2. Recap of Week 2

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From the course by IESE Business School

Accounting: Principles of Financial Accounting

617 ratings

IESE Business School

Accounting: Principles of Financial Accounting

617 ratings

Course 1 of 5 in the 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.

From the lesson

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

Meet the Instructors

Marc Badia
Assistant Professor
Accounting and Control

[MUSIC]

Let me start by making a quick recap of week two.

So last week, we recorded all the transactions that took place in the first

year of operations of the campus bookstore.

Sales of books.

The cost of the books sold.

Different operating expenses.

Depreciation and amortization.

And so on and so forth.

After regarding all these transactions, we prepare two financial statements.

First, the balance sheet.

And we said everything is on the balance sheet.

Every single transaction that takes place in a business affects the balance sheet.

At least two accounts of the balance sheet, okay?

And second, we prepare the income statement that talks about profitability.

So the balance sheet that we had of December 31st of year x1,

was the following that you see here on the screen.

The balance sheet, also called the statement of financial position,

gives a picture of the company with all the sources of capital and

all the uses of capital.

Any accounting transaction affects the balance sheet,

at least two accounts of the balance sheet, so that the basic accounting

equality assets equal owner's equity plus liabilities always holds.

However, the limitation of the balance sheet is that this is static, so

it only gives you the ending balance of each account.

So the only way to know what happened to the business during the year is by

comparing the ending balance with the beginning balance.

Now, as a shareholder in the firm,

it is very possible that you want to learn more about certain accounts that can give

you more information about how the business has performed during the year.

One of such accounts is the profit and

loss account that will tell you what profitability.

How did the operations contribute to the net worth of the shareholders

during the year?

How efficient are we in our operations?

This is why we need a vision of financial statement that analyzes the profit for

the business.

This second financial statement is the income statement.

And we start as you see by sales, that's the top line, and

then minus the cost of goods sold, we have the gross margin and

you keep going down until you get the bottom line which is the net profit.

And the net profit is the increase in the net worth of the shareholders,

thanks to operations.

So the income statement is not a picture but

a sort of a movie of what happened with operations during the year.

This is why we talk about the income statement for a period of time, for

year x1 in this case, as opposed to for a specific date.

As important as being profitable is having cash,

because at the end of the day profits should translate into cash.

As mentioned earlier, this week we're going to introduce a new financial

statement that is going to analyze what happens with the cash account.

So the cash flow statement will help explain the change in cash for the period.

It will give us information about the liquidity of the business.

Okay, before we start with your next two transactions, I would like to make

a couple of clarifications about how the accounting process works.

So in the next video, I'm going to introduce the T-account and

journal entries.

[MUSIC]

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