accounting class notes
Chapter 1
• (Basic) Business cycle: Take Cash (initial $5) to PURCHASE (i.e. Retailers & Wholesalers) or MANUFACTURE - turn it into inventory
THEN SELL - turn it to receivable
THEN COLLECTION turn it into Cash ($8).
• CASH: before purchase, you have $5 CASH,
@ Inventory you have $0 Cash -> down by ($5)
@ Receivable you have $0 Cash -> still 0
@ Collection, you have $8 Cash-> up $8
@ end of the cycle your Cash increased by 3
• Either $5 or $8 is a reasonable measure of inventory if the business cycle is stopped midway (ex if you start the cycle but the year ends at Inventory OR receivable)-NOTE, you CAN’T have $8 @ Inventory and $5 @ Receivable, every other value combo is acceptable
• Let’s call the $5 the SACRIFICE VALUE
• Let’s call the $8 the BENEFIT VALUE
• If inventory and receivable both listed at sacrifice value, $3 picked up at collection
• If inventory and receivable both listed at benefit value, $3 picked up at inventory
• If inventory listed at sacrifice and receivable picked up at benefit, then then $3 picked up at Receivable
• HOWEVER you can put Inventory at $6 and receivable at $7 and pick up $1 on Purchase, $1 on Sale, and $1 on Collection.
• Benefit Value>Sacrifice Value “5 min university: buy something and sell it for MORE”
• VERY IMPORTANT concept: Cash Flow=FACTS (everyone reasonably will agree with this) VS. FAIRY TALES (things you can’t prove)
• (Both Actual & Potential) Investors/Creditors want to Predict FUTURE CASH FLOWS therefore, accountants tell them FAIRY TALES
• Management is interested in the its own FAIRY TALES because they want to MAKE DECISIONS
• MANAGEMENT ACCOUNTING has nothing to do with this course
• We are concerned about FINANCIAL ACCOUNTING
• Rules for accounting known as GAAP (Generally Accepted Accounting Principles)
• GAAP has been called Cleverly Rigged Accounting Ploys by the late Professor Briloff
• IRS: Tax Accounting (totally different than GAAP) therefore nothing to do with our course
• 3
• (Basic) Business cycle: Take Cash (initial $5) to PURCHASE (i.e. Retailers & Wholesalers) or MANUFACTURE - turn it into inventory
THEN SELL - turn it to receivable
THEN COLLECTION turn it into Cash ($8).
• CASH: before purchase, you have $5 CASH,
@ Inventory you have $0 Cash -> down by ($5)
@ Receivable you have $0 Cash -> still 0
@ Collection, you have $8 Cash-> up $8
@ end of the cycle your Cash increased by 3
• Either $5 or $8 is a reasonable measure of inventory if the business cycle is stopped midway (ex if you start the cycle but the year ends at Inventory OR receivable)-NOTE, you CAN’T have $8 @ Inventory and $5 @ Receivable, every other value combo is acceptable
• Let’s call the $5 the SACRIFICE VALUE
• Let’s call the $8 the BENEFIT VALUE
• If inventory and receivable both listed at sacrifice value, $3 picked up at collection
• If inventory and receivable both listed at benefit value, $3 picked up at inventory
• If inventory listed at sacrifice and receivable picked up at benefit, then then $3 picked up at Receivable
• HOWEVER you can put Inventory at $6 and receivable at $7 and pick up $1 on Purchase, $1 on Sale, and $1 on Collection.
• Benefit Value>Sacrifice Value “5 min university: buy something and sell it for MORE”
• VERY IMPORTANT concept: Cash Flow=FACTS (everyone reasonably will agree with this) VS. FAIRY TALES (things you can’t prove)
• (Both Actual & Potential) Investors/Creditors want to Predict FUTURE CASH FLOWS therefore, accountants tell them FAIRY TALES
• Management is interested in the its own FAIRY TALES because they want to MAKE DECISIONS
• MANAGEMENT ACCOUNTING has nothing to do with this course
• We are concerned about FINANCIAL ACCOUNTING
• Rules for accounting known as GAAP (Generally Accepted Accounting Principles)
• GAAP has been called Cleverly Rigged Accounting Ploys by the late Professor Briloff
• IRS: Tax Accounting (totally different than GAAP) therefore nothing to do with our course
• 3