Financial Accounting:

• The main goal of financial accounting is to share a company’s financial results and condition
with people outside the company, helping them make informed decisions.
• Another goal of financial accounting is to check how well managers are doing and make sure
they use the company’s resources wisely.
*****************************************************************************
Manergial Accounting:
• The main goal of managerial accounting is to give useful information to people inside the
company so they can make better decisions.
• Another goal of managerial accounting is to check performance and help manage and
reduce costs.
*****************************************************************************
Tax Accounting:
• Tax accounting provides information to tax authorities
*****************************************************************************
Accrual Accounting:
• Accrual accounting records transactions when the main business (Primary economic) event
happens, not when cash is actually received or paid.
• This method creates two key financial reports:
a) The income statement (shows profit or loss) and
b) The balance sheet (shows what the company owns and owes).
*****************************************************************************
Rules of Accrual Accounting:
• Revenue recognition means a company can record income when it delivers a product or
service, knows how much it earned, and is sure to get paid.
• Matching costs to revenues means related expenses are recorded in the same time period as
the income’s time period they helped to earn.
a) Example:
Let’s say a company sells a product in April.
It also paid for materials and labour to make that product.
Even if the company paid for materials in March, the cost should be shown in April, because
that’s when the product was sold and the revenue was earned.
The goal is to show a true picture of profit:
Revenue (money in) − Expenses (money out) = Profit, all in the same period.
*****************************************************************************
Advantages of Accrual Accounting:
• Under Accrual Accounting, the financial statements provide timelier and more decision-
relevant information
*****************************************************************************
Disadvantages of Accrual Accounting:
• Accrual accounting is based on judgments & estimates and so less reliable than cash flows
*****************************************************************************
Assets:
• Assets are things a company owns that help it make money in the future, either by bringing
in more cash or reducing costs.
• Examples:
a) Cash and similar items
b) Inventory:
For a clothing store: shirts, jeans, and jackets on the shelves are inventory.
For a factory: raw materials, work-in-progress items, and finished goods are all part of
inventory.
c) Buildings (Property), Industries (Plant), and Machines (Equipment)
d) Intangible items like patents and trademarks.
*****************************************************************************
Classification of Assets:
• Current assets are things a company expects to turn into cash, sell, or use within one year.
• Non-current assets are things a company plans to keep or use for longer than one year.
Liabilities:
• Liabilities are amounts a company owes to others and must pay in the future.
• Examples include:
a) Money owed to suppliers (accounts payable)
b) Short-term loans
c) Long-term loans or debts.
*****************************************************************************
Classification of Liabilities:
• Current liabilities are amounts a company needs to pay within one year.
• Non-current liabilities are amounts a company will pay after more than one year.
*****************************************************************************
Shareholders’ Equity:
• Owners' investment in the company
This refers to the money that the owners or shareholders put into the company. It’s the initial
or additional amount they invest to help the company grow. Think of it as the owner’s "stake"
in the business.
a) Example:
If you start a company and invest $10,000 into it, that $10,000 is your investment in the
company. This becomes part of the shareholders' equity
• Retained earnings
Retained earnings are the profits the company earns but doesn’t pay out to the owners (as
dividends). Instead, the company keeps these profits to reinvest in the business, pay off debts,
or save for future use.
a) Example:
Let’s say your company earns $5,000 in profit over the year, but instead of paying it all out to
shareholders, the company keeps $3,000 to reinvest in the business. That $3,000 is considered
retained earnings and adds to the shareholders' equity.
Balance Sheet:
• Assets = Liabilities + Equity is the basic rule of a balance sheet.
• Assets show how the company uses its money, while liabilities and equity show where that
money comes from.
*****************************************************************************
Income Statement:
• How much money the company made or lost during a period.
• Shows: Revenue - Expenses = Net Income
• Purpose: Measures profitability over a time period (e.g., Jan–Dec)
• Key sections:
a) Revenue (Sales)
b) Cost of Goods Sold (COGS)
c) Operating Expenses
d) Net Income (Profit or Loss)
*****************************************************************************
Cash Flow Statement:
• Where the cash came from and went during a period
• Shows: Inflows and outflows of cash
• Purpose: Tracks how well a company generates cash to fund operations, pay debts, and
invest.
• Key sections:
a) Operating Activities: Cash from day-to-day business
b) Investing Activities: Buying/selling assets, investments
c) Financing Activities: Issuing stock, borrowing money, repaying loans
*****************************************************************************
Assets (Things the company owns):
Category Item Amount ($ Million)
Current Assets Cash and cash equivalents 15,890
Marketable securities 3,918
Inventories 10,243
Accounts receivable & 6,423
other
Total Current Assets 36,474
Non-Current Assets Property & equipment (net) 21,838
Goodwill 3,759
Other assets 3,373
Total Non-Current Assets 28,970
Total Assets 65,444
• Marketable Securities:
These are short-term investments the company can quickly sell for cash (like stocks, bonds, or
treasury bills).
They are liquid, meaning easily turned into cash.
Think of them like a savings account the company can access quickly if needed.
• Goodwill:
This is an intangible asset. It appears when a company buys another company for more than
its net assets are worth.
a) Example, if Company A buys Company B for $10M, but B's assets minus liabilities are only
worth $7M, then the extra $3M paid is Goodwill.
It reflects things like brand name, customer loyalty, or reputation.
• Other Assets:
This is a miscellaneous category that can include long-term investments, deferred tax assets,
or prepaid expenses that don't fit neatly elsewhere.
Basically, valuable stuff that doesn’t fall into property or goodwill categories.
*****************************************************************************
Liabilities (What the company owes):
Category Item Amount ($ Million)
Current Liabilities Accounts payable 20,397
Accrued expenses & other 10,384
Unearned revenue 3,118
Total Current Liabilities 33,899
Non-Current Liabilities Long-term debt 8,235
Other long-term liabilities 9,926
Total Non-Current Liabilities 18,161
Total Liabilities 52,060

• Accrued Expenses & Other:

These are expenses the company has incurred but not paid yet.
For example, unpaid salaries, utilities, interest, or taxes.
Think of it as a tab the company has running, which it’ll settle soon.
• Unearned Revenue:
This is money the company has received in advance for products or services it hasn’t delivered
yet.
For instance, if customers prepay for a software subscription or event tickets, the company
owes them the service.
It’s a liability because the company still has an obligation to fulfil.
• Other Long-Term Liabilities:
These are long-term debts or obligations not included in “long-term debt.”
Examples: pension obligations, deferred taxes, lease liabilities.
Yes, this is part of the total long-term liabilities - just broken down for more detail.
*****************************************************************************
Shareholders’ Equity (What’s left for owners):
Item Amount ($ Million)
Common stock (471 million shares) 5
Additional paid-in capital 13,394
Treasury stock (stock bought back) -1,837
Retained earnings 2,545
Accumulated other comprehensive -723
 loss
Total Shareholders' Equity 13,384
• Common Stocks = 471 Million
Par Value (Symbolic) (Per Share) = $ 0.01
Common Stock Value = 0.01 × 471 = $ 4.71 Million ≈ $ 5 Million
Actual Value (Per Share) = $ 28.44
Total Investment Received through Common Stock = 28.44 × 471 = $ 13399 Million
Additional Paid-In Capital = 13399 - 5 = $ 13394 Million
• Treasury Stocks:
Treasury stock refers to a company’s own shares that it has bought back from shareholders.
a) These shares are no longer outstanding (meaning they don't count toward voting or
dividends).
b) They’re often held for future use (like reissuing to employees or reselling later), or just
retired permanently.
Treasury stock is shown as a negative number under shareholders’ equity because:
a) When the company buys back its own shares, it’s spending cash.
b) That reduces total equity - just like a withdrawal from your investment.
Why do companies buy back stock?
a) Increase Share Value: Fewer shares in the market can push up the stock price.
b) Signal Confidence: Shows the company believes its stock is undervalued.
c) Improve Financial Ratios: Like earnings per share (EPS), since profit is divided by fewer
shares.
d) Offset Dilution: From stock-based compensation to employees.
• Accumulated Other Comprehensive Loss (AOCL)
Shows unrealized losses from things outside normal business operations.
Not included in net income, but still affect company value.
Common sources:
a) Losses on foreign currency adjustments
b) Losses on pension plans
c) Losses on investments (not yet sold)
*****************************************************************************
Income statement (Profit & Loss):
• It reports a company’s operating results for the period, which largely includes its revenues
and costs (It shows how much money a company made and spent during a certain time).
• Net Income (Profit or Loss) = Revenues - Expenses
*****************************************************************************
Expensing and Capitalizing:
• If the benefit from spending is used right away, it is counted as an expense.
• If the benefit will help in future, the cost is spread over time and capitalized.
a) Example:
If a company buys a machine, the benefit would be how that machine helps the company
make products or generate revenue. If the benefit lasts only for the current period, it’s
considered an expense. If the benefit lasts over time, the cost is capitalized and spread out
over several periods.
*****************************************************************************
Capitalized Expenditure:
• Examples
Plant (Industry), property (building), and equipment (machines)
Purchased patents and trademarks
• The capitalized expenditures are eventually charged as expenses to the income statement
through two different processes:
a) Amortization/ Depreciation
b) Impairment
*****************************************************************************
Amortization/ Depreciation:
• Amortization is the process of spreading the cost of an asset over time, matching the
expense with the benefit the asset provides. This is done for intangible assets like patents or
software.
Example:
a) Amortization: A company buys a patent for $50,000, and it lasts 10 years. Instead of
recording the full $50,000 as an expense right away, the company will amortize it, meaning
they’ll record $5,000 in expenses each year for 10 years.
b) Depreciation: A company buys a machine for $20,000, and it’s expected to last 5 years.
Instead of recording the entire $20,000 cost as an expense in one year, the company will
amortize it, meaning they’ll record $4,000 as an expense each year for 5 years.
*****************************************************************************
Impairment:
• The loss in value of an asset is recorded as an expense in the period when the loss happens.
• Note: Amortization is regular and spread out, but Impairment happens once when value
drops suddenly.
Example:
a) A company’s machine is damaged in a fire. Its value drops from $10,000 to $4,000. The
$6,000 loss is recorded as an impairment expense.
*****************************************************************************
Income Statement:
• Revenues include only income from the company’s primary lines of business or operations.
*****************************************************************************
Cost of goods sold (COGS):
• This means the direct costs a company pays to make products that are ready to sell.
• This includes raw materials and the wages of workers who help make the product.
• It does not include costs for shipping or the sales team.
*****************************************************************************
Gross Profit:
• Gross Profit = Revenues - COGS
*****************************************************************************
Operating Expenses:
• The major component of operating expenses is selling, general, and administrative expenses
(SG&A)
• This is a non-production cost and typically includes all selling expenses related to selling the
company’s products like advertising expenses, rent, and salaries of the sales force.
*****************************************************************************
Income Statement:

S, G and A Million $
Fulfilment 13,410
Marketing 5,254
General and administrative 1,747
Total 20,411

Item Million $
SG&A (Fulfilment, Mktg, G&A) 20,411
Other Operations Expense (Amortization, Depreciation, etc.) 12,711
Operating Expenses (Total) 33,122

Item Million $
Net product sales 79,268
Net service sales 27,738
Total net sales 107,006
Cost of Sales (COGS) 71,651
Gross Profit 35,355
Operating expenses 33,122
Operating profit (EBIT) 2,233

Item Million $
EBIT 2,233
Interest income 50
Interest expense -459
Other income/ expense (Legal Settlements, Reconstruction, etc.) -256
Total non-operating income/ expense (Foreign Exchange, etc.) -665
Earnings before tax 1,568
Provision for income taxes -950
Equity-method investment activity, net of tax -22
Net income (loss) 596
*****************************************************************************
Equity-method investment activity, net of tax:
• Example: If a company owns 30% of another company, and that company reports a profit of
$100 million, the investing company would record 30% of that profit (i.e., $30 million) as its
share of the earnings.
Earnings Per Share (EPS):
• The EPS tells us how much profit the company has made for each share the company has
sold.
• Types of EPS
a) Basic
b) Diluted
Item Value
Net Income $596 million
Shares outstanding to compute the basic 467 million
EPS
Basic EPS $1.28
Shares outstanding to compute diluted EPS 477 million
Diluted EPS $1.25
*****************************************************************************
Basic Shares Outstanding:
• Basic EPS tells you how much profit each common share earned.
• It uses actual shares held by all the investors (including owner, public shareholders) at the
time.
*****************************************************************************
Diluted Shares Outstanding:
• Diluted Shares = Basic Shares + Potential Shares (Stock Options, convertible bonds)
• Stock Options:
One can buy the stock at a fixed low price later, even if the stock price goes up. It’s a reward
for helping the company grow.
Example:
a) You join StartUp Pizza Co. as an early employee.
They give you 100 stock options at $ 10/share.
A few years later, the company does great - the share price is now $ 100.
You use your option to buy at $ 10, and instantly your shares are worth $ 100.
You just made $ 90 profit per share × 100 shares = $ 9,000
• Convertible Bonds:
Example: An investor gives $ 1,00,000 to StartUp Pizza Co. as a bond.
Normally, the investor would get their money back + interest.
But instead, the bond says, “You can convert it into 1,000 shares of the company if you want.”
If the stock price goes high in the future, the investor will choose to convert — and become a
shareholder.
*****************************************************************************
Retained Earnings = Net Income - Dividend
*****************************************************************************
Cash Flows from Operating Activities:
• There are two methods to calculate cash flows from operating activities:
a) Direct Method
b) Indirect Method
*****************************************************************************

Types of Adjustments to Net Income:

• Adjusting for items that affect net income but not cash
These are items like depreciation and amortization, which reduce net income but don't
involve cash transactions.
• Adjusting for items that affect cash but not net income
These involve cash transactions that don't directly impact net income, like purchasing raw
materials and supplies with cash that haven’t been sold yet.
*****************************************************************************
Non-operations-related adjustments to Amazon's net income:
Item Amount Adjustment Type Effect on
($ Billion) Cash Flow
Net Income 0.60 Starting point Base
figure
Depreciation and Amortization 6.28 Non-cash expense Add back
Stock-based Compensation 2.12 Non-cash expense Add back
(Stock Paid to employees)
Net Operating Expenses 0.16 Adjustment related to operations Add back
Non-operating Expenses 0.25 Non-operating, may not involve Add back
(Interest Payments) cash
Deferred Taxes (Accounted tax 0.08 Taxes not paid yet Add back
Now, paid later)
Losses on Sale of Marketable 0.01 Paper loss (non-cash) Add back
Securities
Excess Tax Benefits from Stock- -0.12 Already improved cash flow Subtract
based Compensation
Total Adjustments 8.78
• Losses on Sale of Marketable Securities:
Imagine selling an old phone for less than you bought it. That’s a “loss,” but you still got cash.
That loss shouldn’t affect how much cash you made from your job.
Amazon sold some investments (like stocks or bonds) and recorded a small loss of $0.01 billion
on that sale.
• Excess Tax Benefits from Stock-Based Compensation:
Amazon pays some employees with company shares (stock) instead of cash.
This counts as an expense for accounting purposes, even though no actual cash is going out.
When Amazon gives out stock to employees, it can deduct this cost when calculating its
income tax.
This reduces the taxes Amazon has to pay - that’s the tax benefit.
Sometimes, the market value of the stock when given to employees is higher than what
Amazon originally estimated.
This means Amazon gets an even bigger tax break than expected - a bonus!
Now, Because of the larger tax break, Amazon pays less in taxes, so its net income increases.

So why subtract it from operating cash flow?

This tax benefit already increased Amazon’s net income.
But this benefit came from stock price changes, not from Amazon’s actual operations (like
selling products).
So, when calculating cash from operations, we subtract it to avoid giving a misleadingly high
number.
*****************************************************************************
Operations-related current asset and current liabilities:
Item Effect Why It Affects Cash Flow
(Billion)
Net Income +0.60 Starting point from income statement.
Non-cash & non-operating +8.78 Adds back expenses like depreciation and
adjustments other non-cash items.
Operating-related current assets
& liabilities:
Increase in inventories –2.19 Amazon bought more stock; cash went out,
not yet sold.
Increase in accounts receivable –1.76 More sales made on credit; cash not
received yet.
Increase in accounts payable +4.29 Amazon delayed paying suppliers; cash is
kept longer.
Increase in accrued expenses +0.91 Recorded expenses but hasn’t paid them
yet; cash conserved.
Increase in unearned revenues +7.40 Customers paid in advance; cash received
now, service later.
Amortization of previously –6.11 Recognizing earlier advance payments as
unearned revenues earned; no new cash.
Net cash flow from operating 11.92
activities
*****************************************************************************
Cash Flows from investing activities:
• This part includes all ways in which a company invests its cash in assets, both current as well
as non-current
• These investments are not reported on the income statement but represent actual cash paid
or received
*****************************************************************************
Cash Flows from Financing Activities:
• These relate to the increase and decrease in non- current liabilities as well as financing-
related current liabilities.
*****************************************************************************
Statements for Investing and Financial Activities:
Cash Flows From Investing Activities
Item Amount ($ Effect on Cash
Billion)
Investments in property, plant, and –4.59 Cash outflow
equipment
Acquisitions, net –0.80 Cash outflow
Purchases of investments –4.09 Cash outflow
Sales/Maturities of investments +3.03 Cash inflow
Total –6.45

Cash Flows From Financing Activities

Item Amount ($ Billion) Effect on Cash
Excess tax benefit from stock-based compensation +0.12 Cash inflow
Long-term debt issued +0.35 Cash inflow
Long-term debt repaid –1.65 Cash outflow
Principal capital repaid –2.46 Cash outflow
Repaid financial lease obligations –0.12 Cash outflow
Long-term debt repayment –4.24 Cash outflow
Repurchases of treasury stock +0.00 No effect on cash
Total –3.76

Final Cash Flow Statement

Item Amount ($B) Effect on Cash
Net cash from operating activities +11.92 Cash inflow
Net cash used for investing activities –6.45 Cash outflow
Net cash provided by (used for) financing activities –3.76 Cash outflow
Effect of exchange rate changes –0.37 Cash outflow
Change in Cash and Cash Equivalents +1.33 Net increase in cash
Total +1.33

Cash and Cash Equivalents at the beginning of 2015 = $ I4.56 billion

Change in Cash and Cash Equivalents = $1.33 billion
Cash and Cash Equivalents at the end of 2015 = $ 14.56 + $1.33
= $15.89 billion
*****************************************************************************