With the accrual basis of accounting there 4 business statements prepared: 1. Income statement 2. The statement of retained earnings 3. The balance sheet 4. The statement of cash flows.

The income statement is used to show the company’s net income or profitability, in cash-basis accounting a small business might still prepare an income statement because it helps the owners in estimating their profitability. This income statement in cash-basis accounting is more like a statement of cash follows in accrual-basis accounting. There would be no need for a business owner to do double work, with that stated, they would not create a statement of cash flows. Most small business owners since they are often the only equity investor would have no need to provide a statement of retained earnings. A company using cash-basis accounting would prepare balance sheet even if the assets, liabilities, and equity would be over or understated. It is a good idea to have a general account as to the value of your assets. Small business owners or cash basis accounting systems would take into account how much cash is on hand, property, plant, equipment, and supplies; as well as how much money do we owe.

In my experience with small business owners using cash-basis account often provide me with a collateral list of all of their assets, and they list their liabilities on what we call a debt schedule. We often ask for a personal financial statement to determine the credit worthiness of a potential borrower. 

Accrual Accounting and Adjusting Entries

What would a company do that followed cash-basis accounting? This question is just one more reason why accrual-basis account is the preferred method of accounting. A company that pre-paid their insurance in cash-basis accounting would take the entire expense when they sent cash to the insurance company. Ultimately the transaction would look like this: Debit insurance expense and credit cash. The expenses in that month would be overstated. Companies that constantly overstated their expense would have a hard time making sound financial decisions. This is also true for external users. If they are looking to invest in a company that overstated their expenses and under stated their assets, the external users might underestimate the amount of money they could lend to the company providing a cash shortage later in the year for a company. Not have enough cash to operate properly is why a lot of businesses are forced to close their doors.

Why is inventory important for a business? How is inventory different from other assets of the business?

All businesses are in business to make a profit. A company has two choices; it can sell a service or sell a product. Inventory is important for a business because inventory is the item that product companies sell to make a profit. Without having any inventory to sell, a product based company cannot make a profit. Whether a company buys inventory “just in time” to make it and sell it or the company has inventory on hand, the inventory items must be bought and then re-sold at a higher price. Inventory is different from other assets of the business. Companies do not intend to add value to their “other assets” and re-sell them. In the book Financial Accounting Tools for Business Decision Making Kimmel explains, “A company’s gross profit (rate) may be expressed as a percentage by dividing the amount of gross profit by net sales” (Kimmel, 2011). The cost of inventory is the expense used to calculate the gross profit. By matching the correct inventory expense to the revenue earned, a company can determine the gross profit. However, all assets of a company should assist to generate revenue for the business; inventory is sold to generate that revenue. I find the financial services industry fascinating. Obviously financial service companies earn service based revenue. Like product based companies you have to manage the cost of capital. Cash in the company acts like inventory in a merchandising company.

Kimmel, P., Weygandt, J. & Kieso, D. (2011). Financial accounting tools for business decision making. Danvers, MA: John Wiley & Sons, Inc.

How is the income statement of a merchandising company different from that of a service company?

The income statement of a merchandising company is different from the income statement of a service company because it is a multiple-step income statement and it shows the gross profit, income from operations, and the net income of the merchandising company.  A service company would not have to report any cost of goods sold which helps determine the gross profit of a merchandising company.

Before I entered the world of property management and financial services I worked for a nut, dried fruit, and candy wholesaler supplier. One of the major goals of the president was to drive down his cost of goods sold. He was always happy when he could order larger quantities of his goods or work a yearly purchase agreement to guarantee a certain quantity discount to get his “goods” at a better price. I remember looking over the income statement every month because my bonus was based on the price at which I could sell the product to my retailers less the cost of goods sold, or the gross profit. According to Kimmel (2011) in his book Financial Accounting Tools for Business Decision Making he states, “A merchandising company has two categories of expenses: the cost of goods sold and operating expense” (2011). Merchandising companies must detail those expense categories on their income statement while service companies do not.  

Kimmel, P., Weygandt, J. & Kieso, D. (2011). Financial accounting tools for business decision making. Danvers, MA: John Wiley & Sons, Inc.

what accounting is?

www.inbeefinancial.com

In my opinion accounting is the documentation of a company’s activities. It provides a look into the past, present and future of a company. Because I own a commercial finance corporation, I work with all different kinds of small business owners. It is truly surprising to see the lack of accounting knowledge that many of the business owners do not possess. Many business owners think that because they have an idea that they should be able to raise capital for their business. If they knew more about accounting they would be more prepared to present their opportunity to me. A lot of times I have to take bank statements and prepare an income statement, statement of cash flows, and a balance sheet for them. I often catch mistakes that business owners are making on their financial statements that they prepare themselves. The accounting of a business affects all stakeholders. In the book Financial Accounting Tools for Business Decision Making, I noticed that accounting is not just a business function but also a personal tool. The book states, “Accounting provides internal reports, such as financial comparisons of operating alternatives, projections of income from new sales campaigns, and forecasts of cash needs for the next year” (Kimmel, 2011). This got me thinking about my personal finances and all the “internal users” involved. Having the tools and reports to make decisions reduces arguments and provides a realistic framework for family decisions.

Kimmel, P., Weygandt, J. & Kieso, D. (2011). Financial accounting tools for business decision making. Danvers, MA: John Wiley & Sons,Inc.

Financial Reporting Environment and GAAP

I really like the word stewardship because it implies the ethical, moral actions, and decisions that managers of money must undertake in the business setting. In making business decisions it is improtant to be a good steward of the funds you invest, save, raise, or borrow. I believe that accounting makes it possible to make those informed decisions and be a good steward of funds. A company without good accounting procedures is going to be making decisions without the proper analysis tools. It would become eaiser to lose money without identifing problems, recording trasanctions, classifying the proper information and understanding the economic activities of the company.

What is the purpose of a Balance Sheet? What information does it provide?

The balance sheet is a picture of the company’s assets, liabilities, and stockholders’ equity at a specific point in time. The balance sheet helps in determining important information to the stakeholders of an organization. In the book Financial Accounting Tools for Business Decision Making, Kimmel shows the importance by explaining solvency, liquidity, and profitability. Kimmel defines a company’s solvency as, “The ability to pay interest as it comes due and to repay the balance of a debt due at its maturity” (Kimmel, 2011). He goes on to define liquidity as, “The ability to pay obligations expected to become due within the next year or operating cycle” (Kimmel, 2011).

Determining the profitability of a company for comparative analysis is difficult without knowing the net income which is found on the income statement and the average number of common stock shares outstanding. The balance sheet’s purpose in determining profitability is to provide the value of what the common stock is worth at a specific point in time.

Kimmel, P., Weygandt, J. & Kieso, D. (2011). Financial accounting tools for business decision making. Danvers, MA: John Wiley & Sons, Inc.

What is the purpose of a Balance Sheet? What information does it provide?

I agree that the balance sheet informes stakeholders as to the position of the company's debts vs. assets. Business decision makers utilize the balance sheet to determin the value of a corporation. The actual "bottom line" often referred to in the business culture today is the net income or net loss which are found on the income statment. Stackholders want to know how profitable a decision in a company will be, thus how much drops to the "bottom line" of the income statment. The balance sheet is an overall snapshot of the tangible net worth of a corporation. http://www.investopedia.com/terms/b/balancesheet.asp#axzz1u1VMJqKL  This link is to investopedia and provides more information on the purpose of a balance sheet.

Financial Accounting Tools for Business Decision Making

One thing I find interesting about the primary financial statements published by a corporation are how the statements inter-relate. The classification cash used in a balance sheet appears on the statement of cash flows and should be the cash at the bottom of the statement of cash flows. The numbers from the different financial statements provide the story as to how the company is positioned financially and tells us the story of the overall company performance. In the book Financial Accounting Tools for Business Decision Making, Kimmel states, “The debt to total asset ratio is one source of information about long-term debt-paying ability.

It measures the percentage of total financing provided by creditors rather than stockholders… Thus, the higher the percentage of debt financing, the riskier the company” (Kimmel, 2011). This debt to total asset ratio information is only 1 part of the financial picture. What if a company was highly leveraged but was still profitable. Take property management for instance. What if the asset would be profitable even if it was 100% leveraged. Risky? Maybe, but without all the financial statements to determine profitability the business owner would never take that risk. Often times real-estate companies are highly leveraged and still highly profitable. In my opinion not having any equity is an insane decision. Kimmel, P., Weygandt, J. & Kieso, D. (2011). Financial accounting tools for business decision making. Danvers, MA: John Wiley & Sons, Inc.

How is cash-basis accounting different from accrual-basis accounting?

Cash-basis accounting is very different from accrual-basis accounting. One major difference is when the business records revenues and expenses. Cash accounting is used more by very small businesses. These businesses recognize revenues when the business receives cash and recognizes expenses when cash is paid out. In accrual-basis accounting revenues are recognized in the period the revenue is earned or accrued. The expenses are matched to the period in which they help to generate the revenue earned or the expense is actually accrued. Kimmel in his book Financial Accounting Tools for Business Decision Making explains accrued revenues as, “revenues earned but not yet recorded at the statement date” (Kimmel, 2011). He goes on to explain that, “An adjusting entry for accrued revenues results in an increase (a debit_ to an asset account and an increase (a credit) to a revenue account” (Kimmel, 2011). Accrual accounting principles are Generally Accepted Accounting Principal (GAAP). Accrual-basis accounting is the way most U.S businesses record the economic events of the company.

Kimmel, P., Weygandt, J. & Kieso, D. (2011). Financial accounting tools for business decision making. Danvers, MA: John Wiley & Sons, Inc.

What is the role of the accounting equation in the analysis of business transactions?

In the book Financial Accounting Tools for Business Decision Making, Kimmel states, “Transaction analysis is the process of identifying the specific effects of economic events on the accounting equation (Kimmel, 2012).” The basic account accounting equation use in analyzing those economic events is assets = liabilities + stockholders equity. The role of the accounting equations is to provide a determination as to whether the company needs to record an economic event for the internal or external users. For instance, when a company hires a new employ that is an event, but not an economic event. It does not need to be accounted for until the employee actually is to be paid for their time worked. However, in determining whether or not to hire an employee, the economic events of the company weigh heavily on that decision. Kimmel, P., Weygandt, J. & Kieso, D. (2011). Financial accounting tools for business decision making. Danvers, MA: John Wiley & Sons, Inc.

National Association of Equipment Lease Brokers Code of Ethics

http://www.naelb.org/displaycommon.cfm


As broker members, funding source members, associate members and honorary members of the NAELB, we pledge ourselves to maintain honesty, professionalism and integrity in all our dealings with customers, fellow members, the public, equipment vendors, all licensed professionals, other brokers and funding sources, employees and subcontractors and members of other professional leasing associations. We ascribe to the following Code of Ethics and pledge ourselves to the word and principal of these ethics:

1. We will demonstrate honesty, professionalism and integrity in all our relationships and business dealings with customers, fellow members, the public, equipment vendors, all licensed professionals, other brokers and funding sources, employees and subcontractors and members of other professional leasing associations. We will at all times adhere to two golden rules: First, treat other business professionals as we would like them to deal with us and Second, to always conduct our business dealings so as to reflect a positive image upon our profession and the Association.

2. We will respect the right of ownership of property. Where we have received funds in a fiduciary capacity, we will hold and account for those funds until returned or owned. If a transaction does not close, we will not keep such funds unless (a) the party remitting the funds has acknowledged that the funds are deemed earned, (b) to cover actual expenses incurred in the processing of the transaction, or (c) the subject transaction does not close due to a breach or fraud by the applicant and the application or agreement clearly permits retention for these reasons.

3. We will communicate as soon as it becomes available to us all information germane to all third parties, funding sources, lessees, vendors and any others where the knowledge of any facts may impact any such party's decision regarding the transaction in any way. However, we will only communicate such information to the affected party, recognizing that we should not spread information to parties other than those affected by such information.

4. We shall respect the confidences of our customers, clients and business associates. Any information delivered to us with the expectation of confidence shall be kept confidential by us. At all times, however, we shall not use the shield of confidence to hide facts that are germane to keep a funder, broker or other party fully informed about a transaction.

5. We will never knowingly make false statements to anyone. Under no circumstances will we perpetuate, encourage or disregard fraudulent or inherently dishonest activity by any person in connection with an equipment leasing transaction.

6. When we are asked for legal, accounting, tax or any other professional advice, outside our profession, we will always advise that the individual we are speaking to should ask the same question of a duly licensed and qualified professional.

7. We will not make payments to employees or other agents of a supplier or funding source without the knowledge and permission of the supplier or funding source.

8. We will ascertain that all equipment has, to the best of our knowledge, been delivered before selling or assigning to any third party any lease transaction except where such verification is not required by a funding source prior to funding, such as in a pre-funding program. However, we shall cooperate with the funding source on all issues of delivery and acceptance of equipment as our funding sources shall require.

9. We will deal fairly with our funders in a manner which respects the value of their time and financial commitment. We will not request funding for any transaction if we do not honestly believe that the funding source would exhibit some level of interest in funding the proposed transaction in accordance with the funding source's programs. We will use our best efforts to submit proper and complete applications and documentation in accordance with the policies set by our funders from time to time.

10. In all cases where subsequent facts impacting the viability or legitimacy of a lease transaction become known to us, even if such facts become known to us after the funding of a transaction, but only within a reasonable time after the funding of the transaction, then we shall communicate that information to all parties known to us having an interest in that transaction. In regard to our competitors, we will not seek unfair advantage by dishonest, unethical or questionable actions.

11. We will strive to enhance our professional competence and keep ourselves informed of all new developments in our industry.

12. We will respect the valuable proprietary nature of and relationships between brokers and their lessees and vendors and not circumvent these relationships except under terms which are agreed to in advance by all parties involved. The use of the terms "National Association of Equipment Leasing Brokers", "NAELB" and the NAELB "Logo" shall be used only by members in good standing on their letterhead and business cards in accordance with rules promulgated by the NAELB Board of Directors from time to time.

In the event that any member becomes aware of the use of the aforesaid by a non-member, then such member shall immediately bring the usage by the non-member to the attention of the Board of Directors for further action. All members of the National Association of Equipment Leasing Brokers agree to abide by and submit to the arbitration dispute resolution program administered by the NAELB and in effect from time to time.

What accounting is. Anybody?

You are certainly right that both internal and external users are relying on the accounting information to make accurate decisions about the company. The great thing about equipment is that it is an asset; however, the acquisition of essential equipment to the company may not be possible if their debt is too high. A company’s frontline manager that has an understanding of accounting may then make the decision to lease the equipment if the profitability or cash position of the company would increase with the control of the asset. Leasing is an interesting tool for businesses in that it preserves lines of credit with the bank and offers the usage or utility value to the corporation. The leasing company maintains ownership of the asset and may even take on debt to acquire it. Lessors use the companies accounting records to make decisions about the creditworthiness of corporations, but more importantly their ability to make the rental payments. Most businesses today lease some if not all of their equipment. They get the benefit of control of the asset while they reduce their tax burden. This often improves the cash position of a company therefore providing an opportunity to pay divides or retain the cash to grow the business. Understanding accounting is essential to all users.

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