Prof. Maurino Bolante “Mau”
Basic Accounting Concepts
Basic Financial Reports
- for potential investors (equity / capitalization / creditors)
- 5 Strategic Questions
- Can we sell?
- Can we produce?
- Costs (what the customer gets, you incur a cost; direct)
- Cost of Sales
- Cost of Production
- Cost of Service
- Can we operate?
- Can we afford?
- Is it worth it (rate of return)?
- John Gokongwei
- the value that you created and the money should make you happy
Income Statement (or Performance Report or Score Card)
Sales (Top Line)
- [Costs + Expenses] (Middle Line)
= Net Profit / Net Loss (Bottom Line)
What is your bottom line? Is it worth it?
Usually reports are prepared after a year
For the period ended – the period when you have began selling
- A/R or Account Receivable
- What went into the product that has been sold?
- Cost of Goods Sold or Cost of Sales or Cost of Service or Cost of Production
- When there is no Sales, there is no Cost of Sales
- Perishable goods that are unsold will be attributed to Wastage Expense
Less: Operating Expenses
- whether there is sales or none, opex must be paid (also called Period Costs)
= Net Operating Income
Depreciation: expense of fixed assets (building, equipment, machinery) under operating expense
In a starting business, as much as possible, look for customers who will pay in cash.
It’s not sufficient to simply make a sale. Make a sale in cash. Eventually when you trust the customer already, you can sell in credit.
As much as possible, avoid Period Costs; commission basis employees?
Balance Sheet (Status Report)
- Pre-operating Balance Sheet
- Assets (left) | Liabilities & Equities (Right)
- T Account
Pre-operation and Post-operation
When you start, invest less money on Fixed Assets. Put more money on Current Assets or Operating Capital. Build Fixed Assets as you become profitable.
Avoid long term loans.
Shareholders have a hold on a company; just use creditors.
The Asset side says about the investing decisions of the company (where did the money go?).
Put your money where it will generate the revenue.
Assets are company resources that are expected to generate performance.
The Liabilities and Equities
- Where did the money come from?
- Long-term sources of funds to fund long-term assets: Capital Stocks and Long-term debt
- Short terms sources should not be used by long-term investments
- You can use Retained Earnings in short-term or long-term investments
How much is salary expense versus sales?
- Specific record of Cash: In and Out
- Current Assets and Current Liabilities: CFO
- Long Terms Assets: CFI
- Interest Bearing and Long-Terms Liabilities: CFF
Depreciation: to be set aside for replacement after the life of the asset
Steps in preparing Statement of Cash Flow
- secure 2 Balance Sheets and 1 PL
Free Cash Flow (FCF)
- cash from operations less the amount of capital expenditures required to maintain the firm’s present productive capacity
- the larger the FCF, the healthier it is; means more cash available
Financial Statement Analysis
- establish standards / benchmarks
- targets / goals
- industry / competitors
- computation of analytical ratios from the financial statements and the interpretation of these ratios to determine their trends as a basis for management decision
- ratio as part of sales
Common measures of profitablity: margins
Cash flows from Operations Ratio = Cash flows from operations / current liabilities
Always look for cash customers
Don’t lock in your inventory which will not sell; you will dispose of it in a discount which will not make profit