1. Assets, liabilities and equity – Describes amounts of resources and claim to resources at a moment of time.
2. Investments by owners, distribution to owners, comprehensive income, revenue, expenses, gains and losses- Describe transactions, events and circumstances that affect company during a period of time.

Basic assumption of accounting:

1. Economic entity assumption:  Means that economic activity can be identified with a particular unit of accountability. A company keeps it activity separate from its owner and any other business unit. It doesn’t necessarily refer to separate legal entity.
2. Going concern assumption: The company will have a long life. We expect companies to last long to fulfill their objectives and commitments. Many accounting principles rely on this assumption, such as depreciation and amortization. The going concern assumption applies in most business situation. Only where liquidation appears pending, the assumption may be inapplicable.
3. Monetary unit assumption:  Means that money is the common denominator of economic activity and provide an appropriate basis for accounting measurement and analysis. The monetary unit is the most effective means of expressing to interested parties changes in capital and exchange of goods and services. The monetary unit is relevant, simple, universally available, understandable and useful.
4. Periodicity assumption: A company can divide its economic activities into artificial time periods. This time periods vary, but the most common are monthly, quarterly and yearly.

Basic principles of accounting:

1. Measurement principles: Historical cost principle: GAAP require that companies account for and report many assets and liabilities on the basis of acquisition price. Fair value principle: Market based measure. At the initial acquisition, historical cost equal fair value price.
2. Revenue recognition principle: Generally occur when revenue realized or realizable, or when revenue earned. A company realizes revenue when it exchanges products or services, merchandise or other assets for cash or claims to cash.
3. Expense recognition:  (The matching principle) Recognition of expense is related to the net changes in assets and earning revenue. Let the expense follow the revenues. When matching expenses with revenues, the expense recognitions principle is implemented.
4. Full disclosure principle: It recognizes that the nature and amount of information included in financial reports reflects a series of judgmental trade-offs. These trade-offs strive for sufficient detail to disclose matters that make a difference to users, yet sufficient condensation to make the information understandable, keeping in mind costs for preparing and using it.

Oren Gulasa, notes from Financial Accounting, FIU 2010.

Return on investment: the ratio of a measure of return divided by measure of investment. Compute by dividing net income by total assets. Other measures include ROA and ROE, RONA

DuPont ROI: reflect the two basic ways to improve profits increasing income per dollar of sales and utilizing assets to generate sales. DuPont ROI calculated as: Return on sales (net income / sales) X asset turnover (sales /average investment).

Residual income: Refers to the net income minus cost of capital based on capital invested. Formula: Net income – (required rate of return x invested capital).The different between ROI and Cost of capital (required rate of return) = Spread.  Residual income and ROI relationship: As the required rate of return increase, residual income decrease. When residual income is 0, the required rate of return = ROI.

Residual income = Net income – Required rate of return (i). Residual income = 0, when i equal ROI.

Net income $300,000 Average invested capital $2M and cost of capital 12%

ROI = 300,000 / 2,000,000 = 15%, Residual income = 0 when, = 300,000- (15% x 2,000,000)

Investment decisions: EVA measures reflect the importance of making investment when return exceeds costs and where value is enhanced. Economic Value Added computed by:

Net operating profit (after taxes) – ( (Total assets- Current liabilities) x Weighted average cost of capital)

Free cash flow: Net operating profit after taxes + Depreciation and amortization – Capital expenditures – the change in working capital requirements.

Financial and nonfinancial performance measures: Use of financial ratios, profitability ratios and cost measurement, as well as nonfinancial measures such as customer satisfaction, on-time delivery etc.

Balanced Scorecard: Refers to a strategic performance measurement and management framework for implementing strategy by translating an organization’s mission and strategy into set of performance measures. Four perspective measures of the balanced scorecard:

1. Financial perspective: Focus on return on investment (Revenue growth, profitability, ROI)
2. Customer perspective:  Measure customer satisfaction, and customer retention.
3. Internal business processes perspective: Include performance measures on cost, quality, and time for processes that are critical for customers.
4. Learning and growth perspective: Performance measures related to employees, infrastructure, teaming and capability necessary for achieving customer satisfaction and financial objectives.

Performance measures are driven by the organization mission, vision and strategy. Characteristics of Balanced Scorecard:

1. Strategy focused: communicate the strategy to all members.
2. Performance measures balanced in terms of financial and nonfinancial measures
3. Include both financial and nonfinancial measures.
4. Connected using cause and effect linkage:
5. Unique to the strategy.

Business develops its strategy maps and Cause-and-Effect linkages to show diagrams of the cause and effect relationship between strategic objectives.  List of sample of performance measures categorized to the four perspective of the balanced scorecard:

Financial perspective: ROI, Economic profit, cash flow ROI, Free cash flow, net income/sales ratio, sales/asset ratio, revenue growth, revenue from new products, cost of sales %.

Customer perspective: Customer satisfaction, customer retention, customer acquisition, % of highly satisfied customers, percentage of business from customer referrals

Internal process perspective: On-time delivery, Cost per-unit, % of late orders, total cost of quality, cycle time, process efficiency, capacity utilization, inventory turnover, number of joint projects

Learning and growth perspective: Employee turnover, number of six-sigma black belts, R&D employees.

1. Nominal Gross Domestic Product (GDP): Defined as “the price of all goods and services produced by a domestic economy for a year, at current market prices”.
2. Real GDP: The price of all goods and services produced by a domestic economy at price level adjusted (constant) prices.
3. Potential GDP: The maximum amount of production that could take place in an economy without putting pressure on the general level of prices.
4. GDP Gap: The difference between potential GDP and Real GDP. A positive GDP gap indicates that are unemployed resources in the economy, and we could expect unemployment. A negative GDP gap, indicates that economy is running above normal capacity, and we can expect price increases.
5. Net Domestic Product (NDP): Calculated as GDP minus depreciation.
6. Gross National Product (GNP): The price of all product and services produced by labor and property supplied by the nation’s residents.

How to calculate GDP; 2 approaches:

1. The income approach: Add up all incomes earned in the production of final goods and services by household in the economy. I.e. income from wages, interest, rent, dividends etc.  National income, plus indirect taxes, plus compensation on fixed capital, plus payment of factor income to other countries = Gross domestic product.
2. The expenditure approach:  Add up all the economy’s expenditures to acquire final goods and services by households, businesses and the governments. It includes personal consumption expenditures, gross private investment in capital goods,  as well as the country’s net export. Gross domestic product = personal consumption expenditures, gross private domestic fixed investment (by businesses, government), plus government purchase (federal and local) plus net exports.

GDP and unemployment: There is a clear relationship between the change in employment and the economy’s GDP. High output growth will result in decrease in unemployment rate. A recession is a period of negative GDP growth (at least two consecutive quarters of negative GDP growth).

The general partners usually manage the partnership while limited partners invest capital in the business. In addition, general or limited partner contribution could be cash, services performed or property (or promise to perform service, give notes,).

Profit and loss sharing are based on the certificate of agreement form of the business. For limited partners, losses (as well as liability) are limited to their capital contribution. If there is no loss/ profit sharing agreement exist, shared based on % of capital contributions.

Limited Liability Partnership: Characteristics and Advantages:

This new form of business allow professionals who want to do business as professionals in a partnership, but still pass through tax benefits while limiting their (the partners) personal liability. LLP is very common business structure among law and accounting firm. How to form a limited liability partnership (LLP): Company must file article of LLP with the secretary of state, as well as to include phrase of limited liability partnership in the company’s name to notify public. States may require approval of majority partners to become LLP.  The laws of the state in which the partnership formed govern affairs of the company business conduct in all other states.

Disadvantages:

As in general partnership, general partners in LLP have unlimited liability for the business. However, states allow LLP to be formed so there is no general partner, where each member act as limited partner with the following guidance:

1. Specific amount of liability malpractice insurance is required.
2. Partners remain fully liable for their own negligence or wrongful acts of those in the LLP they supervise of have control over.
3. Limit to partners’ liability – when more than one partner is liable for negligence, liability is often proportioned.

Advantages:

1. Taxes pass through.
2. Limited liability for partners.
3. Partners avoid personal liability for mistakes or malpractice of other partners.