Cornell Finance Club

Education Series #1: Intro to Accounting

September 27, 2019
Agenda

I. Semester Overview

II. Resume and Cover Letter

III. Intro to Accounting

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I. Semester Overview

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How New Member Ed will Work

• Greater emphasis on technical skill development. Professional development will be integrated into
G-body as it is applicable to whole club
• Meant to provide the tools necessary to get started. Most of being technically proficient in your
Finance skills is self-studied and developed
• There will be light assignments each week to enforce the concepts. Most of the learning is in
conjunction with participating in your sectors
• Feel free to reach out if you have any questions!

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II. Resume and Cover Letter

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Resume

General Tips:
• Stand out for your content, not your formatting
• Minimum 10.5 pt font, have thinner margins
(approx. 0.65 in to 0.8 in) to give yourself more
space
• Use up all your white space
− Have appropriate spacing
− Make bullets as descriptive as possible
• Interests section should be actual interests, not
just more academic / professional pursuits

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Cover Letter

• Specific name if known

• Demonstrate interest
• Speak about one or two
experiences
− Internship experience
− Campus experience
• Conclude with polite
ending and reminder of
your interest

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III. Intro to Accounting

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Brief History and Foundational Concepts

• Generally Accepted Accounting Principles (GAAP), established by the Financial Accounting

Standard Board (FASB), relies on the following key assumptions and principles
• Assumptions
− Accounting entity—a company is a distinct from its owners
− Going concern—a company is expected to remain indefinitely, meaning its assets are recognized at values
that assume the company will not have to liquidate
− Measurement—financial statements are reported in the monetary unit of where the company files reports
− Periodicity—company file reports annually and interim periods
• Principles
− Historical cost—companies report the value of their assets as the price for which they were acquired
• Limits management discretion and high costs of appraisal and re-evaluation
− Revenue recognition—revenues are recorded when earned and measurable
− Matching principle—costs are recorded the same period as when revenue is generated
• “matching revenue with expenses”
− Full disclosure—companies are required to provide all relevant economic information that materially
affect decisions of those using their reports
• Financial statements, notes / MD&A, supplemental information
• IASB is the governing body for accounting standards internationally

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Income Statement: Overview

• The report depicting operating performance over a period of time

− Core focus is on Revenues – Expenses  Profitability
• Important as a tool to evaluate the operations of the business
− Growth prospects
− Cost structure
− Profitability
• Serves as a basis of comparison across periods or comparing performance of multiple
companies during the same time period
• Other names include
− Consolidated Statement of Earnings
− Profit and Loss (P&L) Statement
− Statement of Revenues and Expenses

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Income Statement: Line Items
• Revenues—value of payment reasonably assured for goods
and services recognized as delivered during time period
• Cost of Goods Sold (COGS)—direct cost to manufacture
or procure a good or service
Income Statement for Murtha's Hot Dog Truck ($ USD)
• Gross Profit—Revenues – COGS For month ended August 31, 2019
Revenues:
• Selling, General, and Administrative (SG&A)— Food Sales 10,000
operating costs that are not direct inputs Merchandise Sales 2,000
− Payroll, wages, office supplies, marketing, etc. Total Revenues 12,000
• Research and Development (R&D)—costs associated (-) COGS (2,000)
with developing new products / procedures Gross Profit 10,000
(-) SG&A (3,000)
• Depreciation and Amortization (D&A)—allocation of (-) Research and Development (500)
cost over a fixed asset’s useful life (-) Depreication and Amortization (1,000)
− Straight-line, double-declining, unit of production, sum of Operating Income (EBIT) 5,500
years digits Interest Income 100
(-) Interest Expense (500)
• Earnings Before Interest and Taxes (EBIT)—
(-) Non-operating Expenses (200)
Gross Profit – Operating Expenses
Pre-Tax Income 4,900
• Interest Expense—amount payed on debt owed (-) Tax Expenses (980)
• Interest Income—income from cash holdings and Net Income 3,920
investments
• Non-operating Expenses—unrelated to core
operations, i.e. gains / loss on investments
• Tax Expense—tax liability a company reports
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Income Statement: Revenue Recognition Practice

Which of the following are considered revenue?

• A. Murtha’s Hog Dog Truck collected $2,000 in cash from a local grocery store for hot dogs
previously ordered and delivered
• B. 30 school children bought hot dogs worth $100 from Murtha’s Truck during a field trip
• C. Barwin’s Souvenir Shop ordered $200 worth of hats from Murtha’s Hot Dog Truck which was
subsequently delivered
• D. Received $20 of interest income from the company checking account
• E. Sued Auntie Anne’s, winning $5,000, for using the recently developed sauce without permission

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Income Statement: Revenue Recognition—Answers

B and C

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Income Statement: Expenses Practice

What expenses (COGS, SG&A, or other) are the following considered as?
• A. $3,000 worth of meat and buns were used to generate revenue.
• B. Used up $200 worth of paper when printing receipts
• C. Paid the part-time cook a monthly wage of $2,000
• D. Paid the cashier $1,000
• E. Spent $200 on flasks to discover the true essence of the perfect hot dog
• F. Spent $300 re-stocking the condiments supply
• G. Recognized $100 of depreciation on the grill used to make hot dogs

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Income Statement: Expenses—Answers

• A. COGS
• B. SG&A
• C. COGS
• D. SG&A
• E. Other, R&D
• F. Other, not an expense!
• G. COGS

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Balance Sheet: Overview

• Reports the company’s assets (resources used to run its operations) and how they are funded
(liabilities and stockholder’s equity) on a particular date
• Used to get a financial snapshot at a set point in time to evaluate the health of the company
− Contrasts with the income statement, which analyzes a company’s operations over a period of time
• Fundamental Accounting Equation that MUST BALANCE:

Assets = Liabilities + Stockholder’s Equity

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Balance Sheet: Line Items
• Cash and Cash Equivalents—money held in bank accounts
or debt / equity securities owned by company Balance Sheet for Murtha's Hot Dog Truck ($ USD)
At August 31, 2019
• Accounts Receivable—payment owed for products / services Current Assets:
already delivered Cash 19,700
Marketable Securities 6,700
• Inventories—goods waiting to be sold Accounts Receivable 300
Inventories 2,000
• Prepaid Expenses—rights to future services
Prepaid Insurance 1,000
• Property, Plant, and Equipment—land, building, and Total Currents Assets 29,700
machinery owned by the business to support its operations Property, Plant, and Equipment 40,000
Intangible Assets 20,000
• Intangible Assets—non-physical, i.e. patents and trademarks Total Assets 89,700
• Accounts Payable—Amount owed for items purchased
Current Liabilities:
• Accrued Expenses—Expenses incurred, but not yet paid Accounts Payable 400
• Unearned Revenue—cash received for product / services not Accrued Expenses 1,000
Unearned Revenue 300
yet provided
Current Portion of Long-Term Debt 3,000
• Short Term / Long Term Debt—Debt whose maturity is Total Current Liabilities 4,700
within / exceeds one year Long-Term Debt 25,000
Total Liabilities 29,700
• Common Stock—Capital received when a company issues
shares Common Stock 40,000
• Retained Earnings—How I/S connects to balance sheet Retained Earnings 20,000
Total Shareholder's Equity 60,000
− Net income flows into owner’s equity through retained earnings
Total Liabilities and Shareholder's Equity 89,700
• Revenues increase retained earnings
• Expenses decrease it

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Balance Sheet: Double-Entry Accounting
Each transaction affects the Balance Sheet in two ways to make it balance (debits = credits)

Assets = Liabilities + Equity

Debit Credit Debit Credit Debit Credit

Increase Decrease Decrease Increase Decrease Increase

↑ ↓ ↓ ↑ ↓ ↑

Phil invests $10,000 of his own money into Murtha’s Hot Dog Truck uses $40,000 in Cash to
Murtha’s Hot Dog Truck purchase a Truck.

Cash Equity Truck Cash

Debit Credit Debit Credit Debit Credit Debit Credit
10,000 10,000 40,000 40,000

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Balance Sheet: Double-Entry Practice

A. Murtha’s Hot Dog Truck takes out a $20,000 loan due in 7 years from Bank of America

B. Joseph, the cook, is paid his $2,000 in wages for his work over the last two weeks

C. Murtha’s Hot Dog Truck received $4,000 of buns from Laura’s Bakery, but has yet to pay

D. Murtha’s Hot Dog Truck delivered Hot Dogs using up $200 of buns and meat for Eric Zhou’s frat party,
recognizing $400 in revenue. ΦΔΘ (or whatever his frat is) has yet to pay Murtha’s. Assume no other expenses
were incurred

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Balance Sheet: Double-Entry—Answers

A C
Cash LT Debt Inventory AP
Debit Credit Debit Credit Debit Credit Debit Credit
20,000 20,000 4,000 40,000

B D
Accrued AR Equity
Cash Expenses
Debit Credit Debit Credit Debit Credit Debit Credit

2,000 2,000 400 400

200
Inventory
Debit Credit
200

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Cash Flow Statement: Overview

• Provides insight beyond what the Income Statement provides, namely ability for of a company to
generate cash from various activities
• A company can show high profitability, but can be running out of cash because a significant
portion of their revenues could be non-cash
• Thus, the Cash Flow Statement reconciles net income to a company’s actual change in cash balance
over a period of time
• Bottom Line (Net Income) of the Income Statement is the “top line” of the Cash Flow Statement.
Non-cash adjustments are made. Operational line items from the balance sheet are reflected on the
Cash Flow Statement. The rest of the Cash Flow Statement reflects changes in Balance Sheet line
items.

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Cash Flow Statement: The Sections
Cash Flow from Operations
Cash Flow Statement for Murtha's Hot Dog Truck ($USD)
• Adjust net income for non-cash expenses Month Ended August 31, 2019
Cash Flow from Operating Activities:
• Reflect changes in Working Capital (Assets and Net Income 3,920
Liabilities tied up in normal operation of a business) (+) D&A 1,000
(-) Increase in Accounts Receivable (50)
• Reflect other changes: – Impairments, +/– Gain/Loss (-) Increase in Inventories (100)
on sale of assets, + Stock based compensation, /+ (-) Increase in Prepaid Insurance 250
Increases in deferred tax assets/liabilities (+) Increase in Accounts Payable 100
(+) Increase in Accrued Expenses (200)
Cash Flow from Investing Activities (+) Increase in Unearned Revenue 50
• Tracks additions and reductions to fixed assets and Cash Flow from Operating Activities 4,970
investments during the year
Cash Flow from Investing Activities:
• Common line items include: (-) CapEx 2,000
(+) Proceeds from Asset Sales 0
− Capital Expenditures
(-/+) Purchase/Sale of Marketable Securities (300)
− Purchases of Intangible Assets Cash Flow from Investing Activities 1,700
− Asset Sales
− Purchases and sales of debt and equity securities Cash Flow from Financing Activities:
(-) Dividends 0
Cash Flow from Financing Activities (-/+) Decrease/Increase in Short Term Debt (200)
(+) Additions to Long-Term Debt 2,000
• Tracks changes in the company’s sources of debt and (-) Reductions in Long-Term Debt (50)
equity financing (+) Proceeds of Stock Issuances 0
• Common line items: Cash Flow from Financing Activities 1,750
− Issuance/repayment of Debt
Net Change in Cash 8,420
− Issuance/Repurchase of Common Stock
− Issuance Dividends
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