�OVERVIEW OF THE BALANCE SHEET & �INCOME STATEMENT�COLUMBIA CORE ACCOUNTING�REVIEW SESSION��ANTHONY LE�

OUR TA TEAM AND REVIEW SESSIONS

Who We Are:

• We have three TA’s this semester:
• Me (Anthony): ale25@gsb.columbia.edu
• MJ: MSong26@gsb.columbia.edu
• Jiehang: JYu24@gsb.columbia.edu

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• Office hours: Fridays, 2:00 pm-3:00 pm, Kravis 1173
• For more specific, individualized questions
• If you can’t make this time and have questions, you can email us to set up an alternate time�
• Review sessions: Fridays, 12:00 pm–1:30 pm, Geffen 520, beginning on 9/15
• To review the prior week’s problem set + do a brief recap of the prior week’s content
• Mainly helpful for those students who are struggling to understand the concepts covered in lectures – we will focus on the key concepts and (hopefully) try to make it more intuitive
• All material used in the sessions can be found on our Canvas page in Files -> Review Sessions, or you can find them all posted here: https://sites.google.com/view/leantho/teaching

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Feel free to reach out to any of us with questions!

WHAT ARE THE KEY FINANCIAL STATEMENTS WE DISCUSS?

• The Balance Sheet
• What information does it record? You can think of the balance sheet as recording the “financial position” of the company at a point in time
• Main Categories: Assets, Liabilities, Equity

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• The Income Statement
• What information does it record? You can think of the income statement as measuring the “performance” (i.e., the profit) of a company in a given period
• Main Categories: Revenues, Expenses

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• The Statement of Cash Flows
• What information does it record? It tracks how cash was generated/used throughout the year. Early point to drill in (for non-business majors): revenue does not necessarily equal cash! (which makes this different than the income statement).
• Main Categories: Cash from Operating Activities, Cash from Financaing Activites, Cash from Investing Activities

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WHAT ARE THE KEY FINANCIAL STATEMENTS WE DISCUSS?

• The Balance Sheet
• What information does it record? You can think of the balance sheet as recording the “financial position” of the company at a point in time
• Main Categories: Assets, Liabilities, Equity

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Things to note:

• At a ”point in time” means this balance sheet shows the “financial position” of the firm as of December 31, 2022�
• Note the type of accounts that show up under each category:
• Assets: things that are of economic value to the company
• Liabilities: obligations that the company owes to other parties (i.e., debt)
• Equity: the “net value” of the company-> Take all the things of value that the company owns (Assets) and subtract off everything it owes in debt (Liabilities) and that gives you Equity (i.e., it’s net worth)�
• Remember the key accounting equation:

Assets = Liabilities + Equity

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WHAT ARE THE KEY FINANCIAL STATEMENTS WE DISCUSS?

Lets Focus on Assets:

• Current Assets: an asset that is expected to be converted into cash or disposed of in less than one year
• Typical accounts: Cash, Accounts Receivable, Inventory, Prepaid Expenses

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• Long-Term Assets: an asset that is expected to be converted into cash or disposed of in more than one year
• Typical accounts: Property, Plant and Equity (PP&E) (e.g., buildings, land, machines); Intangible Assets (e.g., patents, trademarks); Long-Term investments

WHAT ARE THE KEY FINANCIAL STATEMENTS WE DISCUSS?

Lets Focus on Liabilities:

• Current Liabilities: an asset that is expected to be converted into cash or disposed of in less than one year
• Typical accounts: Cash, Accounts Receivable, Inventory, Prepaid Expenses

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• Long-Term Liabilities : an asset that is expected to be converted into cash or disposed of in more than one year
• Typical accounts: Property, Plant and Equity (PP&E) (e.g., buildings, land, machines); Intangible Assets (e.g., patents, trademarks); Long-Term investments

WHAT ARE THE KEY FINANCIAL STATEMENTS WE DISCUSS?

Lets Focus on Equity:

• Common Stock: records the par value of all common stock issued by a corporation
• Paid in Capital: The amount raised by issuing shares of the company above-and-beyond the par value (for the purposes of this course: focus on “Paid In Capital” as the money raised by issuance of new stock – don’t worry too much about the “Common Stock” account)
• Treasury Stock: Records the amount in repurchased shares
• Retained Earnings: The cumulative earnings of the company minus the cumulative dividends
• FORMULA: Ending Retained Earnings = Beginning Retained Earnings + Net Income - Dividends

WHAT ARE THE KEY FINANCIAL STATEMENTS WE DISCUSS?

For those who are wondering what the definitions are for these typical accounts … �

CURRENT ASSETS

• Cash & Cash Equivalents: very intuitively, just the amount of cash that the company has. “Cash Equivalents” refers to potentially investments/securities that are so liquid (i.e., so easy to sell) that they are basically like cash�
• (Accounts/Notes/Loan) Receivables: “Receivables” represent situations where you (as a company) have provided a service, but your customer (or other party) hasn’t paid you in cash yet. By far, the most common type receivable we see in this course is “accounts receivable,” which are created when you sell to your customer on credit (or put more simply, your customer hasn’t paid you yet for a service).�
• Inventory: the stock of what you have to sell to your customers! (i.e., if you are a furniture store, the number of couches, tables, chairs, etc.)�
• Prepaid Expenses: prepaid expenses are assets because we paid for them in the past but haven’t used them yet (i.e., they have value in future!). For example, a common prepaid expense we see if Prepaid Rent. If we paid next month’s rent, that would be an asset to the company because we haven’t “cashed in” on that benefit yet, which will come next month when the rent is due.��

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WHAT ARE THE KEY FINANCIAL STATEMENTS WE DISCUSS?

For those who are wondering what the definitions are for these typical accounts … �

LONG-TERM ASSETS

• Property, Plant & Equipment (PP&E): We usually lump these three categories together into the one PP&E item on the balance sheet. This includes everything in the list below: buildings, machines, land, vehicles, etc. Basically it is anything that is tangible and offers value for more than one year (making it a long-term asset).
• Sometimes referred to as a “fixed asset”
• Notice that we have another account linked to this: Accumulated Depreciation. We will talk more about depreciation, but you can think of it as the value that’s been lost on the long-term assets over time. For example, if we buy a car this year, we will expect it to lose value over the next 5 years. “Accumulated Depreciation” keeps track of all the value that’s been lost on the PP&E over the years the company has owned them.�
• Goodwill: associated with the purchase of other companies. It represents the amount above-and-beyond the value of the net-assets on the company we’re acquiring (don’t worry too much about this one)�
• Other Intangible Assets: This can include things such as patents and trademarks. Basically anything that is not a tangible thing, but provides the company with value for a period of greater than one year.

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WHAT ARE THE KEY FINANCIAL STATEMENTS WE DISCUSS?

For those who are wondering what the definitions are for these typical accounts … �

LIABILITIES

• (Accounts/Notes/Bonds/Loan/Tax/Wages/Interest) Payable: Basically any type of payable represents a situation where we owe something to someone else but haven’t paid them yet. You can think of this as the flip-side of a receivable.
• Accounts payables occur when you owe your supplier money because you purchased something on credit
• Loans payables occur when another company/bank has made you a loan but you haven’t paid them back yet
• Bonds payables occur when you “issue bonds” (i.e., a form of debt similar to a loan - we’ll discuss this towards the end of the course)
• Notes payables are, again, similar to loans and represents a “promissory note” that states the company owes the bank some money.
• Tax payables occur when you owe the government tax but haven’t paid them in cash yet
• Wages payables occur when you owe your employees their wages but haven’t paid them in cash yet
• Rent payables occur when you owe your landlord rent but haven’t paid them in cash yet
• Interest payables occur when you owe interest (e.g., on a loan) but haven’t paid it in cash yet�
• Deferred Revenue: This occurs when you have collected cash from your customers for a good/service but you have not actually provided that service yet. It is a liability because you owe that good/service to your customer in the future.

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WHAT ARE THE KEY FINANCIAL STATEMENTS WE DISCUSS?

For those who are wondering what the definitions are for these typical accounts … �

LIABILITIES

• “Accrued Expenses”: This is not an actual item in and of itself but rather a broad category of liabilities representing expenses that have been incurred but not paid out yet. This includes several payables we talked about on the last slide, including: wages payable, income tax payable, interest payable … all fall under this category because we have a related expense (i.e., wage or employee expense) but we have not paid it out yet, making it an obligation (or liability)

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WHAT ARE THE KEY FINANCIAL STATEMENTS WE DISCUSS?

Tackling a real balance sheet:

• Note that sometimes when we are dealing with questions based on real financial statements, we see accounts we’ve never delt with before. While you won’t be asked about specific features of these accounts, you may still be expected to deduce the general gist of what the account represents:�
• For example, we may have a question asking about “operating lease assets.” While we never explicitly talk about this, we should still be able to deduce that it is something of value to the company (i.e., the “asset” part) and it pertains to a lease (i.e., a rental agreement of some kind)�
• Beyond that, you wouldn’t be expected to know any details about this new account that are not explicitly mentioned

• You are expected to have a better understanding of common accounts (e.g., accounts receivable, inventory)

WHAT ARE THE KEY FINANCIAL STATEMENTS WE DISCUSS?

• The Balance Sheet
• What information does it record? You can think of the balance sheet as recording the “financial position” of the company at a point in time
• Main Categories: Assets, Liabilities, Equity

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• The Income Statement
• What information does it record? You can think of the income statement as measuring the “performance” (i.e., the profit) of a company in a given period
• Main Categories: Revenues, Expenses

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• The Statement of Cash Flows
• What information does it record? It tracks how cash was generated/used throughout the year. Early point to drill in (for non-business majors): revenue does not necessarily equal cash! (which makes this different than the income statement).
• Main Categories: Cash from Operating Activities, Cash from Financaing Activites, Cash from Investing Activities

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WHAT ARE THE KEY FINANCIAL STATEMENTS WE DISCUSS?

• Definitions:
• Sales revenue is the money generated from normal business operations
• An expense in accounting is the money spent, or costs incurred, by a business in their effort to generate revenues. Essentially, accounts expenses represent the cost of doing business
• Sales, General & Administrative (SG&A) Expenses: This is pretty much all Operating Expenses – we usually use these terms as synonyms. Just a blanket term to refer to all common expenses we have in conducting our selling & administrative functions of our company.
• Operating Expenses: Expenses that are incurred in the normal, day-to-day operations of a business
• Non-Operating Expenses: Expenses that are incurred but are not related to the day-to-day of a business (e.g., interest expense)

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WHAT ARE THE KEY FINANCIAL STATEMENTS WE DISCUSS?

• The Balance Sheet
• What information does it record? You can think of the balance sheet as recording the “financial position” of the company at a point in time
• Main Categories: Assets, Liabilities, Equity

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• The Income Statement
• What information does it record? You can think of the income statement as measuring the “performance” (i.e., the profit) of a company in a given period
• Main Categories: Revenues, Expenses

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• The Statement of Cash Flows (to dive deeper into on another day …)
• What information does it record? It tracks how cash was generated/used throughout the year. Early point to drill in (for non-business majors): revenue does not necessarily equal cash! (which makes this different than the income statement).
• Main Categories: Cash from Operating Activities, Cash from Financaing Activites, Cash from Investing Activities

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