6. Other Operating Costs

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En provenance du cours de IESE Business School

Accounting: Principles of Financial Accounting

737 notes

IESE Business School

Accounting: Principles of Financial Accounting

737 notes

Cours 1 sur 5 dans Specialization Foundations of Management

Financial Accounting is often called the language of business; it is the language that managers use to communicate the firm's financial and economic information to external parties such as shareholders and creditors. Nobody working in business can afford financial illiteracy. Whether you run your own business, work as a manager or are just starting your career, you want to understand financial information and be able to interact with accountants, controllers, and financial managers. You want to talk business! This course will provide you with the accounting language's essentials. Upon completion, you should be able to read and interpret financial statements for business diagnosis and decision-making. More importantly, you will possess the conceptual base to keep learning more sophisticated accounting and finance on your own. Do not forget that, as with any other language, becoming proficient with accounting requires constant practice.

À partir de la leçon

Week 3: The Cash Flow Statement

Now that you have a good grasp of the balance sheet and income statement, I'll help you master how to recognize the transactions we went over in week two. I'll also introduce a third financial report - the cash flow statement - and discuss liquidity. Course objectives: To understand the difference between liquidity and profitability, become familiar with T-accounts and gain insight into the purpose of the cash flow report.

1. Introduction to Week 32:10

2. Recap of Week 23:15

3. T-Accounts and Journal Entries5:45

4. Setting up T-Accounts for the Campus Bookstore3:06

5. Sales, Cost of Goods Sold, Collections from Customers and Payment to Suppliers7:05

6. Other Operating Costs4:10

7. Transactions with Non-Current Assets8:09

8. Bank Loans and Interest4:03

9. Taxes, Closing Entries and Payments of Dividends5:44

10. Preparing the Balance Sheet3:54

11. Preparing the Income Statement4:30

12. Introducing the Cash Flow Statement I7:29

13. Introducing the Cash Flow Statement II4:03

14. Recap of Week 3 and Conclusions3:12

Rencontrer les enseignants

Marc Badia
Assistant Professor
Accounting and Control

[MUSIC]

In this video clip, we are going to account for a few transactions that we

already recorded in the past period in the first year of operations.

So you should be already familiar with them,

and therefore I'll try to go a little bit faster in my explanations.

We're talking here about operating costs of running the business,

the campus bookstore.

Such as the salary of Christina who at the moment is the only person running

the business and the utilities, water, electricity, etc.

Total amount of this operating cost that I'm going to call selling,

general administrative expenses is 37,000 euros.

And they're all paid in cash, so how would you account for this?

The most clear thing that happens is that we pay everything in cash, so

let's start by recognizing the decrease in the cash account.

We credit the cash account for a total amount of 37,000 euros,

now the second question here is, are we generating an asset?

Or we have to recognize an expense, clearly,

this is an expense because you are talking about the salary of Christina.

And she's been working for the campus book store for the past year, so

this value is already gone, consumed.

And second the utilities, water and electricity that also have already been

consumed, and therefore there is no future value into them.

Hence, we are going to recognize here a decrease in the profit and loss account by

debiting this profit and loss account for a total amount of 37,000 euros.

So after this transaction, we are poorer by 37,000 euros and

also we are less liquid by the same amount.

You know, if all the transactions were paid in cash at the moment you

purchased things accounting would be much easier.

But unfortunately, this is not the case, so we need accrual accounting.

In the fourth week I'm going to explain a little bit more

what accrual accounting is about.

So I'm going to clarify this concept and

we're going to see the differences between cash accounting and accrual accounting.

Now let's consider another operating cost,

here we are talking about the cost of the rent.

As you will remember, the campus bookstore is renting the premises

where they are operating the business.

At the end of the year X1, we prepaid the rent for the year X2, and

now that the year X2 has passed we need to recognize the consumption

of this prepaid rent.

So the value of this asset would decrease, how would you account for this?

Well first you're going to recognize the decreasing in the rent, so

we are going to credit the prepaid rent.

The asset loses value, actually loses the total value it had.

Second, we need to recognize that we are poorer as a shareholders in this company.

So we recognize an expense, a rent expense for the total amount of 6,600 euros.

After this transaction, one of our assets has lost value, and

therefore now we are poorer.

In terms of liquidity, cash has not changed because we prepaid these,

remember in the last period, in the year X1.

Now let's take care of the payment of the rent for the following year, so

at the end of year X2, on the last day of year X2.

The campus bookstore pays the total cost of rent for the year X3,

how would you recognize this?

This one is easy as well, so cash obviously is going to decrease, so

we credit cash.

The total amount is 7,200 euros, and

then we need to recognize now that we have another asset, so we give cash.

And in exchange, we get another asset, which is the right to use the premises for

one more year, and we call this prepaid rent.

And so we debit the prepaid rent because it's an asset that increases.

So one asset decreases, another asset increases, we are less liquid but

profitability has not changed.

Again, there is a mismatch in time between the payments in this case and the expense.

In the next video we're going to see a few transactions related to

non-current assets.

[MUSIC]

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