two parts to it. So let's go back to that accounting equation and consider a couple things. If you were to use cash to pay off a long term debt while your cash goes down and your debt goes down, there's two parts. You might borrow money in what's called an accounts payable account to purchase raw material. Essentially, your vendor is giving you credit terms to purchase raw material, so there's two parts. Your raw materials go up when you receive them and your accounts payable go up simultaneously because you owe that vendor money. You may also draw from your retained earnings. That's money past your expenses. Essentially your prop your net earnings that you have held in the company, and you may divert some of that retained earnings into something called dividends and dividends air essentially money you're giving back to the shareholders or the investors in the company. So again, I haven't auxiliary section that explains debits and credits a little bit more. But for now, just know that there's two parts to every transaction, and if it feel like digging into the debits and credits, go ahead. If not, you can skip that video and just go right to the next video on balance sheets. 8. Double Entry, pt 2: Okay, welcome to this auxiliary video on the double entry bookkeeping system. Now, this had a lot of relevance to the classic bookkeepers all through the oh gosh, from From From Petroleos Day All the way through the 19 eighties, probably 19 nineties. There were book keepers who literally used paper, books and pencils and calculators to keep the books record all the financial transactions. And they use this double entry bookkeeping system. Hands on. Okay, so today Ah, lot of that. All the all of it is still relevant, but it's kind of faded into the background a little bit because the computerized accounting systems are sort of the face of accounting today. I'm not saying there isn't relevance to it, but it's relevant. If you're using accounting systems for people that want just an overview of financial statements and business transactions and things, it may not be as relevant. The terminology will be very useful, but the actual practice of bookkeeping is a little bit of, ah, antiquated skill. Okay, so and I no offense to anybody who's actually working as a bookkeeper today. We already talked about this. We said every accounting transaction is composed of at least two equal parts. Okay? And those parts are called a debit and a credit. Now forget everything you know or think. You know about the words debit and credit. A debit is not bad. Credits. Not good. It doesn't mean Mawr credit doesn't mean more money. And forget it. Okay, those there's different meanings in this bookkeeping system. It's very simple dab. It means left credit means right. That's all it means. Debit left credit, right? Okay, So what are we talking about here? Think back to that fundamental accounting equation. We said assets equals liabilities, plus owner's equity. So debit accounts are those areas in our accounting system where we record the transactions related to assets. Remember the left hand side of the equation? Assets, cash, accounts receivable, land machinery, intellectual property, all that stuff, those air assets there on the left hand side of the equation, we refer to those as dab. It accounts. It's just a word. It means left debit accounts. Credit accounts are on the right hand side of that equation. So what was over there? We had liabilities like long term dad and mortgages and accounts payable and all that type of stuff with owner's equity like common stock and paid in capital and retained earnings. Those are credit accounts. Okay, so we're just referring to debit accounts. Left hand side credit accounts right hand side. Now let's take a look at this. Remember, here's our equation again. So assets equals liabilities plus owner equity. These are debit accounts, and these are our credit accounts already said Left hand side. So debit accounts left hand side. Just You might call this nomenclature the way in which we record things kind of a system whenever assets increase. We call that a dab it whenever they decrease. It's called a credit. Okay, so debit accounts increase with debits, credit accounts increase with credits. Okay, I would actually recommend if you're concerned about this, I'd actually recommend printing up this slide and using it for future reference. It's gonna take a while to lock this in, but let's pretend you're using a bookkeeping system, okay? And you haven't done anything. A brand new company. Okay, So to raise money, you sell stock in your company. So let's say you successfully sell ah, $100,000 worth of stock. Now we know stock is part of owners equity. It's on the right hand side of the accounting equation, which makes it a credit account. Credit means right hand side. So we record are $100,000 because our our account, called common stock, is going up because we just put $100,000 in there. So $100,000 on the right hand side of this, we call it a T account. It's in our ledger, our bookkeeping larger. Okay, now, every transaction has two parts, right? So we have $100,000 of owners equity and then we have $100,000 of cash because we haven't done any. We haven't bought anything. We haven't sold anything. This is all we have. This is the whole business. $100,000 in common stock recorded on the right hand side of the common stock account, and then $100,000 of cash. Remember, debits make debit accounts go up. Debit means left. So we record ah, $100,000 on the left hand side of our cash t account. Our ledger here. Okay, so now we wanna start moving our business forward, and we need to buy a piece of equipment So what is equipment? Machinery? It's an asset. Its on the left hand side of the accounting equation. So we purchase a piece of machinery for $25,000. A machinery account is a debit account. So we record $25,000 on the left hand side of our ledger. How did we pay for this? Well, we paid cash for it. Okay? So, again, every transaction has two parts. We bought machinery, machinery goes up, we paid cash, cash goes down, dab it accounts go down with credits. So this is called a $25,000 credit to our cash account. That is so confusing. If you're if you're sticking with, like words that you're familiar with outside of accounting, If I say hey, I credited our cash account, and that's fantastic. It doesn't mean that it means it actually went down. OK, so let's keep moving ahead. We're recording the financial transactions in our business. Now. We need some raw materials. Okay. We're gonna We gotta feed this machinery with something. We're gonna purchase $50,000 worth of raw materials again, a raw material like inventory. Like working process. It's an asset. Its on the left hand side of the fundamental counting equation. We record. It's a dab it account. So it goes up with DAB. It's so debit means laughed. We record $50,000 on the left hand side of our ledger. How did we pay for this? OK, so here's an example. When I said at least two, here's an example where there's actually three, but check this out. How did we pay for this raw material? Well, first we half of it. We bought with cash $25,000 so we spent $25,000. In other words, we credited our cash account again with $25,000. That means it went down because debit accounts go down with credits. Well, how did we pay for the other half? Well, our vendor extends credit to us. They want to encourage business. They want to make our business flow a little easier, so they're going to extend credit to us for the other $25,000. Now, let's just pause and think about this. Accounts payable. What is that? In the fundamental accounting equation, it's ah, liability, right? It's credit account, so it's a liability. So the liability is on the right hand side. That makes it a credit account, which means it goes up with a credit. So we record the $25,000 of credit given to aspire vendors on the right hand side. Okay, so now we want to start operating our business. So we go back to our owners. We need a little more money now. We want toe renovate our least building. We need to buy some office furniture and shelving, build out our warehouse so we reach our owners and ask them for some paid in capital. So this is additional a pick additional paid in capital. So what is additional paid in capital? It's part of our owners equity. It's on the right hand side of the equation. It's a credit account, and we want 1/4 of a $1,000,000. Hey, just call your your owner up. Hey, I need 1/4 of a $1,000,000 so $250,000 is recorded in the right hand side of our ledger because it's a credit account. And what has that become? There's always two parts. It becomes cash, so debit accounts assets like cash or debit accounts they go up with debits. Debit means left hand side. We record it onto the left hand side. Okay, Thank you for your patience. Again. This is kind of bookkeeping 101 It's fundamental to accounting. It's very important. If you capture anything out of this, it's going to be the meaning of debit. The meaning of credit. Don't miss. Use those words in accounting again. Dab. It means left credit means right, That's all it means. OK, So, as you're analyzing, uh, we'll call him lower level documents. Not not the top. You know, maybe not the balance sheet or maybe not the top things. But as you get further down into your counting system, you start seeing ledgers and t accounts like this, so keep this in mind and you may use it, and you may use the terminology as well 9. Balance Sheets, Pt 3: Okay, let's really dig in now and start filling out our balance sheet. We've learned a lot of terminology, a lot of concepts, and we're gonna put it all into practice and keep learning here. So this is the balance sheet template that we've already developed here. And I just made up some fictional assets that I'm going to stick in here and we're gonna walk through the asset side. I might need to videos to do this, but that's okay. We're going to do We're gonna walk through this and see how far we get. So we already know the assets are listed on the left hand side, and I made a further distinction within our assets category called current and non current . So very simple. Distinction current simply means assets that are expected to be converted into cash within the next 12 months. Less than 12 months. Okay, so what do we have here? Cash? Naturally, that is a cash, you know. So well. List caches. Online cash equivalents. Now, this might be, you know, cos sometimes put their cash into Ah, maybe a money market fund or a very short term CD just to earn some residual interest on their money before they need it. So cash equivalents, though it's a very short term investment, and it's effectively the same as cash accounts receivable. We talked about that. That is you. You've sold product to your customer uncredited, and you fully expect to receive payment for that product. But you just haven't received it yet, so it goes into this account called accounts Receivable. Sometimes you hear these terms like Net 30 Net 60 these types of terms. It's referring to the number of days you've given your customer. You have allowed your customer toe wait before they pay of the bill. So you ship the product on January 1st and you have a Net 45 account, maybe the invoices due on February 15th. It smooths out the financial transactions between companies, so accounts receivable is the sum off those accounts. Essentially, all of this $9.2 million is money that your customers oh, you and you fully expect to receive prepaid expenses. I think about your own personal finances. Maybe at the beginning of the year your car insurance policies do for the whole year, so you pre pay 12 months worth of car insurance. But you're only using that car insurance in like one month blocks, right? So is, let's pretend this is February. Well, you've prepaid all the way through December, so you've used January and February, but you have 10 more months of insurance coverage, so that's considered a prepaid expenses considered an asset because you're going to receive financial benefit in the future, and you've already paid for it. So it's called a prepaid expense inventory. Now this is the raw materials, the working process, the finished goods, these air products that were fully expecting to sell to our customers. But we just haven't done so yet, even towards a great way to smooth out fluctuations in ordering and shipping delays and things like that. So it's very common for customers, manufacturers and other types of suppliers to carry inventory. So this is the value the selling price of that total inventory. We are fully expecting to sell this if for some reason some inventory goes obsolete or there's ah, unnatural delay in it. This that the the assessed value of that inventory needs to change. But this is in mature that were fully expecting to sell for that amount of money to our customers and then other current assets. It's just kind of a catch all for will just say, advances you've made to your supplier for product or advances you've made for maybe to your employees. It could be any number of things. Okay, just doesn't fit neatly into one of these other categories. So let's pause for a second here, and I want to show you something. The general rule of thumb for assets is to put them in the order of liquidity. Liquidity refers to how quickly something can be converted into cash, so cash is always up on top because it is fully liquid already. It's already cash cash equivalents. You know, maybe you need a one week before you pull money out of your money market fund or this type of thing accounts receivable. It might be net 30 net 45 days, but it's it's money on the way, you know. But you just need another month to get it. Prepaid expenses, kind of our insurance example. Maybe it's six months you've prepaid, or maybe the whole year through the end of the calendar year, it's again. It's a little bit more time inventory. So now there's a whole transaction and then ah, then accounts receivable cycle. So maybe that even takes a little bit longer. But we're putting them in the order of how liquid they are. Most liquid on top toe lease liquid on the bottom. Ah, and again, but still were fully expecting to sell this within 12 months. That's why it's called a current asset. Then naturally, we have what's called a non current asset. So this is assets that we don't expect to turn into cash within the next 12 months. Sometimes there's terms like fixed assets. Those air, usually land building property. In other words, we're not planning to sell them. Were planning to keep them there fixed within our organization. Sometimes it says long term assets. That's okay, too. There's a lot of different terminology, so maybe it's long term. Maybe it's fixed. Ah, this type of thing. So what do we have here? We have land. We have building and properties. I've seen the other term plant property and equipment that sometimes pops up on these. These air, the structure of your company. Maybe you're building a building, so you're not done yet. But you have some value to it. So it's construction in process, intangible assets. And we've talked about that. Could be any number of things from licenses, intellectual property, etcetera. So this is our fixed assets or non current assets. Okay, so what have I done here? Have totaled it right here. Total current assets, 19.9 million. And then I have total non current assets. 30.2 million. OK, now, I'm not going to talk about depreciation just yet, but I want to talk about a principle that relates to these fixed assets land and buildings , particularly, and then account accounting principles called the monetary unit assumption. Now, let's just walk through this real quick. It states two things. One accounting transactions are measured in stable monetary units. Okay, so, uh, right, But But it has some implications that might not immediately seem obvious in that the cost of similar long term assets are combined in the balance sheet with no regard to inflation. So you saw we had land, we had buildings while companies especially more mature older companies. I mean, it could be around for 30 40 50 years, obviously even longer than that. So you may have a fixed asset like a building, and then you add to it later. And the the accounting, The monetary unit assumption just says that the cost of those two buildings are combined under buildings. Let me just give you an example here. Let's just say you purchase a plot of land. It's five acres undeveloped land Stubbed Ill. Kansas In 2005 you paid $25,000. So on your balance sheet, you're gonna list under non current assets land $25,000. Okay, we know that part. Now let's just say 10 years later, you purchase another five acres right next door, immediately attaching undeveloped land stuff. Bill, Kansas 2015 will now because of inflation, that land costs $30,000. Nothing has changed. It's the same land, same community, same valuation. It's just that inflation, you know, has made its effectively our dollars weaker. The product isn't different. The dollars or different, right? So so now we have $25,000.30,000 dollars. We just combine those and make it $55,000. There's no regard to inflation or anything else. When we're talking about combining fixed assets under a balance sheet. In extreme situations outside the scope of this class, there might be some adjusting if there's an unstable currency, hyperinflation, this type of stuff. But the general rule 99% of time, you're just combining the values without regard to inflation. OK, so we're gonna pause there on our balance sheet and the next video I'm gonna show You wanna talk about depreciation? What is it? We're gonna talk about that first. Then we're gonna come back and then finish up our assets side. 10. Depreciation and Amortization: now, these topics of depreciation and amortization can be confusing for a lot of people. So we're gonna take a little Segway here and discuss these two concepts. So, first of all, depreciation amortization, what are they? They're the planned gradual reductions in the recorded value of an asset over its useful life by charging it as an operating expense. Now that's a mouthful here. But let me just start by saying that depreciation and amortization have nothing to do with cash flows were only we're talking about. We're only talking about the recorded value of the asset. And really, we're talking about on the balance sheet where where we recorder assets were talking about . How is a piece of equipment or a building or a major capital purchase? How is its value recorded? So depreciation and amortization is the gradual reduction of the value of that asset, and it's charges in expense. Okay, so we'll dig into this a little bit more. Why do we do this? It's to comply. Two reasons. One is to comply with the matching principal. Here's a new principal the matching principle, which states that expenses were recorded in the same period as it's related revenue. So imagine that you're excavating company and you purchase a large bulldozer for $100,000. Well, that bulldozers gonna last for 10 years will say so. The matching principle states that a portion of that bulldozer you're using every month So to comply with the matching principle, some portion small portion of the purchase of that bulldozer is expensed per month as you're doing excavating jobs and collecting revenues and and that sort of thing. The other reason is that when you spread it out that the that big cost when you spread it out over the life of the asset. Now you're recording that expense every month, and you're receiving a tax deduction every month. So it's helpful from a tax standpoint as well. So the now there's gonna make two points here, and they're going to be a little confusing. The total reduction of the value it in the asset is called a contra asset. It's recorded on the balance sheet as something called a contra asset, and it's an offsetting deduction to the offset. When we get back to the next video, we'll get back to the balance sheet and I'll show you how that works. This offsetting expense is recorded on the income statement. That's the second of the major financial statements, so it's a little confusing, but stick with me and I'll try to explain it. So couple Claire Fine points. So the difference between depreciation and amortisation is depreciation applies to tangible assets like equipment and buildings and the sore thing. Amortization applies to intangible assets like franchise fees, licensing fees, intellectual property, etcetera. Land, which is considered a tangible asset, is generally not depreciated, since it's thought to have an unlimited, useful life. Even if you put a building on their, you know, 100 years from now, it's still a piece of land. It's Concil BU, so it's generally not appreciate it. Okay, so let's look at an example here. Imagine that you are the owner of a large apartment building, and there's many small residential units inside the apartment building. Naturally, they'll have a hot water tank. Well, the hot water tank you install in a given apartment in will call Year zero at this start of our timeline, and that hot water tank costs you $1000. No, you know, because you're a professional and you've done this, that that hot water tank is gonna last eight years. By the end of eight years, that hot water tank will have degraded all broken down. The heating element will need repaired and it won't be as efficient anymore, and and it will be dead. Okay, so by the end of your eight, you're going to spend another $1000 to replace that hot water tank. So from a cash flows standpoint, you have $1000 at the beginning of the timeline and another $1000 at the end of year eight . But in between, there's no real cost there. The hot water tank is just sitting there, look sustain its heating water. And as we know naturally, it's starting to break down like a car gets older or hot water tank. It's older, but generally there's no expenses related to that, so depreciation and amortisation is calculated. The expense is calculated using what's called the straight line method. So if you take the purchase cost in our in our case, it's that $1000 subtract the salvage value and this is your estimation of the value of that piece of equipment of that building etcetera at the end of its useful life. And then you divide that by the years of useful life. So back to our hot water tank. Example. Let's imagine we already know we paid $1000 for Let's imagine there is no salvage value at the end of your eight. We're just going to throw it in the dumpster. It has no value whatsoever. Okay, so So we have our annual depreciation expense calculation are purchase costs is $1000 are salvage. Value is zero are useful. Life is eight years, so that gives us an annual depreciation expense of $125. Every year we record a depreciation expense on our income statement of $125 so that depreciation is offsetting the value of that asset. So, on our books, we know the asset. We originally was worth $1000 but it became worth less and less by $125 a year until by the end of year eight. It is worthless. It has no value to it Now, how do we record the reduction in the value of that asset on our balance sheet? We do it using what's called a contra asset account. So it's quite simple. Are Contra asset account, which is the accumulation of depreciation starts out of zero. There is no depreciation and then every year we add that $125 value to it. The Contra Asset value account I show this is as a positive on a balance sheet. It's always recorded is a negative, but this is the amount of depreciation accumulated depreciation of your assets. So we're gonna go back to the balance sheet and take a look at how this works in practice. 11. Balance Sheets pt 4: Okay, let's return to our balance sheet then, and we have our total current assets. We know what those are. We have total non current or long term assets. And now we have this Contra asset account, which we've called accumulated depreciation and amortization notice. It's a negative number, and this is the sum of all of those incremental depreciations. And amortisation is throughout. The well up to this point will say So we have these assets. We know land is non appreciable, so that doesn't count for anything down here. Building and property equipment. These are things that you purchase at a cost up front. And then there's a estimated salvage value at its end of useful life. And every month goes by and you depreciate a little bit more, a little bit more off of that equipment and that property every month. So the accumulation of that is depreciation that falls into this account. Construction and progress probably doesn't have any depreciation yet, because it's it sounds like it's more than brand new. It's not even new yet, but it's in progress. Intangible assets, those air, those licensing fees and intellectual property those are advertised. So those fall into this account as well. So the incremental expenses of depreciation and are tangible assets and amortization in our intangible assets get accumulated in this one account in this case, $9.667 million. And this offsets the value of our total current non current assets. So these air the prices that we paid for those assets and this is the amount of degradation or depreciation, this is a reduction in the initial value of those assets. Okay, so, uh, net non current assets. That number is very important. This is our total assets, and we subtract this accumulated depreciation and we come up with 20.62 OK, so then what do we have down your total assets? So we're adding our total current assets and our net non current assets, and we come up with $40.54 million 12. Balance Sheets pt 5: Let's keep building out our balance sheet. Now I've added the liability section. And again, these are all fictional numbers. I just made these up. But the important thing to note is one how the math works and secondly, is the names of the various accounts listed on our balance sheet. So, just like assets, we also have current liabilities and non current liabilities. So our current liabilities are those that we expect to be paid in full within the next 12 months. So some various categories you might see short term notes. This is short term borrowing, often used to cover the costs of raw material to fulfill purchase orders or some other short term need. Okay, the next item current portion of long term note. So first of all, let's notice down here there is a long term note, a long term borrowing that's going on here. Well, we know even though this might take years and years to pay off, we know that some portion of it we are gonna pay off in the next 12 months. So this is a common designation for accountants to make where the current portion or the the portion that we're going to pay in the next 12 months is listed under these current liabilities. So even you notice here 2.4 million is what we're gonna pay off this year. The note itself, 16.7 somewhat larger. So it's going to take years to pay off. But we know that some portion will be paid off this year. The next line we've talked about accounts payable. So this is credit that your vendors may be your raw material suppliers have issued to you. So you've taken ah, shipment you've received will save raw materials. It could be any number of other items, but that's just a good example. You've received them, you have them, so you owe the money. So maybe you. Your company is on net 30 net 45 days with your suppliers. This is the amount of money that you owe them. So it's called accounts payable. And then we talked about unearned revenue a couple videos ago. So we any number of things Ah, we talked about season tickets, but think gift cards or anything that you would pay in advance. So a customer has paid you in advance. Maybe for if you're ah concert venue, and you're buying your concert tickets a month ahead of time so you can make sure you get a good seat. Well, that money is unearned because the customer hasn't delivered the product. In that case, the concert isn't here yet or the baseball game or or if they sell you a gift card, you haven't cashed in yet. So there's a portion that they haven't earned because revenues aren't recognized until they're earned until that product or service is delivered. So that becomes a liability, a short term liability on the balance sheet. So just like we did on the asset side, we some those 7.184 million and now we're into the long term side. So we have a long term note. Maybe we had a major purchase or expansion of our company. We have a long term borrow borrowing going on there, so that's our long term note, and then maybe we have it might be separated as a property mortgage. It's also long term note, but we're designating separately because it because it's for a building or something we've constructed. So we have this separate long term note and then of course we have. We've sub totaled it here. Total non current liabilities or sometimes will say long term liabilities. And then we add this. Plus this equals total liabilities. So this is the total amount of money that our company owes to our creditors. 13. Balance Sheets pt 6: okay, we're almost done with our balance sheet for the Bob Smith Carwash Company. Let's take a look at this last section owner's equity. There's a few major titles you see fairly often these air accounts, I should say that you see fairly often in the owner's equity section. We have common stock, and common stock is issued at the initial public offering. When a when a company first goes public and generally it has a very each share of stock has a very low face value. It's essentially called a par. Value is what it's called. This is a little bit of a formality in in finance. I wouldn't get too hung up on it. So common stock is listed, usually in a pretty low number. Additional paid in capital A pick This is the This is the additional money on top of the price for the common stock that investors paid at the initial sale of stock. Okay, so realistically, if you combine these two numbers together common stock plus a pick, you're giving the initial selling price of that stock. Okay, the initial stock no anytime stock is sold in a secondary market like is a private investor . If you buy stock in IBM, IBM doesn't get that money. That money is just traded between other investors. But this is what I'm talking about, the initial, the very start of a company or the start of it going public. This is the money. These two together is the money that's paid in. Ah, Aziz. That part of that initial investment okay, retained earnings. This is the sum of all the earnings that the company has made over the top of any expenses that it incurred. So this is money that the company has earned, and it currently belongs to the owners. Its owner's equity now side note. Here, it's out of retained earnings that dividends are paid. So you sometimes hear about the word dividends. It's It's a share of the earnings that goes back to the investors while it comes out of net earnings. So it's giving money back to the investors. Also, by the way, you can have a negative retained earnings if the company is losing money or or, I should say has accumulated a loss. Sometimes it's called accumulated deficit when it's negative. Okay, so ah company could have negative retained earnings or an accumulated deficit. In other words, it's spending mawr than it has taken it. OK, so all that being said, we have total owner's equity, 14.7 million, and then we add together total liabilities. If I get my ink pen going, I'm having trouble right now. But if you get total liabilities plus total own owner's equity, you're going to get the two to gather total liabilities. Plus, Owner's equity equals $40.547 million. Just like the assets, these two always equal each other. Because why? Because we have that double entry bookkeeping system. Every dollar that comes in is accounted for somewhere else. That's how it every transaction is balanced. So therefore, the sum of all those transactions are balanced. These two will always equal each other, and that's why it's called a balance sheet cause a center line. It's balanced right here, so assets equals liabilities, plus owner's equity every time. So that's the end of my spreadsheet example. But I would encourage you and I and I have an example. Coming up is type in your favor company. If you're a fan of Google, if you're a fan of Apple Computer if you're into maybe the company you work for, Maybe you work for some Fortune 500 company. Look up that company, whatever the name of the company is, and then type in balance sheet or type in annual report or something like that, and you're going to find the balance sheet for that company. So I did that for you here, and this is a little on the small side, but I want to show you a couple things. This is for Apple. I just typed in apple balance. I'm sorry. Typed in Apple annual report and then within the annual report, there's a There's a in the table of contents you confined. It will say financial statements, and you go to the annual report. There's a lot of notes, a lot of tables, but it's in there. You go to the annual report, find balance sheet and start reading and check this out. Apple computer, Gigantic corporation. Their balance sheet. This is it right Here is one page, you know, So you have a few things you have to learn, but you know it's not impossible here. So I just want to point out a few things we know the entity. Principal economic entity principle. They right the name of the company on there. Now, notice what they did here. And I was going toe point this out is they have now. This is the fiscal year that ended September 30th. So they have the date on their September 30th 2017. And look what they did here. They have this September 24th. So it's the end of the fiscal year 2016. So you can compare year over year for any one of these categories. OK, so what do we have? We have assets. We have liabilities and shareholders Equity. Let's zoom in here, and it'll be a little easier to read. Okay, so this is just the top of that same sheet. And again, we're comparing your every year. And what do we have? Your cash? Current assets, just like our balance sheet for the Bob Smith carwash company have cash, cash equivalents, short term marketable securities. You know, those are probably the CDs, money market funds, etcetera, accounts receivable. We know what those are inventories. We know what those are. Of course. Vendor. Non trade receivables. You know, it's not the key word here is non trade. So this has to do with insurance companies and the government and certain loans and things like this. Non trade means it's not relate for Apple. Doesn't everything do with computers? Okay, it has to do with other things. A lot of times, insurance of the government or something like that. Other again, a catch all. There's all sorts of prepaid expenses and cash advances and all sorts of stuff, but it's a catchall. And by the way, if you want to dig in any of these, all you have to do in that same annual report there, tons of footnotes and it'll talk about every single one of these. So there's our current assets now. What do we have now near long term marketable security? So these air investments of various types financial investments, property, plant and equipment. So that's are you might call it fixed assets. That's the the hardware of the company's, so to speak. Goodwill. Goodwill is a concept. I'll just tell you really quickly. It has to do with its listed as an asset. It's the price Apple paid for the purchase of another company that went above the Net assets of that come. Here's an example, like if you were to buy in a consulting firm or something, consulting firms generally have very little assets. They might have some office furniture and they might have a building, and they might have a few other things. But the value of that companies very high. Usually the valuation of a company is based on its cash flow annual cash flow. If a company's making $10 million a year, well, you know it's gonna be worth, you know, I don't know 70 $80 million or something like that. But their assets, though I mean it might be a printer and some computers and some furniture and, you know, some contracts and stuff, but their assets hard assets may not be all that high. So when it when Apple Computer buys another company, it receives those assets, would it, which it puts into the various places on its balance sheet? But goodwill is the price they paid above those hard net asset acquired intangible assets. This often has to do with those same licenses and intellectual property. In their case, probably they probably own a lot of patents they've purchased and things like this. So they own a lot. And by the way, these Aaron these air in millions of dollars. So this is two billion. 298 million, dot, dot, dot So they you And that looks like a small number, but it's pretty big. And then other non current. So these air, long term assets and again, this could be any number of things. Okay, so what do we have here? Total? Just like our Just like the balance sheet we made. We have a total current. They don't sub total their long term. But so we have a total assets right here. 375,000,000,319 million. They drop everything else. OK, so what can we do? It's great comparison year over year. So the previous year they were at 321 $1,000,000,000. 321.6 billion. So they've gained 50 some $1,000,000,000 of assets in the last year. Not too bad. Um, okay, so let's look at the bottom half of that sheet. And again, I just zoomed in so we can look at it a little bit better. This is liabilities and shareholders. Equity. Ah, we have current liabilities. We know what this stuff is. Accounts payable money they owe to vendors to the government, employees, etcetera, accrued expenses. This could be any number of things as well, especially for a company the size. But maybe it's warranty claims, quality costs. It could be inventory, losses, obsolescence, any number of things. They know it's going to cost them, but they haven't paid out that money yet. So it's accrued expenses. Deferred revenue. That's another term for we talked about unearned revenue. Same idea. Commercial paper. This is some sort of financial, ah, debt that they have. It could be a short term loans to fund purchase orders. It could be any number of things. And again, if you're interested, it's just digging through those notes. It's a great place to find out what that IHS. Here we go again. Look at this current portion of long term debt and you you find this on most Balanchine's, actually, so we have a long term debt down here. So long term debt, $97 billion. Aren't you glad you don't own 0 97 billion, but the the portion of that 97 that they're gonna pay this year $6,000,000,496 million. Big, big numbers. So total current liabilities A mere $100 billion. Okay, And then we have deferred revenue, non current. So that's long term obligations. These might be contracts they have with universities or the government or something to provide services and software and hardware is, you know, so they they haven't yet fulfilled those obligations. So that's 2.8 billion long term debt again, that could be any number of mortgages borrowing and anything for them 97 billion and then other non current liabilities. Again. It's sort of a catch all for anything that doesn't fall into these 1st 2 categories. So what do we have here? We have total liabilities. A mere $241 billion. Now what we have here, we have our shareholders equity. So that's right below liabilities. And here they combine common stock with a pick, which I think is a good idea. So the initial fund raising $37 billion then they have $98 billion of retained earnings and every year, you know, probably more than every year, probably every quarter. Apple's paying out dividends so that as dividends air coming out of this fund, so they've probably not probably they've certainly earned a net earning of more than this. But they've given some back to investors in the form of dividends. And then there's a accumulated other again, a little bit of a catchall for losses and income that doesn't fall into this other categories. So then, here you go, you have shareholders equity total shareholders. Equity is right here. So you add this plus this and you get $375 billion. We've seen that number before, and that is the same number as we saw on the asset side again. It's balanced out, so I would definitely encourage It's gonna be a great learning experience. Go to your favorite company. You can. You can look up if it's a publicly held company. It's an S e. C S E C. Regulation that they file an annual report, and these shorter report quarterly reports called 10 queues annual documents called 10 K's . But all that aside, they're required to publish quarterly and annual financial statements, and you can look up your favorite company and figure out what they're doing. I encourage you to do that 14. Income Statements, Pt 1: Okay, We're making some great progress through this course, and we're just getting ready to start. The second major financial statement it's called the Income Statement and the Income Statement is that, as I said, the second of the four major financial statements and sometimes it's called the statement of operations or statement of income and operations, and it has different names based on different traditions will say in different business sectors. But it's not so much the name that it is important as the major features of this report. So maybe the name varies from here to there. But when you start seeing the major features, you'll recognize. Okay, this is the income statement or or whatever you wanna call it, and the income statement starts with the top line, and that's slang for your revenue. Your company's sales. That's the top line. How much product did you sell this year? How much services did you sell this year? What were your total sales? And then it shows you the organization's path to the bottom line, which is net earnings, which is another term for profitability. So if you can picture the top line revenue, the bottom line, which is profits or net earnings. As it's called, you're talking about the income statement. So let's take a quick look here and we're gonna do just like we did in the balance sheet. We're just gonna build one ourselves and you'll see here just like the balance sheet. We want to comply with the economic entity principle. So we're calling out. What economic entity are we talking about here? Harkins and Sons. Plush toys. That's who we're talking about. The next line is the name of this document. It's the income statement, so that's really clear. Now here it's a little bit different than the balance sheet. It is still very important to call the time noticed what I'm stating here for the 12 month period ending with December 31st 2017. Now the balance sheet. We had the date here, but if you remember, it was just the date. The balance sheet is a snapshot in time, but the income statement is the summary of transactions that occurred within a time period . So it's not a snapshot, but it's the it's a time period. So this particular income statement were building is a 12 month period ending December 31st 2017 so you might think of it as an annual income statement. But there are absolutely quarterly statements and six months statements, and it doesn't have to be an annual statement. But it does have to call out what is the time period and when does it end? What are we talking about here? And that is to comply with the next accounting principle. It's called the time period assumption, and this is gonna sound pretty basic. But it's necessary. And it basically says that time can be divided into distinct and consecutive time periods into which all financial transactions can be summarized. One of the interesting things I've noticed is that looking at the income statements for massive worldwide organizations WalMart and General Motors and Ford and these really big big companies, they'll have a one page income statement. It's pretty simple to divide up even a very complex operation into just a relatively few number of bullet points, while the time period assumption says that this these are the fence posts, you might say for this income statement, it's very important that all the time is accounted for and all the time is identified on these documents, and this time period assumption becomes the basis for what we call accrual. Accounting were all the transactions in the time period are recorded when they occur, not necessarily when the cash exchanges hands. If you're new to accounting, this is. This is one of those concepts that you have to embrace. Let me give you an example. Let's just say it's June 30th and you're going to go to your favorite big box store to buy some new by a new grill for your Fourth of July party in your backyard. So you go Teoh. I won't name any companies. Your favorite big box store nearby. That grill. Well, it's June 30th. You put it on your credit card. Now that big company, they're not going to get your money until I don't maybe a couple weeks later, certainly into July. But they delivered the product. You received the product in June, so they're recording the sale in June. So Cruel Accounting says that transactions are recorded in the time period in which they occur. The transaction occurred they didn't necessarily have the money in their pocket, but the transaction occurred and this holds true for revenues and expenses and all sorts of period costs like overhead and indirect labour and all sorts of stuff. So it's when the expenses occurred? Not necessarily when the cash exchange hands. So we're gonna start with the top line here and we're gonna build this out. There's gonna be a lot of great information here, but I'm just gonna take it step by step. And like I said, it starts with the top line. So for the 12 month period ending in December on December 31st 2017 Harkens and Sons net sales $44.6 million. Now, that's quite a nice amount of sales for a toy company. So this says net sales. Sometimes you see revenue, it's or just sales. They're all the same. Okay, the word net implies, let's say you bought that grill and then it's something didn't work. The gas valve was broke or something. Another, and yet to take it back, you know, So that just means the final sales so occasionally, especially retail stores and the big the big online stores. You know, they have a lot of returns, you know. So this is the net sales all the sales that didn't come back, so to speak. Okay, so it'll say net revenue revenue sales all the same thing. That's the top line, and that's where we're starting this income statement. 15. Income Statements Pt 2: Let's continue building our income. Statement four. Harkins and Sons Plush Toys Inc. We already talked about net sales, and we have this for the year of 2017 the 12 month period ending in 2017. Our next line here is cost of goods sold. Now, sometimes you'll see this is cost of revenue or cost of sales. It's really the same thing. It's the cost of the stuff you needed to put into the product or the service that you're selling. Cost of goods sold, sometimes referred to as caw eggs as an abbreviation, is seen a for retailers and for manufacturers where they're actually selling a good. But if you, you know, product. But if you were, ah, accounting firm consultancy firm, if your primary thing you're selling is a service, it's probably going to say cost of sales. But it's really the same thing. Okay, so in this case it's 39.642 million. And there's a few things, especially in the manufacturing world that goes into this caw eggs. The first is direct material, so imagine that you're buying a bicycle. Well, what are the direct materials you have steel tubing. You have pain to have tires. You have, ah, chain. You have materials, you have stuff that was the manufacturer purchased and put into that bicycle. Those air direct materials. He also have direct labour. So you have people that are welding and measuring and assembling. They're actually putting that bicycle together in a plush toy organization. It's probably people are sowing the product and putting the tags on and cutting fabric, and it's the labor required to make the product. Next, you'll have indirect material. Indirect material is tangible raw materials, components, fasteners, etcetera. But for one reason or another, it's not tied to a direct product that they're selling. Lay in the bicycle. Example. Let's just say every bicycle use your cell is the chain is greased because that's necessary . You have to have a lubricated chain for the bicycle to function properly. Well, you're not gonna measure the grease and, you know, calculate what's the cost of it? The reason materials Air indirect is because either you cannot trace the particular batch of material to the finished product or it's just inconsequential. Doesn't matter. It's not worth the energy to do it, you know, in a bicycle painting. You know, you have solvents and chemicals and things like this, you know, you know you're using them their essential, but you're not tracing them back to a particular product. Then you have indirect labour. And if you've ever worked in a factory or tour the factory, you're going to see tow motor drivers, quality control, people, supervisors. You're going to see people that are not building the product, but they're essential to the product being built. So, you know, maybe a tow motor driver is loading up raw materials. That 15 20 different manufacturing lines? Well, there's no sense and tying his or her labor. You know, he spent 10 minutes here than nine minutes here than 18 minutes there. There's no sense in it. You know, you need people to inspect product to supervise departments. You know you need these indirect people, so it goes into this cost of goods sold. It's called indirect labour, and then, lastly, is overhead. And overhead is the essential costs of manufacturing in this case, but again that aren't tied to a particular product. They tend to be referred to as period costs like, for instance, you might have insurance you have utilities, you turn the lights on. You gotta power of the equipment you have. Obviously, your gas bill and other expenses related to manufacturing that tend to be assigned to a particular month. They could be fixed. Like, for instance, if you're renting a crane to load your machines up or whatever you know the rental company is gonna is gonna charge $1000 a month. They don't care how much you use it. It's independent of production. It's fixed relative to how much production there's. You could also have variable overhead expenses like utilities. The maybe you have a gas furnaces and you're doing a heat treating operation. The more production, the higher gas bill, the higher your electric bill, whatever. So it could be variable or fixed. But it's Chen's be what's called a period cost. Okay, so if we were to take the net sales and subtract or costs of goods sold, we get this. 4.997 million. It's called gross earnings, sometimes called gross profit, profit and earnings kind of the same term. Gross profit, gross earnings. Okay, so that is the earnings of the product itself. OK, but we're not done. We still have to run a company, so I've included some other things here. SGN A. The stands for selling general and administrative. So there's costs of running a company that are not the cost to manufacture the product. Right? So you have, ah, human resource people accounting people. You have people that answer the phones. You know, that might be called administration general expenses. You might have rent on office buildings and other things office supplies and equipment, stuff that's necessary to run a company selling SGN A. That could be any number of things like sales commissions or direct mailings that you do, or or whatever. Now, in selling into marketing intensive companies, usually like retail companies, you know you'll see advertising broke out because it tends to be a substantial expense. So if you see advertising broke out, you know that well, often it's in here, but if it's significant, they pull it out, you know, so the person can understand a little better how much is being spent. So we have SG and a kind of the cost of doing business advertising. Then we have We've talked about depreciation and amortization on the balance sheet. So we were talking about the gradual and systematic reduction of an asset value right when we're talking about the balance sheet. So depreciation is for tangible assets like buildings and equipment. Amortisation is for intangible assets like licenses, franchise freeze, intellectual property. So where we saw on the balance sheet for third car Wash company. We were looking at the balance sheet and we saw two things. We saw the value of the asset and then we saw remember the contra asset account. It was the accumulated depreciation and amortization, so that was an accumulation over time. This is the depreciation and amortization for this time period. So if we were to look at the balance sheets from 2016 to 2017 of this company and we looked at accumulated depreciation, for instance, we would see that it would change by this much. That's one way that the income statement and the balance sheet are connected as the depreciation for a particular year is accounted for. Income statement. The accumulated depreciation goes up by that amount on the balance sheet, so hopefully that makes sense. So you have depreciation, amortization, and then what do you have here operational earnings. So if you take your gross earnings and subtract will call the cost of doing business, you have to have this stuff. It's essential to run a business, but it's not directly related to making the product that you're selling. So this is the cost of doing business. Subtract that. So gross earnings minus all this stuff equals operational earnings. 16. Income Statements, Pt 3: So let's keep going with our income statement here. The next section we have is other income. So what do we have here? We have interest expense. So this is money paid out in interest on mortgages. Long term debt short termed at what? Whatever it is that you have, this is interest paid, and then you have interest income. And this is probably related to if you have money in the bank. Or maybe in a short term investment, you're earning some small amount of interest. So this is interest income, and sometimes you see these two categories together, and it'll just say net interest. Same idea. Okay, next line gain or loss from the sale of equipment. Sometimes you'll see, it'll say, from a sale of fixed assets, and the reason this is listed separately is because it is a gain. Well, in this case, it's a lost cause. It's in princes, but it is a business transaction, and it does affect your bottom line. But it's not a recurring loss or benefit. So if you sell a building or a piece of property or some other fixed asset like a piece of equipment, it's it's expected that It's just going to be a one time thing. You're not gonna keep selling buildings. You're just doing it one time. So it is income. But it's not expected to be a recurring transaction, so it's kept on a separate line. In this case, there's a loss of money. So then we have earnings before tax or income tax. Now, I don't want to confuse this with E bit. Sometimes you see the phrase and I'm Maybe I should have put it up here. Sometimes you'll see this e bit earnings before interest and taxes, and and it might be confusing with income taxes, earnings before interest in taxes. Sometimes that number is called a bit okay, but E b t earnings before tax. This is separate line because this is really everything that your business did. The tax falls below that line. You're gonna be taxed on your e b t. You know. So here's what your business did, and then the taxes, just the tax. You know, you hate to say that, but there's not probably a lot you can do down here. Your business all happens up here. So you have this earnings before tax. So now you have your tax, which is applied to your earnings. Your E B t. So you have what's called a current tax. That's tax that you pay that year. Then you have what's called deferred tax. So that's tax you owe this year, but you won't pay until future years. It's beyond the scope of this class, so I'm not gonna get into it. But sometimes there's differences between the way you report for your income statement versus the way that you report for filing taxes. There's nothing illegal here at all. It's a very common accounting practice, but you have to follow certain rules for the ire s and you have to follow. I should say you have to follow certain rules for income statement. But the law, the ire s laws allow you to follow different rules that differ income tax payments. So that works to the benefit of an organization. So commonly they do that. But then, on the income statement, they'll list themis separately. So sometimes now I ever hear total tax provisions. Sometimes it's just listed is that and these two are just netted together, just added together, So you have a total tax provisions So then you take your E B T earnings before tax minus your tax equals your net earnings. So we're talking about the bottom line. Here is your bottom line. It's the net earnings or the net profits of your operation. 17. Income Statements, Pt 4: This is the last full video dedicated completely to the income statement. We've covered a lot of territory, a lot of concepts. We saw the top line, we saw the bottom line and we saw how we got there. So there's a lot of great concepts. I want to introduce you to one more very important concept that you'll see not just on income statement you, but you'll see it on the balance sheet and other statements as well. And that's called the common size statement. So the phrase is the common size statements. So what we have here is an income statement. We list all the dollar figures 44 million and four million and 5400 etcetera. But on a common size statement like this, the revenue becomes 100% and then everything else becomes a percentage of the total sales or the net sales, you might say. So what that allows me to do is to take a quick look here, and I could look at my net earnings and I could say, OK, 4.7% of my earnings was my profits quickly. You know what your profits were? I could look at my costs of goods sold 88.8%. I can look at any value here. I can look at operational earnings any one of these lines I can look at and say Okay, What was gross earnings As a percentage of sales? 11.2%. That allows me to make comparisons year over year or from one company to another company. Maybe I'm considering investing in a grocery store, and I want to understand how grocery store A compares the grocery store be well. Their sales aren't going to be identical, so it's hard to compare some of these important categories dollar for dollar when the Net sales aren't the same. So the common size right here allows me to do that now. Another common feature on income statements balance sheets, other financial documents is the list more than one year, so you can do a comparison year. Over year, you can see the progress of the company. So just some quick observations and this is fictional that, of course. But this is the type of observations you would make on an income statement that you're looking at. I can look here While 16 2041.1 million. Uh, 2017. 44.6 million. So my sales went up. You could just think really quickly. Okay? My sales went up. How about my gross earnings? Well, wait a second. Even though my sales went up, my earnings went down. That's interesting. You can even actually see that dollar for dollar 5.4 million versus five million. Even so, I could look at my net earnings and this is what the common size statement allows me to do . I can look at these different figures and try to understand. Okay, Was it are you know, it Was there a gain or loss difference? Was it a tax difference? Where did my costs get out of line from year to year? And this common size statement and multiple year approach allows you to do that. So let's take a look. This is a fictional statement, but let's take a look at an actual income statement now. I just picked this. This is from the 2016 Target Annual report. You can go to any publicly held company want pick your favorite company like Google. You like IBM. You read an article about Exxon in the newspaper. You can go to any of the investor relations website for any publicly held company or there's other like NASDAQ or the S. E. C. Have these financial reports on file. It's a requirement that publicly held companies file reports quarterly and annually, and one of those is the income statement, and you'll find it in there. You'll find the balance sheet to. So let's take a look at the income statement. So this is the 2000 16 income statements. So we noticed. First of all, they did five years year over year from 2012 through 2016 so you can get a nice looking comparison off of Target. And I could look at the sales and all of these numbers earn millions of dollars. So So, like this number, that's 68 million, which means this is 69 billion. So just looking at the sales, I would say it's been flat or a little down, so there hasn't been a tremendous amount of movement in any direction in total sales. If anything, it's crept down slightly. I can look at cost of sales, but here's a perfect example. If I had the common size statement right next to it. I could see what was the percentage of sales that comprise the cost of sales. I don't have that here. I could Sure, I could get my calculator out and do it, but I don't have that right in front of me. So then I had my gross margin. We talked about that gross profit kind of the same idea. SG and A They list credit card expenses. That's interesting. I didn't look up exactly what they were referring to here. I probably have a good idea, but what I noticed was it was 0000 But way back here, 2012 they had some credit card expenses. I haven't looked at the 2017 report, but I bet you that this has just gone altogether. They left it here so you could see something historically. But I bet you that will disappear pretty soon. Depreciation and amortization. We talked about that. This is the expense related to the loss of stated value of their assets, both tangible and intangible. And then I see gain on sale. We saw this on our report to so this is the gain or loss on the sale of fixed assets. So periodically they were selling things that looked like at a loss off three of the five years that they sold something. And then let's let's read this carefully. Earnings from continuing operations before interest and income taxes a bit, earnings before interest and taxes. Even so, we can look at that. Their earnings have Well, they went down 15 4016 So that's kind of interesting. Then here I mentioned the net interest expense. So this is the interest paid, netted with the interest received. So there's some interest here and then earnings from continuing operation before taxes. So this is their whole everything up here. This line right here represents what did their whole company do right here? And then they have this line provisioned for income taxes right here. And then here's your net. Earning from continuing operations. Let me show you something. Why they did that. So this line this is a little bit unusual to see continuing operations separately. They lists the discontinued operations net of taxes. So this is a gain. Small gain 68. $42 million. I guess it's small. By comparison, there's a loss here, but the reason they separate discontinued operations. These air essentially stores that have closed. So they separate the net earnings net of taxes of discontinued operations. Because whatever's in this line, sort of like the gain on sale sort of like this line, you don't expect it to be a recurring expense. The operation was Diskant discontinued. Whatever happens, gain or loss, it happened. It's done. This won't have an effect on next year's results. So it's important for a company like this with many, many operations, many many stores to do that. So here we go. Bottom line. Net earnings and we can see how the net earnings of target back here very interesting. Lost some money have had gains. They took a loss on discontinued operations that probably had some shift in their business . They were losing money, so they discontinued those. But you can see the progression through time of their net earnings. So, again, I would absolutely encourage you if you read an interesting article or you see some news story about a publicly held company. Pull up their financial state when you have an interest in what they do. Pull it up, take a look, Interpret the numbers and then you can have a personal connection with that. So there you go. That is the income statement. And the next we're gonna look at the cash flow statement the third of those four big financial statements that I was talking about at the beginning. 18. Cash Flow Statements, Pt 1: Now we're moving on to the next major financial statement, called the cash flow statement. And arguably, this is the most difficult and most poorly understood of all the cash flow statements. Now it is the third of the four major statements We've looked at the balance sheet, and then we looked at the income statement. Now we're talking about the cash flow statement, and this document shows where a company's cash came from and where it went. So this is what shows the path between the net income that we saw at the bottom of the income statement and the change to cash between one periods, balance sheet and the next period's balance sheet. Think about that for a second. So it's connecting net income or profits to actual cash on hand. So the the cash flow statement identifies these flows of cash in and out of the organization into three major categories. Operating, investing and financing. We're going to dig into that as soon as we look at our first cash flow statement. So up to this point, we've made a big deal about this a cruel accounting, and that's where the concept of recording a transaction when it occurred? Not necessarily when the cash came in Fort and we've looked at a lot examples, and we've built a lot of tools around this idea to account for the difference between the time of the transaction and the time that the cash was actually received. Well, for the moment, we're gonna forget all that, and we're going to focus on cash. 19. Cash Flow Statements, Pt 2: Okay, Lets start building our cash flow statement by thinking conceptual e about how cash flows through a company. So let's start by looking at a balance sheet. I just picked this one off the Internet. It sounded interesting. The Calloway Golf Company. They make the golf clubs and bags and accessories and all sorts of stuff for golf. So this is their balance sheet that I found in their 2016 annual report. And this is the type of balance sheet kind of like we saw with the with the income statement, where it has more than one year. So it's got 15 4016 in its year end December 31st. So what this allows us to do is compare year to year. But we're looking at a balance sheets particularly handy to develop the cash flow statement . So this is a little bit of a conceptual idea. So think about this. Conceptually. There's a lot of details behind this, but let's just think about this. I zoomed in on the asset section, so these are all of our assets. We saw current assets like cash and accounts receivable. We've talked about thes inventory etcetera. Fixed assets like plant property and equipment goodwill. That's the amount we paid for a company during an acquisition that's greater than their actual assets and all these other categories. OK, so these are the Calloway's assets now looking 2015 in 2016. Every one of these is a little bit different, and that allows us to see the changes from one year to the next. So let's just think for a moment it's probably easiest to think about inventories. Inventory is that raw material, the working process, the finished goods, the physical stuff that is going to become products that they actually sell unearned revenue. So we see in 2015 that they had paid $208 million. This is an 1000 so they're zeros. Past year $208 million will say $209 million for the inventory that they had on hand December 31st 2015. Now, in the year between December 30 31st of 15 to December 31st of 16 that number had dropped $20 million. Now there was of tens of thousands of little transactions from here to here. This is just a snapshot. Thousands and thousands of exchanges of inventory and sales and revenues and all this stuff happened to get here, So the net result is minus $20 million on their inventory. So let's think about this from a cash perspective. From a cash perspective, they freed up $20 million worth of cash in inventory in this year. So if I look at it from a cash perspective, I looked at quote their bank account. I would see an additional $20 million because it was tied up in inventory. Now it's not. So the direction of cash flows from inventory to cash. Let's let's look another category. Let's say accounts receivable. We've talked a lot about accounts receivable, so this is the money that your customers owe to you. So in December 31st 2015 customers owed 100. And let's just say 100 15 million does is just for quick mental math here. So Calloway's customers owed them, and they were expecting to receive in a short period of time, $115 million. That number grew to $128 million in the by the end of 2016 so accounts receivable grew or their customers owed them an additional $13 million. So if you're if the $13 million is owed to you, you don't have it in cash. So from a cash perspective, $13 million was lost, not lost like out of the company. But I just mean it's owed to you so you don't have it in your bank account. So that's a minus $13 million from a cash perspective and every one of these categories you could do the same thing with. Here's another deferred taxes account. So if you think about deferred taxes, this is tax that you actually owe. But because of a difference in reporting, you haven't actually paid yet, so you have so in. So in 2015 that was $7 million. Now it's 114 million, so this grew by 100 and $7 million. That means you have $107 million mawr in your cash account. Then you did the previous year. I hope this is coming together for you so you can do a plus or minus on every one of these from a cash perspective, and that is the method for generating a cash flow statement. We could do the same thing by looking at the liabilities section, and we've sort of done some of these already accounts payable. That's a really common one. So this is money that we owe to our vendors, our suppliers, people that sell us the raw materials. So let's again think about this from a cash in our pocket perspective in 2000 is 2015. Right here. This is 16. Okay, so at the end of 2015 we owed $122 million End of 2016. We owed an additional $10 million. Now that's we have the cash, but we owe our vendors $10 million so we haven't an extra $10 million in our pockets that then we would have the previous year. So hopefully that makes sense. And you could do that with any one of these categories. Deferred taxes. There's a big difference there. So deferred taxes. We know what that is again, seeing a difference here that we have a lot less deferred taxes than we used to That means we have less money in our pocket than we did the previous year. So that's basically how it works. So it's the difference between the accounts on the balance statement, and the purpose is to reconcile net earnings on the income statement. So the money that you claimed you earned with the actual cash that you have on hand 20. Cash Flow Statements, Pt 3: just like the previous two financial statements, we're going to put what we learned into practice for the cash flow statement by building an actual fictional cash flow statement for this company, the Buckeye Belt and Buckle Company. Now, as I mentioned in the previous videos, there's three major sections operating, investing and financing activities. So operating has to do with the core of your business. If you're a manufacturer, if you're a retailer, whatever is that you do the purchasing of raw materials or goods for resale or manufacturing, it's the core activity. If you're an accounting firm, it's the services that you provide to your customers. So it's the cash flow activities as it relates to your core operation. And then we have investing. Now. Investing generally refers to the purchase or sale of fixed assets. So if you're purchasing equipment selling land building buildings, this type of stuff, it's the fixed assets, the change in those fixed assets that are going to be reflected in your investing activities and then the last section. The financing has to do with your borrowing and lending your short term long term Theis issuance of dividends, the acquisition of loans, things like that Mortgages, how you finance your operation. The changes in that is what's reflected in the finance area. So where he talked about the name of the company, and then it's always nice. You gotta have this up here. What are we talking about? It's a cash flow statement. And then the time period assumption forces us to state that this is for the 12 months ending December 31st 2018. It's got to be clear what time period we're talking about. No, the very first line of every cash flow statement is the net income. The net income is found. The bottom off the income statement. It's the result of the income statement, and here we're going to build on two different years. So we have a net income of 2017 net income of 2018. And like some of the other statements we looked at, it's always nice to have two or three or four years so that we can do some comparisons. Year over year 21. Cash Flow Statements, Pt 4: So let's dig into this first section the operating activities. This tends to be one of the busiest sections of the cash flow statements just because that's where so much of the activity of an organization occurs to in its operation. So we already mentioned that we start each cash flow statement with the net income. The next step is to add back in what was expensed under depreciation and amortization on the income statement. So let's think about this depreciation and amortization our expenses on the income statement. But it's really just an accounting function. No cash actually traded hands. So if you were to purchase a large piece of equipment up front, all the cash flow went out. When you purchase that, equipment will say it year zero. But from an accounting perspective year one year, two year three, you're expensing some portion of that, but no cash actually trades hands. So the next step in building cash flow statement is toe ad back in depreciation and amortization because no cash actually moves, so you add it back in to net income. It was removed to create net income on the income statement. Now you're adding it back in on the cash flow statement. The next section I show here is the change in each of these accounts from one year to the next. So accounts receivable there was a increase in accounts receivable of $2.2 million. So it's the difference from one year to the next in accounts receivable. So in this case, there was $2.2 million mawr in accounts receivable, which means we had $2.2 million less in cash. So what I did here and hopefully this helps is I wrote here, increase in parentheses. Now Prince seizes just the count standard accounting format for a negative number where if you don't have parentheses at the positive number, so accounts receivable, inventory shop supplies, this is like packaging materials, greases, oils, this type of stuff, prepaid expenses, all of these air assets. So if there's an increase in an asset like inventory or shop supplies, it represents a decrease in cash flow. So any time there's an increase in an asset, it's a decrease in casual. Similarly, an increase in a liability like accounts payable though notice. I did not put parentheses around here that represents an increase in cash flow. So if we in this case, let's say accounts payable, the difference from one year to the next was $265,714 so we owed an additional $265,000 to our suppliers. Therefore, we didn't pay that, and it's still in cash, so it represents an increase in cash. So the important thing with building a cash flow statement and one of the reasons it makes it so difficult is because you have to really picture what direction is cash flowing. So if you're crewing expenses and you have, ah, gain in your accrued expenses account, it represents an increase in cash because you expenses that you haven't paid. So you can do that with every one of these categories. Picture which direction is the cash flowing that makes it a negative or positive, depending on whether it's an asset or a liability, And then you just fill in the blank. So so in this operating section, and we're gonna end every section with this net cash provided or used by operating activities. So how I got here, I started with my net income I added in depreciation and amortization. And then I just summed these differences in all these various accounts and that yielded a $243,840 net cash provided by our operating activities. If this were a negative number, it would be net cash used by our operating activities. So each of these accounts each of these numbers here represents a difference in each of these accounts from one year to the next. And then the positive or negative represents which way the cash is flowing. So if you can work through that direction of cash flow, you'll understand the cash flow statement much better. 22. Cash Flow Statements, pt 5: The next section of our cash flow statement is the investing activities portion. And again, this has to do with generally speaking the purchase and sale of fixed assets, or at least long term assets. So this, Ah, this little abbreviation property, plant and equipment that's common. You'll see that on various financial statements, and now this is 2018 and this was 2017. It's up there in the header. So if we sold a piece of land or a piece of equipment, it's a sale of plant property equipment. So if we sold it, we would have more cash. Similarly, if we purchased plant property equipment, we would have less cash. So if you're purchasing your using cash, if you're selling your gaining cash so that one's pretty straightforward. And then just like the previous section, we have a net cash provided or used by investing activities, so you can see in 2018 Net cash was provided by investing activities, since we had a pretty large sale or sale outwait our purchase of of equipment, where in 2017 we have this large negative or net cash used by investing activity because it looks like a major purchase. Probably Ah, new factory or a building or something like that. So we had a net used cash in 17 net provided cash in 18. 23. Cash Flow Statements Pt 6: Now we're gonna take a look at our third and final section of the cash flow statement, and that is cash flows related to financing activities. So this is a pretty simple cash flow statement. I've separated cash flows related to short term borrowing versus long term borrowing in publicly held companies. You'll also have other lines, such as. Maybe the sale of capital stock would be one, and also dividends return to stockholders. So these air anything related to the financing of the other portions of the business. So in a privately held company or a smaller company, typically you're just going to see notes related to borrowing. So just like the other sections, we have to think about what direction is cash flowing? So when you borrow money, there is a positive cash flow into your company. This doesn't everything to with profits as to with cash flow. So borrowing money equals a positive cash flow, and repaying loans is a negative cash flow. So the term here net borrowings, so that refers to the sum of what we've borrowed and what we've paid off. So we have. If we have a positive net borrowing like we do right here. It indicates that we borrowed more money than we paid back. That would be the case here. Certainly is. We have. We've borrowed quite a bit more than we've paid back. So then if we have a negative, of course, that means we've paid Mawr than we've borrowed. So we're paying down our loans essentially and again. Just think about it from cash flow. If we pay off our loans, it's less money we have in our pockets. So it ends up being a negative from a cash perspective. And then, of course, we just some them net cash provided or used by financing activities. And then you just add these two lines together. Now we can bring all three sections back to our full cash flow statement, and we see that we have our operating, investing and financing activities. And for each one of those activities, we have a net cash provided or used by that activity. And then right here we have net increase or decrease in cash, and we get to this line right here simply by adding these three sections together. So this is our net increase or decrease in cash. So for 2017. I see that we had a net increase in cash. It's a positive number, probably largely related to this large loan that we received. So there was an influx of money, an increase in cash. And then if I look at 2018 I can see that we had a decrease in cash, mostly because we were spending that money on inventory and other assets here, so we had a decrease in cash. So then what we can look at here is cash at the beginning of the period and then add it to the net change. And that equals cash at the end of the period. So if I look here 2017 I got cash of $8,097,206 and that is the cache of the beginning. Plus net change in cash equals this. Now you notice Here is the same number. I ended 2017 with the same number that I'm beginning 2018 cache of beginning of period. Right here is the same as the previous year ending. And then I take this my $8,097,206 Add a net decrease in cash and that equals $5.9 million . There is my cash flow net at the end of this period. 24. Statement of Shareholder Equity: well, we've arrived at our fourth and final of the main financial statements. It's called the Statement of Shareholders Equity. And for smaller private companies, this is probably the statement that you'll use the least and for someone just getting started into accounting, this is good to know. But some of the other statements are probably a little more valuable. But this statement has to do with the equity kind of the financial structure you might say of the company, and it details the changes within the equity section of the balance sheet over a specific period of time. So this statement has to do with the owner. Sometimes it even says a statement of owners Equity. So the owners or the shareholders of a company, depending on whether it's private or public. But this has to do with who owns the company. Now, before we dig in, there's gonna be a lot of terminology that you don't see in day to day accounting. So let's just hit a couple definitions really quick first of all, common stock. So that's what you hear that term quite a bit. It's It's simply a share of ownership in a company. Now I'm not going to dig into the differences between common and preferred. But essentially, this is the basic share of ownership in a company. Typically, it earns dividends. In other words, a portion of the net earnings will typically be paid out to owners of common stock. It often has voting privileges. So if you're electing new board members or executives, common stockholders often get a vote there. So that's, ah, important term to understand. Another term is par value now par value. Here's the definition, the face value for a share of common stock. This is a little bit of a formality, but when common stock shares are issued for purchase by the public, they actually have what's called this par or face value. Now. If you were to look at the face value or par value value of common stock for big corporations, it's common to see a penny or a fraction of a penny. It's basically some very low value. No one actually purchases stock at the par value, but in the event of a financial catastrophe, it pretty much represents the minimum obligation of the company to the shareholders again, it's a little bit of a formality But it's just important to know that the par value is what's printed on the face of, Ah, the share of stock. Okay, and now another term boy, this doesn't come up very much at all. But again, it has to do with ownership of a company. It's called Treasury stock. So those air shares of stock that have been repurchased by a company from its shareholders . There's a lot of different financial reasons for doing so. It usually has to do with reconfiguring an organization into a different ownership model, but nonetheless it represents shares repurchased from shareholders that the company now owns. It's essentially a shrinking of the equity of a company. Okay, so we have a few definitions. We're gonna need a few more. But let's take a look at a fictional statement of shareholders equity. A lot of information here, but if we step through very slowly, I think it'll make sense. So every statement of shareholders equity starts with a line at the beginning of the time period, so this is balance as of December 31st 2018 so it starts at the beginning of that period and ends at the end of that period. So it's a you're stepping through in this case, the 12 months of changes in equity. So we talked about common stock. So this notice this note here, 30,000 shares issued a dollar par value, so 30,000 times $1 is $30,000. So there's $30,000 of common stock that's been issued. But again, nobody pays face value or par value for a share of stock. That's where additional paid in capital or a picks comes in. Sometimes it's called capital and excessive par. Okay, so all these mean the same thing. But here's the money. So when people are buying into a company, they're paying quite a bit more than par values. So if we were to add these two together, this is what the shareholders actually paid for these 30,000 shares of stock. So this looks like 1.5 million, you know, it's 30,000 times $50 per share. This is actually what the shareholders purchased these shares for. Okay, so the next line again, this is at the start of this year. Okay, The next line is retained earnings. So this is money that's been earned through its operations and just retained or kept in the company. So it's think of it like your savings account. It's just retained money. Okay, accumulated other comprehensive income. This is a mouthful, and it just there's a few categories of oddball earnings and losses that are not listed elsewhere. It doesn't have to do with the core operations. The the other comprehensive income is often listed on the income statement, but it's nothing That's court of the business. So some examples, and I even listed some here, would be maybe gains or losses due to like foreign currency exchange. Not too many companies are doing this anymore, but they used to have their own pension funds so the pension fund itself would have gains or losses. So this is just an accumulation of those other comprehensive incomes. Okay, so Treasury stock. So at some point in time, this American concrete company repurchased $300,000 of its stock. So if we some all of these lines over and these air all sources of equity, if we sum all these up, we have this number $5.357 million. That's where we started the year Now we're gonna move through the year and see how we ended it. So here there was an additional issuance of shares, so 5000 shares were issued at a dollar par. Value face values that equals $5000. That's pretty easy. But the purchaser of these shares actually paid Add these together they actually paid $375,000 so 5000 shares were issued. That looks like $75 per share. So someone or a group of people came in to purchase additional equity in this company. So there's ah, sale of stock. So then we just some that line over. We have this comprehensive income, and again, it's an oddball, maybe to do with foreign exchange. That's about the most common that I see these days if there's a loss or gain just because of money changing hands through different currencies. So there's a loss here of $7100 purchase of Treasury stock, so there was no additional purchases. Okay, then we have netting. Come now. We're familiar with net income that comes off of the income statement all the way at the bottom of the income statement. So this is new money that's been earned. That's kind of cool. So we slide that over here, and then we have cash dividends. So cash dividends are money taken out of the company and paid back to the shareholders. So you see if if you look at the the stocks available on the public markets, they common commonly list what the cash dividends were over the past several quarters or several years. So this is a portion of the earnings that goes back to the shareholders. It's one of the benefits. Receiving cash dividends is one of the benefits of owning shares in the company. So that's money that's coming out of the equity section as well, cause it's going back to the owner. And if you remember back from one of our first lectures were talking about the the entity principle where the economic entity principle. So this money is now coming out of the one economic entity and its going into another. So the the entity essentially gets smaller every time it pays dividends. So that summed over here. And then what we can do is we can just some down our columns and some across our rose. So what do we have here. So as of January 1st 2018 we now have $35,000 of common stock, 1.8 million in a picks we have return Ain't earnings. This hasn't moved a whole lot. Some losses here and some Treasury stock hasn't moved. So then we just the sum down equals the sum over. So now our equity section is $6.6 million. Again, this takes a little bit of time to get familiar with. It's probably the least used by, I will say, common investors and accountants and those types of people. If you're purchasing shares of a stock, this is important. Or if you're working in the governance of a company, if you're an executive within the company or ah on the board, this becomes very important. It has to do with how is the company owned. So this is a good overview. Actual statement of shareholders. Equity can be very complicated and a lot of small details here, but the main categories common stock APICS retained, earnings accumulated. Other Treasury stock. These air the main categories you'll see on any statement of shareholders equity 25. The Next Step: Well, this is the end of the skill share class titled The Basics of Business Accounting. Congratulations for stepping through this material. By now you've gained a ton of financial accounting information terminology, concepts. You've learned a lot of material, and this is a great launch point to continue your learning process. So basically what we've been talking about during this class would be described as financial accounting. And there's a wealth of mawr information to gain within this realm called financial counting. Essentially, financial accounting is what investors use outside of a company, maybe to purchase stocked, maybe to consider an acquisition. This is the information that that those investors and investment bankers look at t understand the workings of a company. It's also the same type of accounting that the people inside, like the CFO's, used to develop those documents for the SEC for regulatory agencies, for other investors. So this has the standardised documentation and accounting that investors and business owners use. Teoh kind of interact with each other. Well, there's a whole another will, by the way, just in this realm of financial accounting bowl, you can just keep going up and up and up you there's so much to learn. We have really just gotten started. But you can also branch off into another area called managerial accounting. So managerial accounting is what it's almost. It has that word manager in it, right? The people on the inside use. So this has sometimes is even referred to his cost accounting. This has to do with the cost of your product, the cost of your overhead, your fixed costs versus your variable costs. This is what the managers and the internal accountants and the executive use you to understand their product and the flow of product and their flow of costs inside the organization. What product lines are our revenues coming from our our costs coming from it helps answer all those questions inside the organization. So that is a great Segway. Into this class has been a great segue way into that whole topic called Managerial County. Now, if you're anything like me, you like toe, learn and look things up and and continue. This process I want to give you to resource is to continue alert your education completely free this website. Accounting coach dot com Fantastic resource for accounting terminology, browsing different accounting topics. Maybe you're struggling with something. Just need to look it up. Just type in the keyword into the search window and there'll be a wealth of information for you. And there's another similar website called Principles of Counting dot com. Both of these websites do an A plus job. I feel indebted to their authors for all of the information, all of the terminology, all of the examples in accounting that they've put out there free of charge for people like you and me, too use and and to further our skills. So take advantage of those free Resource is and I have, and they've been a tremendous help to be okay now for you. As a member of skill share, we have one more step to go, and that's called the Class Project, and that starts right after this video and what I've done for you there. I've given you as an attachment. You can download it. It's a Pdf format. It's all the slides related to the major accounting principles that we reviewed in this class. We looked at six major accounting principles, and I've given you the slides four year download for your reference that you can just continue. What kind of refresher? Learning as time goes on, the other thing I've given you is all of this spreadsheets that I used in this class. So I I in tach an Excel workbook inside that workbook therefore worksheets one for each of the major financial statements and what I would encourage you to do these Air Live spreadsheet. So all the formulas have built in there and play around with some of the numbers and create some scenarios in your mind that that then you can depict on these financial statements. For instance, what if we increased our dividend back to the owners? What if our revenues dropped this year over next? What if our costs rose or fell? You know, these are the types of real life financial management scenarios that can and do happen all the time. Here's your opportunity to create and and depict those scenarios on actual financial statements, and I've also given you four scenarios myself. So there's four steps in the class project that that just imagine certain scenarios. Simple scenarios like I've described use those financial statements, update them according to the scenario, revenues fall, revenues rise whatever and then look at the effect on net earnings. Gross earnings owner's equity assets. Did you look at the effect off these different scenarios on the bottom line and practicing those scenarios and then developing some of your own will make all of this stuff come together? So anyway, that is all yours. So thank you. Thank you. Thank you again for committing some of your learning energy. Some of your time to me. To skill share into this class the basics of business accounting. Thank you so much. And as you know, I love hearing from students hearing your feedback. Send me a note through ah, skill share message. I love connecting with fellow learners and I love hearing from people who have taken my class. So thank you again. Best wishes to you as you continue your learning. And please let me know if I can be of any help to you in the future. God bless you. Thank you.