FE 366 Prof. Dr. Mustafa BAYRAM University of Gaziantep Faculty of Engineering Department of Food Engineering ACCOUNTING TRADING (LOCAL, EXPORT&IMPORT) TRANSPORTATION-LOGISTIC

TRADING AND RULES ¨ Modern (GAFTA; TAHKİM, TTK) ¨ Traditional

Trade = Buy or Sell ¨ Income= Sell-Cost ¨ (in food industry: 7-15% income ratio-profit) Exportation Importation Free-zone (serbest bölge) Antrepo (Gümrülü depo) Dahilde işleme Gümrük Birliği (EU) (Custom s tax free) (Except: Wheat&products, sugar&products, milk&products)

TRANSPORTATION AND LOGISTIC

What is your solution to transfer your product from one place to another? Give example

THE COSTS ¨ COST ORDER: ¨ SHIP (The cheapest)-1 ¨ TRAIN-2 ¨ RIVER BOAT-3 ¨ TRUCK -4 ¨ AIRPLANE -5

Basic equipments to transport the goods Forklift Transpalette Shelf Conteyner Bigbag

Palette

CONTAINER

Popular types and sizes (20’ and 40’)

¨ Open type (Popular sizes)

¨ Packed container

SHIP ¨ Container ship ¨ Bulk ship ¨ 1000 ton-3000 ton-…….60 000 ton ¨ (500 containers—–3000 containers) ¨ NOTE: if product is sensitive to heat and humidity, the container should be put under shipboard or air gates of containers should be adjusted. Or use air conditioned container !!!! For long travelling, there is risk for product.

SHIP ¨ Container ship

¨ Bulk

TRUCK ¨ Special bulk truck

¨ Container truck

TRAIN

¨ Container/Package

TRAIN ¨ Bulk container

AIRPLANE ¨ Expensive and size/weight limited

LOJISTIC/TRANSPOTATION/TRADING TERMINOLOGY

INCOTERMS ¨ Incoterms are international rules for the interpretation of trade terms set by the International Chamber of Commerce. INCOTERM word comes from the contraction in English: International Commercial Terms (International Commercial Terms). ¨ Incoterms 2010 ICC (International Chamber of Commerce) are about to hit the market. Entered into force on January 1, 2011 and replace the old Incoterms 2000. ¨ The new Incoterms is reduced from thirteen to eleven, eliminating those who had little or no use and creating something new. Incoterms disappearing from 2011 are: ¨ DDU (Delivered Duty Unpaid) ¨ DAF (Delivered At Frontier) ¨ DES (Delivered Ex Ship) ¨ DEQ (Delivered Ex Quay) The new Incoterms are: ¨ DAT (Delivered At Terminal) ¨ DAP (Delivered At Place)

¨ EXW “Ex Works” ¨ The seller delivers when he places the goods at the disposal of the buyer at the seller’s premises or another named place (i.e. works, factory, warehouse, etc.) not cleared for export and not loaded on any collecting vehicle. This term thus represents the minimum obligation for the seller, and the buyer has to bear all costs and risks involved in taking the goods from the seller’s premises.

FCA “Free Carrier” The seller delivers the goods, cleared for export, to the carrier nominated by the buyer at the named place. It should be noted that the chosen place of delivery has an impact on the obligations of loading and unloading the goods at that place. If delivery occurs at the seller’s premises, the seller is responsible for loading. If delivery occurs at any other place, the seller is not responsible for unloading. This term may be used irrespective of the mode of transport, including multimodal transport. “Carrier” means any person who, in a contract of carriage, undertakes to perform or to procure the performance of transport by rail, road, air, sea, inland waterway or by a combination of such modes. If the buyer nominates a person other than a carrier to receive the goods, the seller is deemed to have fulfilled his obligation to deliver the goods when they are delivered to that person.

FAS “Free Alongside Ship” The seller delivers when the goods are placed alongside the vessel at the named port of shipment. This means that the buyer has to bear all costs and risks of loss or damage of the goods from that moment. The FAS term requires the seller to clear the goods for export.

FOB “Free on Board” The seller delivers when the goods pass the ship’s call at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that point. The FOB term requires the seller to clear the goods for export. This term can be used only for sea or inland waterway transport. Many people use either FOB or CIF and aren’t sure of the exact differences.

CFR “Cost and Freight” The seller delivers when the goods pass the ship’s rail in the port of shipment. The seller must pay the costs and freight necessary to bring the goods to the named port of destination but the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time of delivery, are transferred from the seller to the buyer. The CFR term requires the seller to clear the goods for export.

CIF “Cost Insurance and Freight” The seller delivers when the goods pass the ship’s rail in the port of shipment. The seller must pay the costs and freight necessary to bring the goods to the named port of destination, but the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time of delivery, are transferred from the seller to the buyer. However, with CIF the seller also has to procure marine insurance against the buyer’s risk of loss of or damage to the goods during the carriage. Consequently, the seller contracts for insurance and pays the insurance premium. The buyer should note that under the CIF term the seller is required to obtain insurance only on minimum coverage. Should the buyer wish to have protection of greater coverage, he would either need to agree as much expressly with the seller or to make his own extra insurance arrangements. The CIF term requires the seller to clear the goods for export. This term can be used only for sea and inland waterway transport. If the parties do not intend to deliver the goods across the ship’s rail, the CIP term should be used.

CIP “Carriage and Insurance paid to…” The seller delivers the goods to the carrier nominated by him but the seller must in addition pay the cost of carriage necessary to bring the goods to the named destination. This means that the buyer bears all risks and any additional costs occurring after the goods have been delivered. However, in CIP the seller also has to procure insurance against the buyer’s risk of loss of or damage to the goods during the carriage. Consequently, the seller contracts for insurance and pays the insurance premium. The buyer should note that under the CIP term the seller is required to obtain insurance only on minimum coverage. Should the buyer wish to have the protection of greater cover, he would either need to agree as much expressly with the seller or to make his own extra insurance arrangements. “Carrier” means any person who, in a contract of carriage, undertakes to perform or to procure the performance of transportation by rail, road, air, sea, inland waterway or by a combination of such modes. If subsequent carriers are used for the carriage to the agreed destination, the risk passes when the goods have been delivered to the first carrier. The CIP term requires the seller to clear the goods for export.

CPT “Carriage paid to…” ¨ The seller delivers the goods to the carrier nominated by him but the seller must in addition pay the cost of carriage necessary to bring the goods to the named destination. This means that the buyer bears all risks and any other costs occurring after the goods have been so delivered. ‘Carrier” means any person who, in a contract of carriage, undertakes to perform or to procure the performance of transport, by rail, road, air, sea, inland waterway or by a combination of such modes. If subsequent carriers are used for the carriage to the agreed destination, the risk passes when the goods have been delivered to the first carrier, The CPT term requires the seller to clear the goods for export.

DAF “Delivered at Frontier” ¨ The seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport not unloaded, cleared for export, but not cleared for import at the named point and place at the frontier, but before the customs border of the adjoining country. The term “frontier” may be used for any frontier including that of the country of export. Therefore, it is of vital importance that the frontier in question be defined precisely by always naming the point and place in the term. However, if the parties wish the seller to be responsible for the unloading of the goods from the arriving means of transport and to bear the risks and costs of unloading, this should be made clear by adding explicit wording to this effect in the contract of sale.

DES “Delivered Ex Ship” ¨ means that the seller delivers when the goods are placed at the disposal of the buyer on board the ship not cleared for import at the named port of destination. The seller has to bear all the costs and risks involved in bringing the goods to the named port of destination before discharging. If the parties wish the seller to bear the costs and risks of discharging the goods, then the DEQ term should be used. This term can be used only when the goods are to be delivered by see or Inland waterway or multimodal transport on a vessel in the port of destination.

DEQ “Delivered Ex Quay” The seller delivers when the goods are placed at the disposal of the buyer not cleared for import on the quay (wharf) at the named port of destination. The seller has to bear costs and risks involved in bringing the goods to the named port of destination and discharging the goods on the quay (wharf). The DEQ term requires the buyer to clear the goods for import and to pay for all formalities, duties, taxes and other charges upon import. If the parties wish to include in the seller’s obligations all or part of the costs payable upon import of the goods this should be made cear by adding explicit wording to this effect in the contract of sale. This term can be used only when the goods are to be delivered by sea or inland waterway or multimodal transport on discharging from a vessel onto the quay (wharf) in the port of destination. However if the parties wish to include in the seller’s obligations the risks and costs of the handling of the goods from the quay to another place (warehouse, terminal, transport station, etc.) in or outside the port, the DDU or DDP terms should be used.

DDU “Delivered Duty Unpaid” The seller delivers the goods to the buyer, not cleared for import, and not unloaded from any arriving means of transport at the named place of destination. The seller has to bear the costs and risks involved in bringing the goods thereto, other than, where applicable, any “duty” (which term includes the responsibility for and the risks of the carrying out of customs formalities, and the payment of formalities, customs dudes, taxes and other charges) for import in the country of destination. Such “duty” has to be borne by the buyer as well as any costs and risks caused by his failure to clear the goods for import in time. However, if the parties wish the seller to carry out customs formalities and bear the costs and risks resulting there from as well as some of the costs payable upon import of the goods should be made clear by adding explicit wording to this effect in the contract of sale.

DDP “Delivered Duty Paid” The seller delivers the goods to the buyer, cleared for import, and not unloaded from any arriving means of transport at the named place of destination. The seller has to bear all the costs and risks involved in bringing the goods thereto including, where applicable, any “duty” (which term includes the responsibility for and the risks of the carrying out of customs formalities and the payment of formalities, customs duties, taxes and other charges) for import in the country of destination. Whilst the EXW term represents the minimum obligation for the seller, DDP represents the maximum obligation. This term should not be used if the seller is unable directly or indirectly to obtain the import licence. However, if the parties wish to exclude from the seller’s obligations some of the costs payable upon import of the goods (such as value-added tax : VAT), this should be made cear by adding explicit wording to this effect in the contract of sale. If the parties wish the buyer to bear all risks and costs of the import, the DDU term should be used. Here is the legend that should be used inconjunction with the diagrams displayed with each above Incoterm. This legend indicates the balance of risks and costs for both the buyer and seller when entering into international trade business during 2008 and 2009.

!!!= Antrepo, ATR Dolaşım Sertifikası

!!!= Bitki sağlık sertifikası, Çeki listesi, Dahilde işleme,
———————– Page 49———————–

ACCOUNTING AND FINANCE

What is accounting? 1- 50 ¨ The language of business ¤ Measures financial aspects of a business ¤ Communicates this information to decision makers

Important terms in accounting ¨ Debtors : Borçlu ¨ Debit: Borç ¨ Creditors: Alacaklı ¨ Assets : Mal-değer-varlık ¨ Liabilities: Borç ¨ Income: Kar ¨ Expenses: Harcama ¨ Account: Hesap-muhasebe ¨ Equity: Özsermaye, Net varlık ¨ Stochholder: Hissedar ¨ Exchange Board: Borsa

Basic Terminology Event Journal Transaction Posting Account Trial Balance Real Account Adjusting Entries Nominal Account Financial Statements Ledger Closing Entries LO 1 Understand basic accounting terminology.

1 Accounting Activities Œ Identifying  Recording Business Business Activities Activities Ž Communicating Business Activities

2 Users of Accounting Information External Users Internal Users •Lenders •Consumer Groups •Managers •Sales Staff •Shareholders • External Auditors •Officers/Directors •Budget Officers •Governments •Customers •Internal Auditors •Controllers

Golden Rules in Accounting ¨ To identify the effect of a transaction on a account there are rules: ¤For Personal Account: nDebit: the receiver nCredit: the giver -For Real Account: nDebit: what comes in nCredit: what goes out -For Nominal Account: nDebit: all expenses and losse nCredit: all incomes and gains

ACCOUNTING ¨ TAX (income and VAT «KDV»Value Added Tax): 1-18-25 % in Turkey ¨ Payment rules (cash, credit, check, leasing, partial, L/C-Acreditif)

Welcome to the study of 1- 57 Financial Accounting

The Accounting Equation 1- 58 Assets = Claims Assets = Liabilities + Equity Mal (varlık-değer) = Borç + Net varlık (özsermaye- borçlardan sonra kalan para) ¨ Asset: something of value Ex: Cash, Land, Buildings, Equipment, Inventories, Supplies, Prepaid Insurance, Accounts Receivables from customers. ¨ Liability: something owed (creditors’ share of the assets) Ex: Accounts Payable, Notes Payable, Mortgage Payable, Interest Payable, Salaries Payable. ¨ Equity: what remains (owners’ share of the assets) Ex: Common Stock, Retained Earnings “Rules” = Generally Accepted Accounting Principles (GAAP)

A1 Accounting Equation EQUITY Assets = Liabilities + Equity

Assets A1 Cash Accounts Notes Receivable Receivable Resources owned or Vehicles controlled by Land a company Store Buildings Supplies Equipment

A1 Liabilities Accounts Notes Payable Payable Creditors’ claims on assets Taxes Wages Payable Payable

A1 Equity Owner Investments CAPITAL

Equity: The Owners’ Share 1- 63 ¨ There are two sources of equity ¤ equity acquired from the owners by issuing stock. ¤ equity “earned” by operations ¨ Expanded accounting equation: Stockholders’ Equity Common Retained Assets = Liabilities + Stock + Earnings

A1 Expanded Accounting Equation Assets Liabilities Equity Assets = Liabilities + Equity = + Owner Owner Capital _ Withdrawals + Revenues _ Expenses Owner’s Equity Revenue=gelir (satıştan gelen gelir)——–withdrawals=para çekmek—-

How is equity “earned by operations”? Answer: By earning “Net Income*” 1- 65 (*also called “Net Earnings” or “Net Profit”.) Revenue – Expenses = Net Income (Loss) ¨ Revenue: Amounts received or to be received from having sold a product or provided a service. [Ex: The amount the customer pays at the cash register.]

How is equity “earned by operations”? Answer: By earning “Net Income*” (*also called “Net 1- 66 Earnings” or “Net Profit”. Revenue – Expenses = Net Income (Loss) ¨ Revenue: Amounts received or to be received from having sold a product or provided a service. [Ex: The amount the customer pays at the cash register.] ¨ Expenses: Assets or services “used up” in the process of earning the revenue this period. [Ex: What it cost the store for the item it sold to the customer, rent, wages, utilities, advertising, taxes]

Equity: The Owners’ Share-cont’d. 1- 67 ¨ Dividends: Company assets given to or withdrawn by owners for their personal use. [Other terms used: Withdrawals, Drawings, and Distributions.] ¨ Retained Earnings:

Equity: The Owners’ Share-cont’d. 1- 68 ¨ Dividends: Company assets given to or withdrawn by owners for their personal use. [Other terms used: Withdrawals, Drawings, and Distributions.] ¨ Retained Earnings: The Net Income [Earnings] kept [Retained] in the business since its beginning. It is the total of all net income (minus all losses) and minus all dividends since the start of the company.

Ratio Analysis Ratio analysis expresses the relationship between selected financial data. These relationships can be expressed as: ¨ percentages ¨ rates, or ¨ proportions

Types of Ratios Type What is measured Examples Short-term ability to Current ratio Liquidity ratios pay maturing Quick assets ratio obligations Activity ratios Effectiveness in using Receivables turnover assets employed Inventory turnover Degree of success or Rate of return on assets Profitability failure for a given Earnings per share ratios period Degree of protection for Debt to total assets Coverage ratios long-term creditors and Times interest earned investors

1- 71 Price-Earnings Ratio This ratio is used by analysts to evaluate the future prospects of a company. ¨ The higher the PE ratio, the more optimistic investors are about a company’s future. Selling price of one share of stock Earnings per share* * Earnings per share = Net income divided by the weighted average number of common shares of outstanding stock. [Why is the “weighted average” number of shares used?]

Percentage Change The percentage change in any two numbers can be calculated by dividing the DIFFERENCE between the two numbers by the base year amount. Given the following data: 2004 Net Income = $ 80,000 2005 Net Income = $100,000 What was the percentage growth in Net Income from 2004 to 2005? 100,000 – 80,000 = 20,000 = 25.0% 80,000 = 80,000 1- 72

The Balance Sheet (BİLANCO)

Balance Sheet: Usefulness The balance sheet provides information for evaluating: ü Capital structure ü Rates of return ü Analyzing an enterprise’s: ü Liquidity ü Solvency ü Financial flexibility

Balance Sheet: Limitations ¨Most assets and liabilities are stated at historical cost. ¨Judgments and estimates are used in determining many of the items. ¨The balance sheet does not report items that can not be objectively determined. ¨ It does not report information regarding off- balance sheet financing.

Current Assets Current assets are expected to be consumed, sold, or converted into cash: either in one year or in the operating cycle, whichever is longer. Current assets are presented in order of liquidity. The following valuation principles are used: 1 Short-term investments at fair value 2 Accounts receivable at net realizable value

Long-Term Investments Long-term investments may be: 1 Investments in securities (bonds, stock) 2 Investments in fixed assets (land not used in operations) 3 Investments set aside in special funds (e.g., sinking fund) 4 Investments in non-consolidated subsidiaries or affiliated companies

Current Liabilities Current liabilities are liquidated: 1 Either through the use of current assets, or 2 By creation of other current liabilities Examples of current liabilities include: ¨ Payables resulting from acquisitions of goods and services ¨ Collections received in advance of services ¨ Other liabilities which will be paid in the short term

Long-Term Liabilities Long-term obligations are those not expected to be paid within the operating cycle. Examples are: ¨ obligations arising from specific financing situations (issuance of bonds) ¨ obligations arising from ordinary business operations (pension obligations) ¨ obligations that are contingent (product warranties)

The Statement of Cash Flows

Cash Inflows and Outflows

Four Basic Financial Statements 1- 82 ¨ Balance Sheet ¤ Assets = Liabilities + Equity ¨ Income Statement (also called Statement of Operations, Earnings Statement, Profit/Loss (or P&L) Statement ¤ Revenues – Expenses = Net income (or Net Earnings) ¨ Statement of Changes in Stockholders’ Equity ¤ Beginning of period total equity + Stock issued + Net income – Dividends = End of period total equity ¨ Statement of Cash Flows ¤ Cash inflow – Cash outflow = Net cash flow

Transaction Analysis 1- 83 ¨ What is a transaction? ¤ a business event involving a transfer of something of value between entities ¨ What is transaction analysis? ¤ determining the effect of a business event on the financial statements ¨ Where do you start? ¤ First, determine the transaction’s effects on the accounting equation. ¤ Second, determine the effects on other financial statements.

A2 Transaction Analysis Equation The accounting equation MUST remain in balance after each transaction. Assets = Liabilities + Equity

EXAMPLE 1

A2 Transaction Analysis J. Scott invests $20,000 cash to start the business. The accounts involved are: (1) Cash (asset) (2) Owner Capital (equity)

A2 Transaction Analysis J. Scott invests $20,000 cash to start the business. Assets = Liabilities + Equity Accounts Notes Owner Cash Supplies Equipment Payable Payable Capital (1) $ 20,000 $ 20,000 $ 20,000 $ – $ – $ – $ – $ 20,000 $ 20,000 = $ 20,000

A2 Transaction Analysis Purchased supplies paying $1,000 cash. The accounts involved are: (1) Cash (asset) (2) Supplies (asset)

A2 Transaction Analysis Purchased supplies paying $1,000 cash. Assets = Liabilities + Equity Accounts Notes Owner Cash Supplies Equipment Payable Payable Capital (1) $ 20,000 $ 20,000 (2) (1,000) $ 1,000 $ 19,000 $ 1,000 $ – $ – $ – $ 20,000 $ 20,000 = $ 20,000

A2 Transaction Analysis Purchased equipment for $15,000 cash. The accounts involved are: (1) Cash (asset) (2) Equipment (asset)

A2 Transaction Analysis Purchased equipment for $15,000 cash. Assets = Liabilities + Equity Accounts Notes Owner Cash Supplies Equipment Payable Payable Capital (1) $ 2 0,000 $ 20,000 (2) (1,000) $ 1,000 (3) (15,000) $ 1 5,000 $ 4,000 $ 1,000 $ 1 5,000 $ – $ – $ 20,000 $ 20,000 = $ 20,000

A2 Transaction Analysis Purchased Supplies of $200 and Equipment of $1,000 on account. The accounts involved are: (1) Supplies (asset) (2) Equipment (asset) (3) Accounts Payable (liability)

A2 Transaction Analysis Purchased Supplies of $200 and Equipment of $1,000 on account. Assets = Liabilities + Equity Accounts Notes Owner Cash Supplies Equipment Payable Payable Capital (1) $ 20,000 $ 20,000 (2) (1,000) $ 1,000 (3) (15,000) $ 15,000 (4) 200 1,000 $ 1,200 $ 4,000 $ 1,200 $ 16,000 $ 1,200 $ – $ 20,000 $ 21,200 = $ 21,200

A2 Transaction Analysis Borrowed $4,000 from 1st American Bank. The accounts involved are: (1) Cash (asset) (2) Notes payable (liability)

A2 Transaction Analysis Borrowed $4,000 from 1st American Bank. Assets = Liabilities + Equity Accounts Notes Owner Cash Supplies Equipment Payable Payable Capital (1) $ 2 0,000 $ 20,000 (2) (1,000) $ 1,000 (3) (15,000) $ 1 5,000 (4) 200 1,000 $ 1,200 (5) 4,000 $ 4,000 $ 8,000 $ 1,200 $ 1 6,000 $ 1,200 $ 4,000 $ 20,000 $ 25,200 = $ 25,200

A2 Transaction Analysis The balances so far appear below. Note that the Balance Sheet Equation is still in balance. Assets = Liabilities + Equity Accounts Notes Owner Cash Supplies Equipment Payable Payable Capital Bal. $ 8,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000 $ 8,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000 $ 25,200 = $ 25,200

A2 Transaction Analysis Now, let’s look at transactions involving revenue, expenses and withdrawals.

A2 Transaction Analysis Provided consulting services receiving $3,000 cash. The accounts involved are: (1) Cash (asset) (2) Revenues (equity)

A2 Transaction Analysis Provided consulting services receiving $3,000 cash. Assets = Liabilities + Equity Accounts Notes Owner Cash Supplies Equipment Payable Payable Capital Revenue Bal. $ 8,000 $ 1,200 $ 1 6,000 $ 1,200 $ 4,000 $ 2 0,000 (6) 3 ,000 $ 3 ,000 $ 11,000 $ 1,200 $ 1 6,000 $ 1,200 $ 4,000 $ 2 0,000 $ 3 ,000 $ 28,200 = $ 28,200

A2 Transaction Analysis Paid salaries of $800 to employees. The accounts involved are: (1) Cash (asset) (2) Salaries expense (equity) Remember that the balance in the salaries expense account actually increases. But, equity decreases because expenses reduce equity.

A2 Transaction Analysis Paid salaries of $800 to employees. Assets = Liabilities + Equity Accounts Notes Owner Cash Supplies Equipment Payable Payable Capital Revenue Expenses Bal. $ 8,000 $ 1 ,200 $ 1 6,000 $ 1,200 $ 4 ,000 $ 20,000 (6) 3 ,000 $ 3,000 (7) (800) $ (800) $ 10,200 $ 1 ,200 $ 1 6,000 $ 1,200 $ 4 ,000 $ 20,000 $ 3,000 $ (800) $ 27,400 = $ 27,400 Remember that expenses decrease equity.

A2 Transaction Analysis A withdrawal of $500 is made by the owner. The accounts involved are: (1) Cash (asset) (2) Withdrawals (equity) Remember that the withdrawal account actually increases. But, total equity decreases because the withdrawal reduces equity.

A2 Transaction Analysis A withdrawal of $500 is made by the owner. Assets = Liabilities + Equity Accounts Notes Owner Owner Cash Supplies Equipment Payable Payable Capital Withdrawals Revenue Expenses Bal. $ 8,000 $ 1,200 $ 1 6,000 $ 1,200 $ 4 ,000 $ 2 0,000 (6) 3,000 $ 3,000 (7) ( 800) $ (800) (8) ( 500) $ (500) $ 9,700 $ 1,200 $ 1 6,000 $ 1,200 $ 4 ,000 $ 2 0,000 $ (500) $ 3,000 $ (800) $ 2 6,900 = $ 26,900 Remember that withdrawals decrease equity.

P1 Financial Statements Let’s prepare the Financial Statements reflecting the transactions we have recorded. 1. Income Statement 2. Statement of Owner’s Equity 3. Balance Sheet 4. Statement of Cash Flows

P1 Income Statement Scott Company Income Statement Net income is the For Month Ended December 31, 2007 difference between Revenues: Revenues and Consulting revenue $ 3,000 Expenses. Expenses: Salaries expense 8 00 Net income $ 2,200 The income statement describes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities.

P1 Statement of Owner’s Equity Scott Company Income Statement For Month Ended December 31, 2007 Scott Company Statement of Owner’s Equity For Month Ended December 31, 2007 Revenues: Capital, December 1, 2007 $ – Consulting revenue $ 3,000 Plus: Investments by Owner $ 2 0,000 Expenses: Net Income 2 ,200 2 2,200 22,200 Salaries expense 8 00 Less: Withdrawals by owner 500 Capital, December 31, 2007 $ 2 1,700 Net income $ 2,200 The net income of $2,200 increases Owner’s Equity by $2,200.

P1 Balance Sheet (Bilanço) The Balance Sheet (Bilanço) describes a company’s financial position at a point in time. Scott Company Balance Sheet December 31, 2007 Assets Liabilities & Equity Cash $ 9,700 Accounts payable $ 1,200 Supplies 1,200 Notes payable 4,000 Equipment 16,000 Total liabilities 5,200 Owner Capital 21,700 Total assets $ 26,900 Total liabilities and equity $ 26,900

P1 Statement of Cash Flows Scott Company Statement of Cash Flows For Month Ended December 31, 2007 Cash flows from operating activities: Cash received from clients $ 3,000 Purchase of supplies (1,000) Cash paid to employees (800) Net cash provided by operating activities $ 1,200 Cash flows from investing activities: Purchase of equipment (15,000) Net cash used in investing activities (15,000) Cash flows from financing activities: Investment by owner 20,000 Borrowed at bank 4,000 Withdrawal by owner (500) Net cash provided by financing activities 23,500 Net increase in cash $ 9,700 Cash balance, December 1, 2007 – Cash balance, December 31, 2007 $ 9,700

A3 Return on Assets (ROA) Return on Net income = assets Average total assets ROA is viewed as an indicator of operating efficiency.

EXAMPLE 2

1- 111 (Balance Sheet, Income Statement and Statement of Cash Flows). Notice how the Balance Sheet section is similar to the Accounting Equation. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 112 Horizontal Model Transaction Analysis Record the six transactions that follow in the Horizontal Model below. Assets = Liabilities + Stk. Equity Amount & Cash + Land = A/Pay+N/Pay+C.Stk.+ R.E. Rev. – Exp. = N. I. OA,IA,FA McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 113 Horizontal Model Transaction Analysis Record the six transactions that follow in the Horizontal Model below. Assets = Liabilities + Stk. Equity Amount & Cash + Land = A/Pay+N/Pay+C.Stk.+ R.E. Rev. – Exp. = N. I. OA,IA,FA Abbreviations: Accounts Payable Notes Payable Common Stock McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 114 Kleen Sweep, Inc. Following are six transactions of Kleen Sweep, Inc., a company that provides janitorial services for local businesses. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 115 Kleen Sweep, Inc. 1. Kleen Sweep was formed on Jan. 1, 2004 by issuing Common Stock in exchange for $2,000 cash. 2. The company provided services to customers for $500 cash. 3. The company incurred $300 of expenses which were paid in cash. 4. The company purchased Land by paying $1,500 cash. 5. The company borrowed $1,000 cash from the bank by issuing a Note Payable on Dec. 31st. 6. The company pays a $50 cash dividend to the company’s owners (the stockholders). McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 116 Horizontal Model Transaction Analysis Transaction #1: Kleen Sweep was formed on Jan. 1, 2004 by issuing Common Stock in exchange for $2,000 cash. Balance Sheet Income Statement Cashflow Assets = Liabilities + Stk. Equity Amount & Cash + Land = A/Pay+N/Pay +C.Stk.+ R.E. Rev. – Exp. = N. I. OA,IA,FA 1 2000 2000 2000 ?? What category of Cash flow “activity” is this? McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 117 Classifications of Cash Flows l Operating activities: s Inflows: Collection of Revenues s Outflows: Payment of Expenses, including interest l Investing activities: sInflows: Disposals of our Land, Building, Equipment Collections of loans made to others sOutflows: Purchases of Land, Building, Equipment Lending money to others (our “debtors”) l Financing activities: sInflows: Borrowing money from others (our “creditors”) Cash received from issuing Common Stock sOutflows: Cash Dividends paid to stockholders Repayment of loans to creditors, but not interest So, transaction #1 is what kind of Cash flow “activity”? McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 118 Classifications of Cash Flows l Operating activities: s Inflows: Collection of Revenues s Outflows: Payment of Expenses, including interest l Investing activities: sInflows: Disposals of our Land, Building, Equipment Collections of loans made to others sOutflows: Purchases of Land, Building, Equipment Lending money to others (our “debtors”) l Financing activities: sInflows: Borrowing money from others (our “creditors”) Cash received from issuing Common Stock sOutflows: Cash Dividends paid to stockholders Repayment of loans to creditors, but not interest So, transaction #1 is what kind of Cash flow “activity”? McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 119 Horizontal Model Transaction Analysis Transaction #1: Kleen Sweep was formed on Jan. 1, 2004 by issuing Common Stock in exchange for $2,000 cash. Balance Sheet Income Statement Cashflow Assets = Liabilities + Stk. Equity Amount & Cash + Land = A/Pay+N/Pay +C.Stk.+ R.E. Rev. – Exp. = N. I. OA,IA,FA 1 2000 2000 2000 FA Financing Activity McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 121 Horizontal Model Transaction Analysis Transaction #2: The Company provided services to customers for $500 cash. Balance Sheet Income Statement Cashflow Assets = Liabilities + Stk. Equity Amount & Cash + Land = A/Pay+N/Pay +C.Stk.+ R.E. Rev. – Exp. = N. I. OA,IA,FA 1 2000 2000 2000 FA 2 500 500 500 500 500 OA McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 122 Horizontal Model Transaction Analysis Transaction #3: The Company incurred $300 of expenses which were paid in cash. Balance Sheet Income Statement Cashflow Assets = Liabilities + Stk. Equity Amount & Cash + Land = A/Pay+N/Pay +C.Stk.+ R.E. Rev. – Exp. = N. I. OA,IA,FA 1 2000 2000 2000 FA 2 500 500 500 500 500 OA 3 (300) (300) 300 (300) (300)OA McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 123 Horizontal Model Transaction Analysis Transaction #4: The Company purchased Land by paying $1,500 cash. Balance Sheet Income Statement Cashflow Assets = Liabilities + Stk. Equity Amount & Cash + Land = A/Pay+N/Pay +C.Stk.+ R.E. Rev. – Exp. = N. I. OA,IA,FA 1 2000 2000 2000 FA 2 500 500 500 500 500 OA 3 (300) (300) 300 (300) (300)OA 4 (1500) 1500 (1500) IA McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 124 Horizontal Model Transaction Analysis Transaction #5: The Company borrowed $1,000 cash from the bank by issuing a Note Payable on Dec. 31st. Balance Sheet Income Statement Cashflow Assets = Liabilities + Stk. Equity Amount & Cash + Land = A/Pay+N/Pay +C.Stk.+ R.E. Rev. – Exp. = N. I. OA,IA,FA 1 2000 2000 2000 FA 2 500 500 500 500 500 OA 3 (300) (300) 300 (300) (300)OA 4 (1500) 1500 (1500) IA 5 1000 1000 1000 FA McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 125 Horizontal Model Transaction Analysis Transaction #6: The Company pays a $50 cash dividend to the company’s owners (the stockholders). Balance Sheet Income Statement Cashflow Assets = Liabilities + Stk. Equity Amount & Cash + Land = A/Pay+N/Pay +C.Stk.+ R.E. Rev. – Exp. = N. I. OA,IA,FA 1 2000 2000 2000 FA 2 500 500 500 500 500 OA 3 (300) (300) 300 (300) (300)OA 4 (1500) 1500 (1500) IA 5 1000 1000 1000 FA 6 (50) (50) (50) FA McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 126 Horizontal Model Transaction Analysis Calculate the end-of-year balances of each General Ledger account. Balance Sheet Income Statement Cashflow Assets = Liabilities + Stk. Equity Amount & Cash + Land = A/Pay+N/Pay +C.Stk.+ R.E. Rev. – Exp. = N. I. OA,IA,FA 1 2000 2000 2000 FA 2 500 500 500 500 500 OA 3 (300) (300) 300 (300) (300)OA 4 (1500) 1500 (1500) IA 5 1000 1000 1000 FA 6 (50) (50) (50) FA B 1650 1500 0 1000 2000 150 500 300 200 1650 Bal Notice where these balances will appear on the financial statements we will prepare shortly. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 127 Which of the 2004 ending balances are carried forward to become the beginning balances of 2005? 1. Carry forward all Balance Sheet account balances. 2. Do NOT carry forward any Income Statement account balances; i.e. Revenues and Expenses. Closing Entries are used to transfer the Revenue and Expense balances to the Retained Earnings account. 3. On the Cashflow Statement, the 2004 ending cash balance is carried forward to become the 2005 beginning cash balance. (but, the OA, IA, FA categories start 2005 at $0.) McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 128 Horizontal Model Transaction Analysis Show the balances that will be carried over to start the next year, 2005. (B5 = Balance at beginning of 2005) Balance Sheet Income Statement Cashflow Assets = Liabilities + Stk. Equity Amount & Cash + Land = A/Pay+N/Pay +C.Stk.+ R.E. Rev. – Exp. = N. I. OA,IA,FA 1 2000 2000 2000 FA 2 500 500 500 500 500 OA 3 (300) (300) 300 (300) (300)OA 4 (1500) 1500 (1500) IA 5 1000 1000 1000 FA 6 (50) (50) (50)FA B4 1650 1500 0 1000 2000 150 500 300 200 1650 Bal Bal. Sheet balances are carried forward. Inc.Statem’t balances are not. B5 1650 1500 0 1000 2000 150 0 0 0 1650 Bal. Now let’s prepare the financial statements. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 129 Kleen Sweep, Inc. Income Statement For the Year Ended December 31, 2004 Revenue Date line must specify: (1) the length of time covered by the statement, and – Expenses (2) the period’s ending date. Net income McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 130 Kleen Sweep, Inc. Income Statement For the Year Ended December 31, 2004 Revenue $ 500 – Expenses 300 $ 200 Net income McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 131 Kleen Sweep, Inc. Statement of Changes in Stockholders’ Equity For the Year Ended December 31, 2004 Beginning Common Stock $ Plus: Common Stock Issued Ending Common Stock $ Beginning Retained Earnings $ Plus: Net income Less: Dividends Ending Retained Earnings $ Total Stockholders’ Equity $ McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 132 Kleen Sweep, Inc. Statement of Changes in Stockholders’ Equity For the Year Ended December 31, 2004 Beginning Common Stock $ 0 Plus: Common Stock Issued 2,000 Ending Common Stock $ 2,000 Beginning Retained Earnings $ Plus: Net income Less: Dividends Ending Retained Earnings $ Total Stockholders’ Equity $ McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 133 Kleen Sweep, Inc. Statement of Changes in Stockholders’ Equity For the Year Ended December 31, 2004 Beginning Common Stock $ 0 Plus: Common Stock Issued 2,000 Ending Common Stock $ 2,000 Beginning Retained Earnings $ 0 Plus: Net income 200 Less: Dividends Ending Retained Earnings $ Total Stockholders’ Equity $ McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 134 Kleen Sweep, Inc. Statement of Changes in Stockholders’ Equity For the Year Ended December 31, 2004 Beginning Common Stock $ 0 Plus: Common Stock Issued 2,000 Ending Common Stock $ 2,000 Beginning Retained Earnings $ 0 Plus: Net income 200 Less: Dividends (50) Ending Retained Earnings $ 150 Total Stockholders’ Equity $ 2,150 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 135 Kleen Sweep, Inc. Balance Sheet As of December 31, 2004 Assets Balance Sheet date line specifies one Cash $ POINT in time, NOT a period of time. Land Total Assets $ Liabilities Note payable $ Stockholders’ Equity Common Stock $ Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity $ McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 136 Kleen Sweep, Inc. Balance Sheet As of December 31, 2004 Assets Cash $ 1,650 Land Total Assets $ Liabilities Note payable $ Stockholders’ Equity Common Stock $ Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity $ McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 137 Kleen Sweep, Inc. Balance Sheet As of December 31, 2004 Assets Cash $ 1,650 Land 1,500 Total Assets $ 3,150 Liabilities Note payable $ Stockholders’ Equity Common Stock $ Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity $ McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 138 Kleen Sweep, Inc. Balance Sheet As of December 31, 2004 Assets Cash $ 1,650 Land 1,500 Total Assets $ 3,150 Liabilities Note payable $ 1,000 Stockholders’ Equity Common Stock $ Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity $ McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 139 Kleen Sweep, Inc. Balance Sheet As of December 31, 2004 Assets Cash $ 1,650 Land 1,500 Total Assets $ 3,150 Liabilities Note payable $ 1,000 Stockholders’ Equity Common Stock $ 2,000 Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity $ McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 140 Kleen Sweep, Inc. Balance Sheet Assets As of December 31, 2004 Cash $ 1,650 Land 1,500 Total Assets $ 3,150 Liabilities Note payable $ 1,000 Stockholders’ Equity Common Stock $ 2,000 Retained Earnings 150 Total Stockholders’ Equity 2,150 Total Liabilities and Stockholders’ Equity $ McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 141 Balance Sheet As of December 31, 2004 Assets Cash $ 1,650 Land 1,500 Total Assets $ 3,150 Liabilities Note payable $ 1,000 Stockholders’ Equity Common Stock $ 2,000 Retained Earnings 150 Total Stockholders’ Equity 2,150 Total Liabilities and Stockholders’ Equity $ 3,150 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 142 Kleen Sweep, Inc. Statement of Cash Flows For the Year Ended December 31, 2004 Cash flows from operating activities $ Net cash flow from operating activities $ Cash flows from investing activities $ Net cash flow from investing activities $ Cash flows from financing activities $ Net cash flow from financing activities $ Net increase (decrease) in cash $ Plus: Cash Balance, Jan. 1, 2004 Cash Balance, Dec. 31, 2004 $ McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 143 Kleen Sweep, Inc. Statement of Cash Flows For the Year Ended December 31, 2004 Cash flows from operating activities Cash receipts from revenues $ 500 Cash payments for expenses (300) Net cash flow from operating activities $ 200 Cash flows from investing activities Cash flows from financing activities McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 144 Kleen Sweep, Inc. Statement of Cash Flows For the Year Ended December 31, 2004 Cash flows from operating activities Cash receipts from revenues $ 500 Cash payments for expenses (300) Net cash flow from operating activities $ 200 Cash flows from investing activities Cash payment for Land $(1,500) Net cash flow from investing activities $(1,500) Cash flows from financing activities McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 145 Kleen Sweep, Inc. Statement of Cash Flows For the Year Ended December 31, 2004 Cash flows from operating activities Cash receipts from revenues $ 500 Cash payments for expenses (300) Net cash flow from operating activities $ 200 Cash flows from investing activities Cash payment for Land $(1,500) Net cash flow from investing activities $(1,500) Cash flows from financing activities Cash receipts from stock issue $ 2,000 Cash receipts from bank loan 1,000 Cash payments for dividends (50) Net cash flow from financing activities $ 2,950 Net increase in cash $ McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 146 Kleen Sweep, Inc. Statement of Cash Flows For the Year Ended December 31, 2004 Cash flows from operating activities Cash receipts from revenues $ 500 Cash payments for expenses (300) Net cash flow from operating activities $ 200 Cash flows from investing activities Cash payment for Land $(1,500) Net cash flow from investing activities $(1,500) Cash flows from financing activities Cash receipts from stock issue $ 2,000 Cash receipts from bank loan 1,000 Cash payments for dividends (50) Net cash flow from financing activities $ 2,950 Net increase in cash $ 1,650 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 147 Kleen Sweep, Inc. Statement of Cash Flows For the Year Ended December 31, 2004 Cash flows from operating activities Cash receipts from revenues $ 500 Cash payments for expenses (300) Net cash flow from operating activities $ 200 Cash flows from investing activities Cash payment for Land $(1,500) Net cash flow from investing activities $(1,500) Cash flows from financing activities Cash receipts from stock issue $ 2,000 Cash receipts from bank loan 1,000 Cash payments for dividends (50) Net cash flow from financing activities $ 2,950 Net increase in cash $ 1,650 Plus: Cash balance, Jan. 1, 2004 0 Cash balance, Dec. 31, 2004 $ 1,650 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 148 What are Consolidated Financial Statements? Financial Statements that show the combined results of a “Parent” company and all the “subsidiary” companies in which the parent has a “controlling interest” (usually more than 50% ownership). Many of the “real world” financial statements you look at in this course will be consolidated statements. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 149 Summary of General Ledger Accounts for 2004 Transactions Assets = Liabilities + Stockholders’ Eq. Trans. Notes Common Ret. Titles of Nominal accts. affected that resulted in Event Cash + Land = Payable + Stock + Earn. the change in Ret. Earn. 1 2,000 2,000 2 500 500 + Revenue 3 (300) (300) + Expenses 4 (1,500) 1,500 5 1,000 1,000 6 (50) (50) + Dividends Bal. 1,650 + 1,500 = 1,000 + 2,000 + 150 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1- 150 The End for the lesson. The remains are in home McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

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