Test Blog: Accounting

what finance is and the difference between finance and accounting.

I have been asked by potential finance students some questions about finance such as what finance is and the difference between finance and accounting.

Accounting: Accountant’s (sometimes called: Controller) primary function is to develop and provide data measuring the performance of the firm, assessing its financial position, and paying taxes. The accountant is responsible for preparing financial statements such as the income statement, balance sheets, and cash flows. It is normally passive work, in the sense that, the work has a very independent nature to it such as preparing forms and financial statements. It is a good job for people who want to work independently and are very organized (this is only a very brief description, if you are interested in accounting, consult your accounting instructor for more information).

Finance: The financial manager or consultant places primary emphasis on decision making. It uses the financial statements prepared by accountants to make decisions about the firm’s financial condition and to advise others about possible losses and profits. In some cases, finance is more a type of leadership position. A financial manager has to deal not only with finance, but also with economics, accounting, statistics, math, and management. For example, people working with stocks and bonds have to understand and analyze how the underlying companies are performing. How a given company is going to perform during recession? Should they sell or buy stocks or bonds. How a decrease in the interest rate in England may affect the projects a company has in that country. Finance also deals a lot with risk. Derivative securities (options, futures, swaps, etc) are used to hedge against possible increase in risk. Risk managers are in great demand everywhere. Most finance majors find jobs in banks and other financial institutions, government, real estate, consultant companies, insurance, investment companies, stock market exchanges, fundraising, and any firm that needs someone to make financial decisions.

Description of Finance

Students will find the major in Finance particularly well-suited for careers in commercial and investment banking, real estate, corporate control and treasury functions, and insurance organizations. In addition, finance is important for generalists seeking careers in organization planning, management consulting, general line management, and small business management. Students seeking careers in the industries of health care, public and nonprofit management will also benefit from a strong knowledge of finance.
Analytical finance such as risk management, investment, and derivative securities provide a more rigorous understanding of financial modeling, the theory and tools that underlie modern financial practice (derivative finance is sometimes called Financial Engineering.). International finance provides the quantitative and analytical foundation for a career in financial analysis, with an emphasis on the international aspects and economic foundations of financial theory and practice. A thorough understanding of the theory of financial markets is combined with institutional detail, hands-on experience with financial analysis, and familiarity with financial applications.

What courses to take depends a lot on your own background, interests, experience, strengths, and weaknesses. Having taken the finance core will leave you with a solid understanding of the key building blocks of real-world finance. The other core courses are crucial elements of this foundation. Firm valuation, corporate finance, investment banking, and most sell-side jobs require a real knowledge of GAAP accounting. Asset pricing, portfolio allocation, and risk management are impossible without a real knowledge of economics and basic statistics. Furthermore, your in depth exposure to international finance give you a comparative advantage (maybe even an absolute advantage) in understanding today's trends, tomorrow's changes, and -- in particular -- the impact of exchange rates -- that is, the "international" in international finance. Going beyond the core, applications and the more practical and more specialized courses give you exposure to real-world experiences and a breadth of experiences. Business courses are particularly relevant for integrating your finance knowledge into the decisions of the firm -- finance is a crucial business input and firms are a key financial environment. Everything is tied together.

I obtained the following information from the Internet

Banking Investment, Commercial, and Insurance and Real Estate

Main Activities:

Valuation and company/segment analysis for mergers, spin-offs, acquisitions, LBO's, and so forth.

Issuance and placement of securities such as loans, bonds, and equity including corporate valuation, due diligence, credit analysis, security design, and security valuation.

Risk management including security sales and structuring, client advising, derivatives valuation, exposure determination (say to foreign exchange fluctuations), VAR, and portfolio allocation.

Research/Strategy/Analysis of sectors, macro-trends, regions, or firms in support of the above activities.

Consulting (Strategic/Valuation)

Main Financial Activities:

Project, business-line, market, and/or financial advice which all center around valuation exercises designed to help the client make better decisions.

Management Consulting (and General Management)

Main Financial Activities:

Internal financing decisions involving the allocation of capital as above, but also decisions on the capital structure and the raising of additional capital, as well as in the overall allocation of risk.

Money Management -- "buy side", because you buy securities

Main Financial Activities:

Security valuation, risk/return measurement, and portfolio allocation.

Risk management in support of the above.

Research/Strategy/Analysis in support of the above.

Sales and Trading -- "sell side" because you sell securities

Main Financial Activities:

Same as above. "Trading" typically is for the firm's own account and in support of their role of making a market in that security. "Sales" is what it sounds like, except that the product is often structured in response to the client's needs. Sales often requires maintaining client relations.

Entrepreneur/Venture Capital

Main Financial Activities:

Valuation of firm, business line, and market.

Fund raising.

International Capital Markets and Banking

Cases in International Finance, International Banking, Foreign Exchange Markets, Credit Analysis, Country Risk Analysis, National Financial Markets and Capital Flows

Corporate Finance and Valuation

Creating and Managing Value, Financial Strategies, Mergers and Acquisitions, Topics in Financial Engineering, Financial Innovation and Structured Finance, Managerial Accounting, Options and Derivatives, Financial Modeling, Mergers and Acquisitions Law, Competitive Strategy, Alliance Strategy

Risk Management

Computer Simulations and Risk Assessment, Credit Analysis, Country Risk Analysis, Options and Derivatives, Financial Modeling

Buy Side and Trading

Options and Derivatives, International Portfolio Management, Fixed Income Securities, Hedge Fund Management, Foreign Exchange Markets

Sales

Transnational Negotiations, Financial Product Marketing, Options and Derivatives, Fixed Income Securities, Foreign Exchange Markets, Topics in Financial Engineering

What is accounts payable ledger

The accounts payable ledger, also called the creditors ledger, is a subsidiary ledger that lists all of the vendors and suppliers that a company owes along with their account balances and details. In other words, the A/P ledger is a summary of all the current and outstanding accounts payable. This is a list that is not detailed in the general ledger of all the vendors and other companies that are owed money.

In a typical accounting system, there is only on main accounts payable account in the general ledger. This keeps the ledger clean and organized without being cluttered with multiple accounts. The only problem is that companies rarely buy goods on account from a single vendor. Thus, they need to record multiple accounts to keep track of the money owed to each vendor.

That’s where the subsidiary ledger system comes into play. A separate subsidiary ledger is set up to track the details of each vendor account, so the general ledger doesn’t have to make tens or even hundreds of accounts payable accounts.

The accounts payable ledger does just this. It tracks the amounts owed to different vendors along with the dates, order quantities, and other purchase information without cluttering up the general ledger with all of this detail. The general ledger simply pulls total balances from the accounts payable ledger and reports it in one accounts payable account.

The A/P ledger can be used to provide current information about vendor balances. It also acts as an internal control. Bookkeepers and managers can compare the subsidiary balance with the general ledger balance to help prevention errors. It also acts as an internal control by segregating they duties of employees. The employee who records the transactions on a daily basis is not the person who checks for errors.

What is accounts receivable ledger

The accounts receivable ledger is a sub ledger in which is recorded all credit sales made by a business. It is useful for segregating into one location a record of all amounts invoiced to customers, as well as all credit memos and (more rarely) debit memos issued to them, and all payments made against invoices by them. The ending balance of the accounts receivable ledger equals the aggregate amount of unpaid accounts receivable.

A typical transaction entered into the accounts receivable ledger will record an account receivable, followed at a later date by a payment transaction from a customer that eliminates the account receivable. If a customer does not pay the full amount of an invoice, a credit memo may be recorded to eliminate the residual balance.

If you were to maintain a manual record of the accounts receivable ledger, it could contain substantially more information. The data fields in a manually-prepared ledger might include the following information for each transaction:

Invoice date

Invoice number

Customer name

Identifying code for item sold

Sales tax

Total amount billed

Payment flag (states whether paid or not)

The primary document recorded in the accounts receivable ledger is the customer invoice. Also, if you grant a credit back to a customer for such items as returned goods or items damaged in transit, then you also record a credit memo in the ledger. An additional charge to a customer may appear in a debit memo (or in a separate invoice).

The information in the accounts receivable ledger is aggregated periodically (anywhere from daily to monthly) and posted to an account in the general ledger, which is known as a control account. The accounts receivable ledger control account is used to keep from cluttering up the general ledger with the massive amount of information that is typically stored in the accounts receivable ledger. Immediately after posting, the balance in the control account should match the balance in the accounts receivable ledger. Since no detailed transactions are stored in the control account, anyone wanting to research customer invoice and credit memo transactions will have to drill down from the control account to the accounts receivable ledger to find them.

Before closing the books and generating financial statements at the end of an accounting period, complete all entries in the accounts receivable ledger, close the ledger for that period, and post the totals from the accounts receivable ledger to the general ledger. These steps are completed automatically in some accounting software packages when a user indicates that a period is to be closed.

What is ledger

What is the difference between a general ledger and a general journal?

Journals are referred to as books of original entry. Accounting entries are recorded in a journal in order by date. A company might use special journals (sales, purchases, cash disbursements, cash receipts), or its accounting software will generate entries for routine transactions, but there will always be a general journal in which to record no routine transactions, such as depreciation, bad debts, sale of an asset, etc. In the general journal you must enter the account to be debited and the account to be credited and the amounts. Once a transaction is recorded in the general journal, the amounts are then posted to the appropriate accounts.

Accounts (such as Cash, Accounts Receivable, Equipment, Accumulated Depreciation, Accounts Payable, Sales, Telephone Expense, etc.) are contained in the general ledger.

To recap...the general ledger houses the company's accounts. The general journal is a place to first record an entry before it gets posted to the appropriate accounts.

What is billing statement

A periodic report that credit card companies issue to credit card holders showing their recent transactions, balance due and other key information. Billing statements are issued at the end of each billing cycle, which is usually about one month long. Credit card holders can receive their billing statements by mail or online.

BREAKING DOWN 'Billing Statement'

Billing statements are usually divided into several sections. One section will show the cardholder’s previous balance, payments and credits (how much money they’ve paid toward their balance plus any merchant refunds), total dollar amount of new purchases made during the billing cycle that just ended, balance transfers, cash advances, fees charged, interest charged and the new total balance. It will also show the minimum payment due and the due date to avoid a late fee and interest charges. Another section of the billing statement will show the cardholder’s total credit limit, amount used and amount available. It will also show any cash advance line available. For rewards credit cards, another section of the billing statement will show the cardholder’s opening reward balance, new rewards earned during the billing cycle, and new rewards balance.

The billing statement will also list each transaction charged during the billing cycle and provide the transaction date, postdate, merchant name and transaction amount. It will show the cardholder’s interest rate for purchases that aren’t paid in full before the due date and the interest rate for any cash advances. There will be a payment coupon for consumers who send their payments by mail and information about different ways to contact the credit card issuer with any questions. The billing statement will also contain fine print about what the cardholder should do if they notice a mistake on the billing statement, how consumers can make payments and how the card issuer will handle those payments. The fine print will also explain how the issuer calculates any interest charges.

What is cash flow statement

Complementing the balance sheet and income statement, the cash flow statement (CFS), a mandatory part of a company's financial reports since 1987, records the amounts of cash and cash equivalents entering and leaving a company. The CFS allows investors to understand how a company's operations are running, where its money is coming from, and how it is being spent. Here you will learn how the CFS is structured and how to use it as part of your analysis of a company.

The Structure of the CFS

The cash flow statement is distinct from the income statement and balance sheet because it does not include the amount of future incoming and outgoing cash that has been recorded on credit. Therefore, cash is not the same as net income, which, on the income statement and balance sheet, includes cash sales and sales made on credit. (For background reading, see Analyze Cash Flow The Easy Way.)

Cash flow is determined by looking at three components by which cash enters and leaves a company: core operations, investing and financing,

Operations

Measuring the cash inflows and outflows caused by core business operations, the operations component of cash flow reflects how much cash is generated from a company's products or services. Generally, changes made in cash, accounts receivable, depreciation, inventory and accounts payable are reflected in cash from operations.

Cash flow is calculated by making certain adjustments to net income by adding or subtracting differences in revenue, expenses and credit transactions (appearing on the balance sheet and income statement) resulting from transactions that occur from one period to the next. These adjustments are made because non-cash items are calculated into net income (income statement) and total assets and liabilities (balance sheet). So, because not all transactions involve actual cash items, many items have to be re-evaluated when calculating cash flow from operations.

For example, depreciation is not really a cash expense; it is an amount that is deducted from the total value of an asset that has previously been accounted for. That is why it is added back into net sales for calculating cash flow. The only time income from an asset is accounted for in CFS calculations is when the asset is sold.

Changes in accounts receivable on the balance sheet from one accounting period to the next must also be reflected in cash flow. If accounts receivable decreases, this implies that more cash has entered the company from customers paying off their credit accounts - the amount by which AR has decreased is then added to net sales. If accounts receivable increase from one accounting period to the next, the amount of the increase must be deducted from net sales because, although the amounts represented in AR are revenue, they are not cash.

An increase in inventory, on the other hand, signals that a company has spent more money to purchase more raw materials. If the inventory was paid with cash, the increase in the value of inventory is deducted from net sales. A decrease in inventory would be added to net sales. If inventory was purchased on credit, an increase in accounts payable would occur on the balance sheet, and the amount of the increase from one year to the other would be added to net sales.

The same logic holds true for taxes payable, salaries payable and prepaid insurance. If something has been paid off, then the difference in the value owed from one year to the next has to be subtracted from net income. If there is an amount that is still owed, then any differences will have to be added to net earnings. (For mroe insight, see Operating Cash Flow: Better Than Net Income?)

Investing

Changes in equipment, assets or investments relate to cash from investing. Usually cash changes from investing are a "cash out" item, because cash is used to buy new equipment, buildings or short-term assets such as marketable securities. However, when a company divests of an asset, the transaction is considered "cash in" for calculating cash from investing.

Financing

Changes in debt, loans or dividends are accounted for in cash from financing. Changes in cash from financing are "cash in" when capital is raised, and they're "cash out" when dividends are paid. Thus, if a company issues a bond to the public, the company receives cash financing; however, when interest is paid to bondholders, the company is reducing its cash.

Analyzing an Example of a CFS

Let's take a look at this CFS sample:

From this CFS, we can see that the cash flow for FY 2003 was $1,522,000. The bulk of the positive cash flow stems from cash earned from operations, which is a good sign for investors. It means that core operations are generating business and that there is enough money to buy new inventory. The purchasing of new equipment shows that the company has cash to invest in inventory for growth. Finally, the amount of cash available to the company should ease investors' minds regarding the notes payable, as cash is plentiful to cover that future loan expense.

Of course, not all cash flow statements look this healthy, or exhibit a positive cash flow. But a negative cash flow should not automatically raise a red flag without some further analysis. Sometimes, a negative cash flow is a result of a company's decision to expand its business at a certain point in time, which would be a good thing for the future. This is why analyzing changes in cash flow from one period to the next gives the investor a better idea of how the company is performing, and whether or not a company may be on the brink of bankruptcy or success. (For information on cash flow accounting, see Cash Flow On Steroids: Why Companies Cheat.)

Tying the CFS with the Balance Sheet and Income Statement

As we have already discussed, the cash flow statement is derived from the income statement and the balance sheet. Net earnings from the income statement is the figure from which the information on the CFS is deduced. As for the balance sheet, the net cash flow in the CFS from one year to the next should equal the increase or decrease of cash between the two consecutive balance sheets that apply to the period that the cash flow statement covers. (For example, if you are calculating a cash flow for the year 2000, the balance sheets from the years 1999 and 2000 should be used.)

Conclusion

A company can use a cash flow statement to predict future cash flow, which helps with matters in budgeting. For investors, the cash flow reflects a company's financial health: basically, the more cash available for business operations, the better. However, this is not a hard and fast rule. Sometimes a negative cash flow results from a company's growth strategy in the form of expanding its operations.

By adjusting earnings, revenues, assets and liabilities, the investor can get a very clear picture of what some people consider the most important aspect of a company: how much cash it generates and, particularly, how much of that cash stems from core operations.

What is cash flow forecast

Estimate of the timing and amounts of cash inflows and outflows over a specific period (usually one year). A cash flow forecast shows if a firm needs to borrow, how much, when, and how it will repay the loan. Also called cash flow budget or cash flow projection.

Cash Inflow

Money received by an organization as a result of its operating activities, investment activities, and financing activities.

Cash Outflow

The process of taking money out of an account as a transfer to another account or to pay for a product or service.

What is Income Statement

An income statement is a financial statement that measures a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year.

Also known as the "profit and loss statement" or "statement of revenue and expense."

BREAKING DOWN 'Income Statement'

The income statement is the one of the three major financial statements. The other two are the balance sheet and the statement of cash flows. The income statement is divided into two parts: the operating and non-operating sections.

The portion of the income statement that deals with operating items is interesting to investors and analysts alike because this section discloses information about revenues and expenses that are a direct result of the regular business operations. For example, if a business creates sports equipment, then the operating items section would talk about the revenues and expenses involved with the production of sports equipment.

The non-operating items section discloses revenue and expense information about activities that are not tied directly to a company's regular operations. For example, if the sport equipment company sold a factory and some old plant equipment, then this information would be in the non-operating items section.

What is Long-Term Liabilities

Long-term liabilities, in accounting, form part of a section of the balance sheet that lists obligations of the company that become due more than one year into the future. Long-term liabilities include items like debentures, loans, deferred tax liabilities and pension obligations. The portions of long-term liabilities that will come due within the next 12 months are listed under current liabilities, such as the current portion of long-term debt.

BREAKING DOWN 'Long-Term Liabilities'

Separating liabilities into current and long-term liabilities allows analysts to gain a more accurate view of a company's current liquidity position. Typically an analyst would want to see that a company has most of the assets needed to pay for current liabilities in cash or cash equivalent accounts, while the assets needed to satisfy long-term liabilities could be expected to be derived from future earnings or future financing transactions.

What is Current Liabilities

The amount of ownership an individual or company has in an asset. The formula is

Owner's Equity = Total assets - Total liabilities

For example, if a home is worth $200,000 and the owner owes the bank $150,000, the owner's equity is $50,000.

For a company, this is also called net worth or shareholders' equity or net assets.

BREAKING DOWN 'Current Liabilities'

Analysts and creditors will often use the current ratio, (which divides current assets by liabilities), or the quick ratio, (which divides current assets minus inventories by current liabilities), to determine whether a company has the ability to pay off its current liabilities.

In the course of conducting its operations, a company may obtain short-term loans or acquire input materials and services from its vendors and pay for them at a later date. Because the company has to honor these obligations in the future as a result of past transactions or events, this gives rise to corresponding liabilities. Liabilities due on demand or within one year are classified as current liabilities on a company's balance sheet.

Examples of Current Liabilities

Accounts payable is typically one of the largest current liability accounts on a company's financial statements, and it represents any unpaid invoices a company has from its suppliers of materials and services used in the production process. Other names for current liability accounts vary by industry or government regulation, and also include dividend payable, customer deposits, current portion of deferred revenue, current maturities of long-term debt and interest payable. Sometimes, companies use an account called other current liabilities as a catch-all line item on their balance sheets to include all other liabilities due within a year not classified elsewhere.

Accounting for Current Liabilities

When a company determines it received an economic benefit that must be paid within a year, it must immediately record a credit entry for a current liability. Depending on the nature of the received benefit, the company's accountants classify it as either an asset or expense. For example, consider a large car manufacturer that receives a shipment of exhaust systems from its vendors, and must pay them $10 million within the next 90 days. Because these auto parts do not go immediately into production, the company's accountants record a credit entry to accounts payable and a debit entry to inventory for $10 million. When the company pays its balance due to suppliers, it debits accounts payable and credits cash for $10 million.

Suppose a company receives tax preparation services from its external auditor for which it must pay $1 million within the next 60 days. The company's accountants record a $1 million debit entry to the audit services expense account and a $1 million credit entry to the other current liabilities account. When a payment of $1 million is made, a $1 million debit entry to the other current liabilities account and a $1 million credit to the cash account are made.

What is Owner’s Equity

The amount of ownership an individual or company has in an asset. The formula is

Owner's Equity = Total assets - Total liabilities

For example, if a home is worth $200,000 and the owner owes the bank $150,000, the owner's equity is $50,000.

For a company, this is also called net worth or shareholders' equity or net assets.

What is Liabilities

A liability is a company's legal debt or obligation that arises during the course of business operations. Liabilities are settled over time through the transfer of economic benefits including money, goods or services.

BREAKING DOWN 'Liability'

Recorded on the balance sheet (right side), liabilities include loans, accounts payable, mortgages, deferred revenues and accrued expenses. Liabilities are a vital aspect of a company's operations because they are used to finance operations and pay for large expansions. They can also make transactions between businesses more efficient. For example, the outstanding money that a company owes to its suppliers would be considered a liability.

Outside of accounting and finance this term simply refers to any money or service that is currently owed to another party. One form of liability, for example, would be the property taxes that a homeowner owes to the municipal government.

Current liabilities are debts payable within one year, while long-term liabilities are debts payable over a longer period.

What is Balance Sheet

A balance sheet is a financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by shareholders.

The balance sheet adheres to the following formula:

Assets = Liabilities + Shareholders' Equity

BREAKING DOWN 'Balance Sheet'

The balance sheets gets its name from the fact that the two sides of the equation above – assets on the one side and liabilities plus shareholders' equity on the other – must balance out. This is intuitive: a company has to pay for all the things it owns (assets) by either borrowing money (taking on liabilities) or taking it from investors (issuing shareholders' equity).

For example, if a company takes out a five-year, $4,000 loan from a bank, its assets – specifically the cash account – will increase by $4,000; its liabilities – specifically the long-term debt account – will also increase by $4,000, balancing the two sides of the equation. If the company takes $8,000 from investors, its assets will increase by that amount, as will its shareholders' equity. All revenues the company generates in excess of its liabilities will go into the shareholders' equity account, representing the net assets held by the owners. These revenues will be balanced on the assets side, appearing as cash, investments, inventory, or some other asset.

Assets, liabilities and shareholders' equity are each comprised of several smaller accounts that break down the specifics of a company's finances. These accounts vary widely by industry, and the same terms can have different implications depending on the nature of the business. Broadly, however, there are a few common components investors are likely to come across.

Assets

Within the assets segment, accounts are listed from top to bottom in order of their liquidity, that is, the ease with which they can be converted into cash. They are divided into current assets, those which can be converted to cash in one year or less; and non-current or long-term assets, which cannot.

Here is the general order of accounts within current assets:

Cash and cash equivalents: the most liquid assets, these can include Treasury bills and short-term certificates of deposit, as well as hard currency

Marketable securities: equity and debt securities for which there is a liquid market

Accounts receivable: money which customers owe the company, perhaps including an allowance for doubtful accounts (an example of a contra account), since a certain proportion of customers can be expected not to pay

Inventory: goods available for sale, valued at the lower of the cost or market price

Prepaid expenses: representing value that has already been paid for, such as insurance, advertising contracts or rent

Long-term assets include the following:

Long-term investments: securities that will not or cannot be liquidated in the next year

Fixed assets: these include land, machinery, equipment, buildings and other durable, generally capital-intensive assets

Intangible assets: these include non-physical, but still valuable, assets such as intellectual property and goodwill; in general, intangible assets are only listed on the balance sheet if they are acquired, rather than developed in-house; their value may therefore be wildly understated—by not including a globally recognized logo, for example—or just as wildly overstated

Liabilities

Liabilities are the money that a company owes to outside parties, from bills it has to pay to suppliers to interest on bonds it has issued to creditors to rent, utilities and salaries. Current liabilities are those that are due within one year and are listed in order of their due date. Long-term liabilities are due at any point after one year.

Current liabilities accounts might include:

Current portion of long-term debt

Bank indebtedness

Interest payable

Rent, tax, utilities

Wages payable

Customer prepayments

Dividends payable and others

Long-term liabilities can include:

Long-term debt: interest and principle on bonds issued

Pension fund liability: the money a company is required to pay into its employees' retirement accounts

Deferred tax liability: taxes that have been accrued but will not be paid for another year; besides timing, this figure reconciles differences between requirements for financial reporting and the way tax is assessed, such as depreciation calculations

Some liabilities are off-balance sheet, meaning that they will not appear on the balance sheet. Operating leases are an example of this kind of liability.

Shareholders' equity

Shareholders' equity is the money attributable to a business' owners, meaning its shareholders. It is also known as "net assets," since it is equivalent to the total assets of a company minus its liabilities, that is, the debt it owes to non-shareholders.

Retained earnings are the net earnings a company either reinvests in the business or uses to pay off debt; the rest is distributed to shareholders in the form of dividends.

Treasury stock is the stock a company has either repurchased or never issued in the first place. It can be sold at a later date to raise cash or reserved to repel a hostile takeover.

Some companies issue preferred stock, which will be listed separately from common stock under shareholders' equity. Preferred stock is assigned an arbitrary par value—as is common stock, in some cases—that has no bearing on the market value of the shares (often, par value is just $0.01). The "common stock" and "preferred stock" accounts are calculated by multiplying the par value by the number of shares issued.

Additional paid-in capital or capital surplus represents the amount shareholders have invested in excess of the "common stock" or "preferred stock" accounts, which are based on par value rather than market price. Shareholders' equity is not directly related to a company's market capitalization: the latter is based on the current price of a stock, while paid-in capital is the sum of the equity that has been purchased at any price.

How To Interpret a Balance Sheet

The balance sheet is a snapshot, representing the state of a company's finances at a moment in time. By itself, it cannot give a sense of the trends that are playing out over a longer period. For this reason, the balance sheet should be compared with those of previous periods. It should also be compared with those of other businesses in the same industry, since different industries have unique approaches to financing.

A number of ratios can be derived from the balance sheet, helping investors get a sense of how healthy a company is. These include the debt-to-equity ratio and the acid-test ratio, along with many others. The income statement and statement of cash flows also provide valuable context for assessing a company's finances, as do any notes or addenda in an earnings report that might refer back to the balance sheet.

What is Assets

Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Examples are cash, securities, accounts receivable, inventory, office equipment, real estate, a car, and other property.

On a balance sheet, assets are equal to the sum of

Liabilities

Common stock,

Preferred stock, and

Retained earnings.

From an accounting perspective, assets are divided into the following categories:

1- Current assets (cash and other liquid items),

2- Long-term assets (real estate, plant, equipment),

3- Prepaid and deferred assets (expenditures for future costs such as insurance, rent, interest), and

4- Intangible assets (trademarks, patents, copyrights, goodwill)

What is Expense Report

Detailed report produced on a monthly, quarterly, or yearly basis that accounts for all the expenses a business incurs. This report may be broken down to small subsets of the business to determine how much money each area is costing the company. Expense reports must be maintained for accuracy to ensure that the company is not spending unaccounted for money. Expense reports are also supplied to the Internal Revenue Service each year for tax purposes. During a downturn, companies often turn to expense reports to determine which areas of the business they can cut back on or eliminate to increase profits.

What is accounting

Practice and body of knowledge concerned primarily with

1- methods for recording transactions,

2- keeping financial records,

3- performing internal audits,

4- reporting and analyzing financial information to the management, and

5- Advising on taxation matters.

It is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information. It reveals profit or loss for a given period, and the value and nature of a firm's assets, liabilities and owners' equity.

Accounting provides information on the

1- resources available to a firm,

2- the means employed to finance those resources, and

3- The results achieved through their use.