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Understanding Accounting: Managerial vs. Financial Accounting and Assets, Appunti di Cost Accounting

Università Cattolica del Sacro Cuore - Milano (UNICATT MI)Cost Accounting

An overview of accounting, focusing on the differences between managerial and financial accounting. Managerial accounting deals with internal reporting for decision-making, while financial accounting caters to external stakeholders. essential concepts such as assets, liabilities, equity, and the balance sheet equation. It also discusses the role of accounting in maintaining a functional market and the importance of reliable and comparable financial reporting.

Tipologia: Appunti

2019/2020

Caricato il 06/09/2022

Ellene98
Ellene98 🇮🇹

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Accounting
Accounting System
Two types of accounting: managerial and financial.
Managerial, for internals.
Financial, for externals –investors.
Find out if employees of a company are happy or not: collects information of
level of happiness and reports them to decision makers. You don’t have
nothing to do with external markets in this case.
Financial accounting, instead, deals with investors and creditors -external
decision makers.
Information given are essential: banks will lend money or not basing on info
you give them.
We will focus on financial (external) accounting.
In accounting classification is essential.
Four basic financial statements:
-BALANCE SHEET. Apple Balance sheet gives us the financial situation of the
company today. Gives us assets, liability (debt), shareholders.
Balance sheet relies on this equation: ASSETS= LIABILITIES + SHAREHOLDERS’
EQUITY
Ex/ Apple’s asset: 375000=
Assets generate profit. How do you buy assets? Banks and shareholders.
Inventory is as asset. Liabilities mean having obligations. Money can come from
banks (through liabilities) or from Share. DEBT and SHARE. Companies can do
two things with profit: reinvest so that the company keeps growing or divide it
between shareholders.
Companies can be made of shareholders of financed by a bank. When you get
a loan from a bank you make a covenant is an agreement between bank and
company saying that the bank gives the money but if the company does not
give money back.
ex/Gillet assets
30billions: Brand
10b: machineries
5b: others
5b: “goodwill”. It is an intangible asset, like brand.
Accounting does not cover every asset of the company. So, there are
intangibles assets.
Goodwill might be some excess, or synergy within the company.
Largest companies in the stock market now: Apple, Google Alphabet, Amazon.
Question: who own Apple? Shareholders. Apple has reached value of 1 Trillion
dollars of market value –also known as market capitalization. Market
capitalization=number of shares x price of the share
A company is like a pie: someone made it, and then wanted to invest in order
to buy machineries and manufacture computers (similar to startups).
Example: given a pie, owner sells investor 30%, while the creator still owns
70%. Given original value=1 million, the value reaches 100 million dollars. You
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Accounting Accounting System Two types of accounting: managerial and financial. Managerial, for internals. Financial, for externals –investors. Find out if employees of a company are happy or not: collects information of level of happiness and reports them to decision makers. You don’t have nothing to do with external markets in this case. Financial accounting, instead, deals with investors and creditors -external decision makers. Information given are essential: banks will lend money or not basing on info you give them. We will focus on financial (external) accounting. In accounting classification is essential. Four basic financial statements:

  • BALANCE SHEET. Apple Balance sheet gives us the financial situation of the company today. Gives us assets, liability (debt), shareholders. Balance sheet relies on this equation: ASSETS= LIABILITIES + SHAREHOLDERS’ EQUITY Ex/ Apple’s asset: 375000= Assets generate profit. How do you buy assets? Banks and shareholders. Inventory is as asset. Liabilities mean having obligations. Money can come from banks (through liabilities) or from Share. DEBT and SHARE. Companies can do two things with profit: reinvest so that the company keeps growing or divide it between shareholders. Companies can be made of shareholders of financed by a bank. When you get a loan from a bank you make a covenant is an agreement between bank and company saying that the bank gives the money but if the company does not give money back. ex/Gillet assets 30billions: Brand 10b: machineries 5b: others 5b: “goodwill”. It is an intangible asset, like brand. Accounting does not cover every asset of the company. So, there are intangibles assets. Goodwill might be some excess, or synergy within the company. Largest companies in the stock market now: Apple, Google Alphabet, Amazon. Question: who own Apple? Shareholders. Apple has reached value of 1 Trillion dollars of market value –also known as market capitalization. Market capitalization=number of shares x price of the share A company is like a pie: someone made it, and then wanted to invest in order to buy machineries and manufacture computers (similar to startups). Example: given a pie, owner sells investor 30%, while the creator still owns 70%. Given original value=1 million, the value reaches 100 million dollars. You

now own the whole pie. You spit it in equal pieces and each slice is a share. You sell part of the shares keeping the others for yourself. Again, market capitalization=n° of shares x price of share The market decides the value of the single share: the stock market sets prices. The value changes, you may buy a share today 1000 and tomorrow it will be

Liabilities are obligations: you own a sale when you deliver a product, it does not matter if you have been paid or not already. Stockholders’ equity: money you saved out of the money made. Total stockholders’ equity in balance sheet is what you saved. If you sum up stockholders’ equity with liabilities it equals assets. Why does it have to balance? If you have a situation of more assets than liabilities + SE.

  • INCOME statement’s fundamental equation is: REVENUES – EXPENSES = PROFIT Revenues can come from sales, but also from lending money to companies. What expenses are we talking about? COGS= costs of sales (costs of goods sold) iPhone’s sale price in a shop=1000$ Cost of manufacturing=600$=COGS Cost of capital: where does the capital come from? Two sources: banks and shareholders. It is the money we can use to invest. To have capital, you have to pay for it. In banks, cost of capital is interest. Let’s say you pay 3% of interest expense. Cost of Capital is a very abstract concept. Why does Zuckerberg care if the shares’ price in the market goes down? Because he still owns a part of the company. Initial public offering: first part of the company you give to shareholders. Let’s say then you sell other shares, the market sets the price of the shares. We call it SEO=seasonal equity offering. Cost of Capital= money you pay with share in order to make capital. Depreciation expense: you use a car for five years and then you sell it. People automatically calculate depreciation of the good –what is the value of the second-hand car. If you have a machine and the machine is getting older, you have to recognize how much the machine depreciates every year. Income statement concerns one year. We talk about a period, not an instant. While the balance sheet is about today, it’s about one moment, like a frame of the company situation.
  • STATEMENT OF CASH FLOWS CFO + CFI + CFF = statement of cash flow -STATEMENT OF RETAINED EARNINGS Beginning retained earning + Net income – dividends = ending retained earnings Accounting communication process

Debit always on the left and credit always on the right column. Income statement R-E=Profit It is composed of operating activities (revenues and costs) and peripheral activities (revenues and gains). If the price of manufacturing is 5$, the cost of sales for this product is 5$. Company makes cash and does not use it immediately, but loans it to other companies (acting like a bank); this generates interest revenue: you make extra revenue. Net income: what I earn Earnings per share (EPS): net income/n° of shares Cash basis accounting Revenue is recorded when cash is received – Expenses are recorded when cash is paid Evaluation based on how much money is going in and how much money is going out: this kind of evaluation is based only on current money. Recognition of future expense before the cash goes out is called accrued accounting : you don’t need cash to recognize expenses and revenues. In cash basis accounting, instead, you don’t take into considerations future expenses or loans etc. GAAP: generally acceptable accounting principles requires the accrued accounting method. It does not recognize cash basis accounting. Revenue principleDid you deliver or not? Main principle for recognition of revenue. Deliver must be occurred.Make sure there is evidence of an arrangement for costumer payment.  Price fix or determinable  Collection reasonably ensured Case n° You received 10.000$ -in cash- for sale of car. You will deliver the car in 2 months. Cash: +10. You have an obligation towards costumer: you have to give a product you have been paid for. It is a liability (unearned revenue), that increases by 10. When you deliver the car, you do have a revenue. Revenue is part of shareholders’ equity, so +10.000. Case n° Sold and delivered 50.000$ in computer, paid in cash by costumer. Cash: +50. Sales: +50.000 (more rev, more SE)

More revenues create more profit. While more expenses decrease income. Income statement resets every year- starts from January and ends in December. Case n° You sold $5000 on shirts and the customers promised to pay in 3 months. You delivered the product, so you already have revenue even if you will have it in the future. Account receivable (more asset): +5. Sales (more rev, more SE): +5. Receivables are transformed into cash: liquidity is the speed in which receivables are turned into cash. It is not an obligation: it is you who is waiting to be actually paid in the future, you don’t have obligation towards someone.

Customer paid you. You increased your cash in 5.000$ Accounts receivable goes down by 5.000$ Principle of conservatism -> you don’t say it is a revenue before you delivered: you expect the worst Recognition of revenues – recognition of expenses There is high level of verification that precedes the recognition of revenues and lower level of verification for expenses. This is called “pessimistic behavior”. Conservatism is a principle of accounting. Contingent liabilities are expenses that are accounted but don’t happen in the end. Earnings quality : for every dollar of profit, in terms of stock price how much is it? Evaluation of credibility of information. Expenses – Case 1 You pay in advance 15.000$ in insurance for the next year. Prepaid insurance (+A): 15.000$, you are paying for the future, you have not used it yet. Cash (-A): -15.000$

We are in July 1st,^ 2019. Record (adjust) expenses for insurance. We used 6 months of insurance out of 12.

Rev-Exp= Profit Stock markets must be kept alive, otherwise economy goes down. Classification of cash flows Operating activities involve the cash effects of transactions that enter into the determination of net income, such as cash receipts from sales of goods and services and cash payments to suppliers and employees for acquisitions of inventory and expenses. Investing activities generally involve long-term assets and include:  Making and collecting loans.  Acquiring and disposal of investments and productive long-lived assets. Financing activities liability and stockholders; equity items and include:  Obtaining cash from creditors and repaying the amounts borrowed.  Obtaining capital from owners and providing them with a return, and return of, their investment. Accounting cycle Revenues and expenses are temporaries. How do we close these accounts? Through retained earnings account. Profit Margin: how much profit you make out of your revenue. Net profit margin given by Net Income/Net sales. Ex/ Ferrari produces less, small manufacture, but they have a big margin, they make a lot of money out of every unit sold. While Fiat sells in volume, they produce a lot and they earn less from every unit, less profit on every dollar of sales. Classification of Long-Lived Assets Trademarks and goodwill do not depreciate. They have indefinite life. Fixed asset turnover= Net sales rev/average net fixed asset This ratio measures company’s ability to generate sales given an investment in fixed assets. Capital Expenditure Book value= acquisition cost-accumulated depreciation