The  Power  of  Accoun.ng  

Officially  Born  in  1494,  when  a  Vene5an  Merchant,  Luca  Pacioli,  in  his  ”Summa  de  Arithme5ca,  Geometria,  Propor5oni  ed  Propor5onalita    described  for  the  first  5me  the  double-­‐entry  system  

“You  have  to  understand  accoun0ng  and  you  have  to  understand  the  nuances  of  accoun0ng.  It’s  the  language  of  business  and  it’s  an  imperfect  language.  Unless  you  are  willing  to  put  in  the  effort  to  learn  accoun0ng  –  how  to  read  and  interpret  financial  statements  –  you  really  shouldn’t  select  stocks  yourself”  Warren  Buffet  

GAAP  Principles  –  10  Commandments   •  Economic  En5ty  Assump5on                              •  Monetary  Unit  Assump5on  •  Time  period  Assump5on  •  Cost  Principle  •  Full  Disclosure  Principle  

•  Going  Concern  •  Matching  Principle  •  Revenue  Recogni5on  Principle  •  Materiality  Principle  •  Conserva5on  Principle    

Double-­‐Entry  System •  T-­‐  Account  •  Journal  Entry  •  Chart  of  Accounts  

The  Main  Accounts •  Assets  •  Liabili5es    •  Owner’s  Equity  •  Revenue  or  Income  •  Expenses  

Debit  and  Credit  

Cash  vs.  Accrual •  Cash  Basis:  Record  transac5on  when  cash  has  been  disbursed  or  received  

•  Accrual  Basis:  Record  transac5on  independently  from  cash  disbursement  or  receipt        

The  General  Ledger   •  Big  book  •  All  transac5ons  for  a  certain  period  are  collected    •  Reports  are  produced:  BS,  IS  (P&L),  CFS    

Main  Financial  Statements •  Income  Statement  (P&L)  

•  Balance  Sheet  

•  Cash  Flow  Statement    

Income  Statement   Example,)Company)XYZIncome)Statement)January)thru)December)31,)Year)1

Year)1Revenue 6,000COGS 4,000Gross)Profit 2,000Advertising (100)Salaries;and;Wages (600)Phone;and;Internet; (34)Depreciation;Expense GOffice;Supplies (25)

Total;Operating;Expenses (759)Operating)Profit 1,241Interest;Expense (200)Interest;Income GProfit;Before;Tax;(EBT) 1,041Tax (141)Net)Profit) $900

Revenue  –  Cost  =  Profit  

COGS

•  Costs  incurred  to  sell  the  good  or  service  

Opera.ng  Expense  

•  Costs  related  to  the  opera5ons  of  the  business  

Non-­‐Opera.ng  Expense

•  Costs  incurred  outside  the  business  opera5ons  

The  boMom  Line!   Net  Profit  

Balance  Sheet •  Financial  Posi5on  in  a  given  moment  in  5me  

Asset  Classifica.on •  Current  Assets  

 •  Non-­‐Current  Assets  

Deprecia5on      &    

Amor5za5on  

Current  Assets •  Cash    •  Accounts  Receivable  

•  Inventories  

•  Prepaid  Expenses  

Non-­‐Current  Assets

CAPEX  vs.  OPEX  •  Useful  Life  •  Amount  Spent  •  Future  Benefits  

Depracia.on  &  Amor.zaion

Straight  line  Deprecia5on  as  the  main  method  used  

Liabili.es   •  Current  Liability  

•  Long-­‐term  (Non-­‐Current)  Liability  

Current  liabili.es •  Account  Payable  

•  Short-­‐term  Loans  and  Overdra`  

•  Accrued  Expenses  

Equity •  Stocks    

•  Retained  Profit  

Balance  The  Balance  Sheet

Assets  Liability    Equity  

Must  always  equal