Financial Accounting Review (Week 1)

Topics

 Income statement and balance sheet

 depreciation
 gains and losses

Financial Accounting: Branch of accounting primarily focused on external reporting of past happenings
using specific rules/guidelines such as GAAP, ASPE, or IFRS.

Management Accounting: Branch of accounting primarily focused on internal reporting with a future
focus using customized approaches.

Financial Statements: reports which provide details of an entity’s financial information, including what is
contained within the business and what the business is earning.

Income Statement Covered in more detail in Week 1 of the Financial Accounting Badge Course

The income statement reports a company’s revenues, expenses, and resulting net income/loss over a
specific period of time (ex. month, quarter, year). The income calculation is as follows:

Net Profit/Loss = Revenues - Expenses

Revenue: Amount of money earned through business activity, such as sales, services, or interest.

Expense: Amount of money spent through business activity, such as salary, rent, or supplies.
 UCW Bookstore
Income Statement
For the Years Ended December 31, 2023 and 2022

2023 2022
Revenues
Sales Revenue $472,500 $460,000
Service Revenue 253,500 210,000
Total Revenues _____ 670,000

Expenses
Operating expenses:
Cost of Goods Sold 200,000 175,000
Salary expense 300,000 275,000
Rent expense 100,000 100,000
Utilities expense 50,000 50,000
Depreciation expense 16,000 20,000
Total operating expenses _____ 620,000
Operating profit 50,000
Interest expense 15,000 24,000
Net Income before taxes 26,000
Income tax expense 10,000 6,000
Net Income $ . $20,000

When revenues are larger than expenses, there is a positive balance at the bottom of the income
statement, also called a profit. We see this in both years above.

When revenues are lower than expenses, there is a negative net balance at the bottom of the income
statement, also called a loss.

Let’s try some questions:

Last year, Francine’s business generated $55,500 in service revenues. Her only expenses were $22,300 in
cost of sales and $25,200 in salary expense. Francine made a net ____________ of $_____________.
Alana is expecting last year’s revenue of $40,000 to grow by 7.5% this year. Additionally, she is expecting
her expenses of $38,000 to grow by 14%. Hence, she is projecting a net ____________ of $___________
this year.

This month, Will is expecting rent expense of $3,000, cost of goods sold expense of $1,800, salary
expense of $2,300, and utilities expense of $1,000. To generate a monthly profit of $2,000, Will must
generate $_____________ of sales revenue.

Balance Sheet Covered in more detail in Week 1 of the Financial Accounting Badge Course

The balance sheet is best described as a statement which embodies the accounting equation:

Assets = Liabilities + Owner’s Equity

As the formula suggests, the total value of assets owned by a business MUST equal the value of the
liabilities and owner’s equity. Liabilities are often referred to as Debt and Owner’s Equity can be
shortened to Equity.

Assets: economic resources controlled by an entity that are expected to provide current/future benefit
to the business ex) cash, office supplies, merchandise inventory, land, machinery/equipment

Liabilities/Debt: debts payable to outside parties such as creditors, suppliers, employees, governments
ex) accounts payable, notes payable, salaries payable, taxes payable

Owner’s equity/Equity: the amount of an entity’s assets which remain after the liabilities are subtracted
(can also be called net assets).

Assets, at the top of the balance sheet, are debit accounts/balances, meaning they are debited when
increases are recorded. Conversely, they are credited when reduced.

The liabilities and equity accounts are credit accounts. Hence, a credit entry increases them, while a
debit entry decreases them.
 UCW Bookstore
Balance Sheet
December 31, 2023 and December 31, 2022

Assets
2023 2022
Current Assets:  
Cash $200,000   $170,000
Accounts receivable 5,000   15,000
Inventory 440,000   430,000

Total current assets   615,000

Fixed Assets  

Furniture 30,000 30,000

Accumulated Depreciation- Furniture (10,000) (8,000)
Furniture, net   22,000
Equipment 50,000   50,000

Accumulated Depreciation- Equipment (20,000) (6,000)

Equipment, net   ________ 44,000
Total Assets   $ .$ $681,000
   
Liabilities and Shareholders' Equity  

Current Liabilities:
Accounts Payable 5,000  5,000
Long-Term Debt  
Bank Loan 232,000 246,000
Total Liabilities 251,000
Shareholders' Equity  
Common Shares 300,000
  300,000
Retained Earnings 158,000   130,000
Total Shareholders' Equity   ________ 430,000
Total Liabilities and Shareholders' Equity   $ .

.
$681,000 .
Let’s try some questions to reinforce the A = L + E concept:

In his business, Deep has equity of $54,000 and liabilities of $16,000. Hence, his assets must be worth
$_____________.

In her first month of business, Sheila transferred in a car worth $11,000, equipment worth $6,500, and
$18,000 cash. She took a bank loan to finance additional assets. Sheila’s assets total up to a net book
value of $44,700. Sheila’s bank loan was for $_____________.

Along with an accounts payable balance of $2,500 and bank loan of $13,000, Jamal has four assets in his
business:

 a car which was purchased for $18,000 and has an accumulated depreciation balance of $4,500
 a truck which was purchased for $23,000 and has an accumulated depreciation balance of
$6,000
 accounts receivable balance of $3,000
 cash balance of $6,700

Jamal’s equity is $________________.

Note that our financial statements report important account information to users. The income
statement reports earnings over a specific period of time, while the balance sheet reports what a
business is made up of at a given moment. Let’s take a closer look at the Fixed Assets portion of the
UCW Bookstore’s balance sheet:

Fixed Assets 2023 2022

Furniture 30,000 30,000

Accumulated Depreciation- Furniture (10,000) (8,000)
Furniture, net   20,000 22,000
Equipment 50,000   50,000

Accumulated Depreciation- Equipment (20,000) (6,000)

Equipment, net
  30,000 44,000
We can see that the furniture and equipment were obtained for $30,000 and $50,000 respectively (top
numbers for both). Then, through a process called depreciation (note that depreciation expense is on
the income statement), the book values of these assets was reduced over time. As of 2023, the
accumulated (total) depreciation on the furniture is $10,000, bringing the net book value to $20,000.
Conversely, the accumulated depreciation on the equipment is $20,000, bringing the net book value to
$30,000.

So, how do we decide how much to depreciate? It depends on several factors, such as the depreciation
method being used, the estimated usefulness of the asset (can be time-based or usage-based), and the
asset’s potential value at the end of its useful life. Depreciation methods will be discussed in more detail
in Week 3.

Gain/loss on sale of an asset

Once again, we can subtract the accumulated depreciation from an asset’s original cost to get its net
book value. If we sell an asset for MORE than its net book value, it is recorded as a gain on sale. If we
sell/dispose of an asset for LESS than its book value, it is recorded as a loss on sale.

Let’s assume the bookstore sells its furniture on Jan 1, 2024 for $22,000. Let’s calculate the gain/loss on
this sale:

Now let’s assume the bookstore sells its equipment on Jan 1, 2024 for $26,000. The gain/loss on this sale
is:

Note that the sale price can also be called market value/price. If this sale/market value is higher than the
original cost, this is a capital gain, which can have tax implications (discussed in the next unit).

Let’s try some more questions:

In 2019, Gina’s business purchased a vehicle for $30,000 and depreciated it $3,000 per year for three
years. The car was sold in 2022 for $22,000. This is a ____________ on sale of $_________________.

In 2017, Bilal’s business purchased specialized equipment for $110,000 and depreciated it $9,000 per
year for six years. The equipment was sold for $42,000. This is a ____________ on sale of
$_________________.

Mona is shutting down her business and sold the following assets for $124,000 total:

 Vehicle 1, which was purchased for $25,000 and depreciated $18,000 to date.
 Vehicle 2, which was purchased for $38,000 and depreciated $7,000 to date.
 Equipment, which was purchased for $98,000 and depreciated $49,000 to date.
 Furniture, which was purchased for $46,000 and depreciated $21,000 to date.

On this this sale, Mona made a _______________ on sale of $__________________.

Jeremiah purchased a piece of art for $33,000 in 2010. He sold it today for $65,000. Jeremiah made a
________________________ of $__________________.