Accounting is the communication of financial information about a business to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management. Such financial information is primarily used by managers, lenders, investors, tax authorities, regulators, and other decision makers to make resource allocation decisions between and within companies, organizations, and public agencies. It involves the process of recording, verifying, and reporting of the value of assets, liabilities, income, and expenses in the books of account ledgers to which debit and credit entries are chronologically posted to record changes in value.
Before you can begin an accounting position there are accounting concepts and terms that must be understood first. Part I of my case assignment will discuss the five commonly use terms in accounting:
I.Generally Accepted Accounting Principles (GAAP). This term is used to refer to the standard framework of guidelines for financial accounting. GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements. GAAP can be derived from many sources, including promulgation of the Financial Accounting Standards Boards and Accounting Principle Board. Textbooks, articles, and papers are other sources that include the body of accounting literature.
II.Double Entry Accounting. I never heard of Double entry Accounting until I started this course. During my research of this term, I have to come to find out what it means. Double Entry Accounting is a record keeping process that tracks just where your money come from and where it goes. By using Double Entry money is never gain nor lost, it is always transferred from somewhere to somewhere else.
III.Historical Cost. This is the original money cost of an asset at the time of the purchase or repayment as opposed to the market value. Historical Cost is also the actual purchase price plus the incidental cost in getting the fixed asset in condition ready for use for commercial production for example: land, building, machines, furniture and vehicles.
IV.Accrual Basis vs. Cash Basis Accounting. Accrual Basis is the income earned that’s reported in a specific period regardless when it was received. It’s also the expenses that were incurred, whether they were paid or not within that specific period. When using Accrual Basis Accounting, you have to record both revenue and expenses when they occur. Cash Basis Accounting is bookkeeping that records financial events based on cash flow and cash position. Revenue is noticed when cash is received and expenses are recognized when cash is paid. With Cash Basis Accounting, revenues and expenses are also called cash receipts and cash payments. Cash Basis Accounting also fails to meet the GAAP requirements. Accrual Basis Accounting is a method of accounting most business are required to use by law.
V.Current Assets and Liabilities vs. Non-Current Items. Current assets are those assets that are cash or can be converted to cash in the short term, such as accounts receivable or inventory. Some people define current assets as those the business expects to use or consume within the year. A business’s non-current assets would be those that have a useful life of more than one year. These include fixed assets and intangible assets fixed assets are those assets that are not easily converted into cash in the short term meaning they are assets that only change over a long period of time. Land, buildings, equipment, vehicles, and furniture are some examples of fixed assets. Intangible assets also may be shown on a balance sheet. Non Current Items are goodwill, trademarks, patents, licenses, copyrights and franchises. Current liabilities are those coming due in the short term, usually within the current business year. These are accounts payable, employment, income and sales taxes, salaries payable, federal and state unemployment insurance and current year’s portion of the multi-year debt. Some examples of current liabilities are short-term borrowing, long-term debt, and accounts payable. All current liabilities will be paid out of the current assets. If the current liabilities outweighed the current asset then the company is in bad shape. Investors should be able to understand and recognize that this is not the best investment.
Part II of this assignment consists of analyzing three different corporation’s financial statements. I will be describing the balance sheet, income statement, and statement of cash flows; provide a prediction of each company.
BP Financial Statement:
•Balance Sheet: The statement lists all the company’s assets, liabilities and the owner’s equity. The company took a lost in the assets as well as the liabilities from the previous year; however the company’s assets nearly doubled its’ liabilities which keeps the company on a good flow. I compared the years 2007-2008.
•Income Statement: The sales and revenues are listed for the past two years. It also break down the before and after taxation profits. The profits were up from the previous year and the earnings per share were also up. This statement will benefit this company quite well.
•Statement of Cash Flow: I have found that you have to have an open mind when reviewing BP’s Cash Flow Statement. It starts with the operating activities then the investing activities and then to the financing activities. In addition it is summed up with the cash and cash equivalents; however BP almost tripled their earnings from 2007.
•Balance Sheet (Consolidated): This statement list the company’s assets, liabilities and stockholder equity. It’s set up similar to the BP balance sheet. The company shows a lost in assets.
•Income Statement (Consolidated Statement of Operation): It was straight to the point and highlighted the earnings and losses from 2007 to 2008.
•Statement of Cash Flow (Consolidated): This statement is very detailed. It covers the operating activities, changes in operating assets and liabilities, cash flows from investing activities, cash flows from financing activities, effect of change rate changes on cash, and cash paid during the year. This statement will be most useful to this company.
•Balance Sheet: This company balance sheet was really easy to read. It was broken to the simplest form and within the guidelines of GAAP. I did notice a drop in the net assets.
•Income Statement: By looking at their income statement, this company is losing profits. This company took a significant loss in their profits from the previous year. From the loss they took I don’t really see any profit gains for 2009
•Statement of Cash Flow: It covered the three basic section of what a Statement of Cash Flow should cover. Very easy to read and spot losses. This statement will be more useful for this company.
In an attempt to predict the future trends of RTL. I saw losses from the income statement throughout. I believe it would be a risk to invest with this company right now. They took major losses in their profits for the year of 2008.