Professor &

Lawyer.
Puttu Guru
Prasad
(ICFAI Trained & Certified
Management Faculty)
 It is an information system that
reports on the economic activities
and financial condition of a business
or other organization.

There needs to be a system or set of

rules so you are able to compare
entities to each other.
 It will help you succeed in business

It is the means that business

information is communicated to the
stakeholders in the business
 Stakeholders are individuals and
organizations that need information
about a business.
They include lenders, government
agencies, employees, news reporters
and others.
 Help you prepare a budget and keep
on target.

Realize how much cash you have and

if there is enough to pay bills.

Uncover places where costs can be

cut.
 Branch of accounting associated with
preparing reports for external users

i.e. the bank, shareholders

 Accounting to guide management in
making decisions about the business

i.e. break even analysis

 To report the financial condition of a
business at a point in time.

To report changes in the financial

condition of a business over a period
of time.
 First, record the economic events
affecting a business.
Second, summarize the impact of
these events in a report called
financial statements.
Generally Accepted Accounting
Principles (GAAP)
 Bookkeepers-record each transaction
Accountants-prepare financial statements
Auditors-review the companys books and
look for errors and discrepancies (could be
internal or external)
Controller-in charge of the accounting
department
 CPAs-certified public accountants
Typically work for an accounting firm called
public accounting
Once a year come in and do an audit of the
books of the company and do the related
tax returns
CPAs also work for private companies
 Balance sheet
Income statement (profit/loss)
Statement of cash flows
Statement of changes in equity
 The information in the financial
statements is organized into 10
categories called elements.

The elements include: assets,

liabilities, equity, contributed capital,
revenue, expenses, distributions, net
income, gains and losses.
 The elements are divided into
classifications called accounts.

For instance there are different kinds

of assets. A business would have a
cash account like a checking account
and they might also own a building.
 Every company has a chart of
accounts, sort of like a table of
contents in a book.

Each account is assigned a number

Usually assets start with 1, liabilities 2,

stockholders equity 3, income 4, cost
of goods sold 5, other expenses 6.
 Think of it like a book that keeps track of
all the accounts
It is a chronological record of all the
business transactions
Sometimes it is called the companys
books
Everything in the general ledger flows to
the financial statements
 Highlights the relative strength of a
company at a point in time.

Terms related to the balance sheet:

assets, liabilities, owners equity.
 Assets are things you own or resources a business
owns.
The assets of a business belong to its creditors
and investors.
Tangible assets-this you can touch like machinery,
buildings, land, computers, etc.
Intangible assets-things you cannot tough such as
right to patents, rights to payments from
customers, copyrights or trademarks.
 Things you owe, future obligations of
the business

Creditor claims

Examples include a bank loan or car

loan, or buying supplies for your
business on credit
 Rights of stockholders or their claim
on assets

There are two types of equity

Common stock is issued by corporations to
finance their operations
Retained earnings which is the portion of
earned assets kept in the business
 This equation is how the balance sheet is
completed.
Assets=Claims
Assets=Liabilities + Equity
Assets=Liabilities + Common stock +
Retained earnings
 The equation always needs to
balance on both sides of the equal
sign.

This is what people mean when they

say balance the books.
 ABC Company has assets of $20,000
and liabilities of $5,000. How much
is stockholders equity?

A=L+OE
20,000=5,000+?
20,000-5,000=15,000
 Also called the P&L (profit and loss statement)
Shows your revenues and expenses over a period
of time (month, year)
Revenue is income from the sale of goods
If revenue is more than expenses, you have net
income
If expenses are more than revenue, you have a
net loss
 Terms used on the income statement:

Revenue or sales
Cost of goods sold or Cost of
merchandise sold
Gross profit
Operating expenses
Net income or net loss
 Sometimes called statement of
changes in owners equity

Explains the effects of transactions

on stockholders equity during the
accounting period.
 Starts with beginning common stock
and adds any additional shares of
stock issued.
Then it takes the beginning retained
earnings and adds on net income
(subtracts net loss)
Then it subtracts any dividends paid
to shareholders
 This explains how a company
obtained and used cash during the
accounting period.

Receipts of cash are called cash

inflows.

Payments of cash are called cash

outflows.
 There are three sections to the cash
flow statement: operating, investing
and financing.

Operating section is first. Operating

activities include receiving cash from
revenue and paying cash for
expenses.
 Investing section includes paying cash
to buy productive assets (like
machinery or equipment) or receiving
cash when you sell productive assets.
Financing section includes receiving
cash from owners or paying cash to
owners (dividends) It can also include
borrowing cash from the bank or
repaying the cash.
 It tells you whether your cash
increased or decreased and why.
 The income statement is prepared first
The income from this statement flows to
the statement of changes in stockholders
equity

The stockholders equity total and common

stock totals flow to the balance sheet

The cash from the balance sheet flows to

the statement of cash flows
 Master Scholar in
Business & Corporate
Laws,
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Constitutional and Property
Laws,
Eminent Faculty for
Security Analysis &
Financial Derivatives,
For
Thank Professor of Merit in
Financial Management, liste
You Expert Faculty in Financial
Accounting and Analysis,
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ning
Strategic Management,
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