financial mgt a

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FINANCIAL ACCOUNTING

University of New York Prague

Martin Kolmhofer


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Course Objectives

Terminology and definitions used in the accounting language. Identify why accounting is a necessary skill.

Summarize the history of accounting.

Identify and describe assets, liabilities and owners' equity.

Demonstrate the effects of business transactions on the accountingequation

Recognize and compare the major financial reports. Describe and create a company's Income Statement.

Compare and contrast a company's revenue, expenses, income, andretained earnings.

Identify the key elements of a Balance Sheet.

Balance the accounting equation and properly chart debits and credits.

Describe the accounting cycle.

Define key terms: inventory, FIFO, LIFO, Cost of Goods Sold.

Summarize cash flow, identify fixed assets, and describe depreciation.

Know what to expect in an audit.


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Bean Counting vs. Big Picture


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Overview Day 1

Accounting Introduction

History - What is accounting?

Why do we need accounting?

The role of monetary calculation in society

Inherent Limitations of financial accounting


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What is accounting?

Definition

The systematic recording, reporting, and analysis of

financial transactions of a business.


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History of Accounting Luca Pacioli (1445 1514)

1494:

"Summa de Arithmetica, Geometria,

Proportioni et Proportionalita"

("Everything About Arithmetic, Geometry and

Proportion).

Double-entry bookkeeping:

For every credit entered into a ledger there

must be a debit

Merchants of Venice

Accounting was created in response to thedevelopment of trade and commerce during the

medieval times

Trading voyages needed to be financed

The system that was in use by these Venetian

merchants was nearly the same as we use today


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History of Accounting)

"Double-entry bookkeeping is one of the most beautiful

discoveries of the human spirit

(Johann Wolfgang Von Goethe 1796)


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Accountant vs. Bookkeeper

Whats the difference?


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WHY STUDY ACCOUNTING ?

Growing field due to increasedregulation (Sarbanes -Oxley)

Many different areas to

spezialize in (AP, AR...)

Lots of job growth opportunity

in all industries

Gives opportunity to move to

other areas of business


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What is accounting?

Functions of Money

Money as:

Store of Value (enables saving, lending, borrowing) Medium of Exchange (Alternative: Barter)

Unit of Account (common measurement in which valuesare expressed)


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Money as a Unit of Account

But if everybody charges in the

same item, that is money, itbecomes very clear who has thelowest price.

What if one supplierwants to be paid inbabysitting, another onein computer help andanother in petsitting andso on

Standard unit of measurement = Language of business


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Why do we need accounting

What is finance all about?


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It s all about people


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Unlimited Wants vs. Limited Resources

Unlimited Wants: Only perfect beings want nothing

Limited Resources: Time, Energy, Money


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Choices must be made


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Economic (calculation) problem

ECONOMICS is the study of how

people chose to use their scarce

resources in an attempt to satisfy

their unlimited wants


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SCARCITY exists when there is not enough

of something (product/service/resource)

to satisfy everyones wantsAT A ZERO PRICE


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The Price Mechanism

How to distribute resources rationally in the economy?

Capitalist solution is the Price Mechanism

Those who are willing to pay the price will get the goods and services


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Price Mechanism

How does the Price Mechanism work?

3 Magic Words: Supply and Demand

Example: Pencil vs. Watch

Common misconceptions about how prices

are determined (by suppliers, by cost of

production)


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Equilibrium Price

Subjective preference rankings interact to yield objective money prices

Equilibrium occurs when quantity supplied equals quantity demanded

Market price will be stable, that is it wont tend to change, whenyou reach the point at which willingness to buy coincides with

willingness to sell in the market


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Equilibrium Price


At 3 dollars every seller can find a willing buyer


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Equilibrium Price


No other price would be stableAll other prices would have a tendency to change

Example:

At a price of 1 dollar therewould be a SHORTAGE(quantity demanded isgreater than the quantitysupplied)Result:Upward pressure on price


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Equilibrium Price - ShortageSubjective preference rankings interact to yield objective money prices

Buyers start to compete to get the available units


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Equilibrium Price


Price goes up and consequentlyquantity demanded drops andquantity supplied rises until we getto equilibrium again


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Equilibrium PriceSubjective preference rankings interact to yield objective money prices

What about a higher price, like 5 dollars?


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Equilibrium Price - Surplus


When the quantity demanded isless than the quantity supplied wehave a surplus and the price willdrop.

At 5 dollars sellers are happyproviding 5 units but buyers areunhappy, they only want one unit.

3 Dollars = MARKET CLEARING PRICE (clears the market of all

surpluses and shortages)


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Equilibrium Price - Surplus


.


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Disadvantages of the Price Mechanism

In our market economy it s the market that determines price and priceserves as the rationing mechanism to determine who gets the scarceproduct or service and who does not.


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Alternative Rationing Mechanisms

Queuing (Waiting in line as a means ofdistributing goods and services )

Ration Coupons (Tickets or coupons that

entitle individuals to purchase a certainamount of a given product per month )

Favored Customers (Those who receive special

treatment from dealers during situations ofexcess demand. )

Problem:

EXCESS DEMAND is created but not eliminated


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Alternative Rationing Mechanisms


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Price Mechanism Rationing, Price Ceilings

What would happen if you force a price that is not the equilibrium price?

Example: Government imposes price ceiling on gasoline

At the imposed price of 2,50 the quantity demanded is greater thanquantity supplied. This means that not everyone is going to get thegasoline that they want, because there is a shortage.

WHAT WILL HAPPEN?


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Price Mechanism Rationing, Price Ceilings

Would you ratherKNOW that you are going to get gas as long asyou are willing to pay 4 USD/gallon, orHOPE that you can get gasat the price ceiling of 2,50 USD?

CONCLUSION: Price mechanism is usually a good and effective

way to allocate resources


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Market Failures

Market Failures:3 examples where the price mechanism may not work -

may not allocate scarce resources efficiently

Public Goods (Free Rider Problem Non Excludability,Examples: Street lighting, national defence) People will

not pay for it Solution: goods are provided collectively by

the government and then financed through taxation

CANY

OU TH

INK OF EXAMPLES? Externalities (Environmental Pollution etcExample CO2

Certificates) factories are not calculating certain costs

Market Power (Monopolists - Price is higher and output is

lower under monopoly than in a competitive market )


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Video Price Mechanism in Action


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VIDEO Price Mechanism in Action

Example: Supply of a big city. Who coordinates?NOBODY

Process of impersonal social interaction is coordinated

through prices

Prices are signals that tell us what we have to do in

order to be useful for other people - This is how it was

possible to create a society based on the division of

labour

Millions of people in society coordinate their plans

through markets


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The Invisible Hand Adam Smith

Adam Smith was the first economist who investigated how

this process of social coordination works.

Rational, self-interested behaviour does not produce chaos, butusually produces social coordination


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Market Phenomena Laws of Social Cooperation

It is not from the benevolence of the butcher, the brewer orthe baker, that we expect our dinner, but from their regard

to their own self interest. We address ourselves, not to their

humanity but to their self-love, and never talk to them of

our own necessities but of their advantages.(Adam Smith, The Wealth of Nations 1776)

Market phenomena

Laws of social cooperation


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Division of Labour

Coordination through money prices

Supply, demand, and prices in input and output markets determine theallocation of resources and the ultimate combinations of things produced.

EXAMPLES OF CREATIVE DESTRUCTION:PolaroidCameras, Typewriter, SteamTrains....

CONSUMER

LABOUR LAND - CAPITAL


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Division of Labour Cost and Profit to the Firm

All social phenomena result from

interactions among the choices that

individuals make after calculating the

expected benefits and costs to

themselves


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Social coordination through money prices.Therefore it is important to calculate Profit correctly

Accounting Profit = is total revenue minus explicit cost.

Economic Profit = total revenue minus opportunity cost

Accountants do not include implicit costs because they

are difficult to measure.


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Opportunity Cost:

How much does it cost to go to university for a

year?

Explicit costs: tuition, books, school supplies, etc.

Implicit cost: The amount that the student could have earned if she had

worked rather than attended university

Implicit costs are costs that do not require a money payment. The

opportunity cost includes both explicit and implicit costs.


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The opportunity cost ofanydecision is what isgiven up as a result of that decision.

Opportunity cost includes both explicit costsand implicit costs. The firms economic profits

are calculated using opportunity costs.

Accounting profits are calculated using onlyexplicit costs. Therefore, accounting profits

are higher than economic profits.


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Method of reasoning - Ability to identify trueopportunity cost!


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Identify true opportunity cost:

Story: The businessman and the fisherman

Conclusion: Does your profit cover all your costs?


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When there is no profit the loss is obvious

(Old Chinese Merchants Proverb)


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Summary Day 1

Money as Unit of Account Unlimited Wants/Limited Resources

Scarcity

Price Mechanism

Equilibrium Price

Disadvantages of the Price Mechanism Market Failures

Alternative Rationing Mechanisms (Price Ceilings)

Division of Labour

Opportunity Cost


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Users of accounting information

Internal

Shareholders / Investors

Staff / Employees

Trade Unions

Managers

External

Customers

Government (Taxation)

Lenders (Banks, Analysts)

Suppliers

The Public

Competitors

The preparation of information for external users is calledFinancialAccounting. (vs. ManagementAccounting)

U f ti i f ti


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Internal: Shareholders / Investors

Companys shareholders are the real owners of a business and needinformation from those who manage the business on their behalf

They need information to help them determine whether theyshould buy, hold or sell (increase or decrease their holding).Shareholders are also interested in information which enables them

to assess the ability of the enterprise to pay dividends.

Question: How does stock price affect a company?

No direct impact. Once the shares are sold into the market, thecompany is no longer affected directly by the share price.However, some indirect effects:

Low Price: Danger ofHostile Takeovers, hard to raise future capital



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ANALYST COVERAGE:

Financial Analyst:

A financial professional who studies various industries and companies, providing

research and valuation reports, and making buy, sell, and hold

recommendations.



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Internal: Staff / Employees

Interested in information about:

Stability and profitability of their employers

Ability of the enterprise to provide remuneration,

retirement benefits, employment prospects

Pay and benefits obtained by senior management


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Internal: Managers

Management is also interested in the informationcontained in the financial statements even though it hasaccess to additional management and financial information

This is because the highly summarised nature of financialaccounts allows management to assess whether thecompany's strategic and tactical objectives are being met.



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External: Customers

Customers have an interest in information about thecontinuance of an enterprise, especially when they have along-term involvement with, or are dependent on, the

enterprise. They will look at the companies finances tomake sure the company is not in trouble and that theirsupplies are not about to dry up.

Example: Strategic Suppliers regular financial check-up!



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External: Government

Tax (Corporate Tax, Capital Gains, VAT) Regulation (Compliance)

National Statistics (GDP, Intrastat)

GDP:Total market value of all final goods and servicesproduced in a country in a given year, equal to totalconsumer, investment and government spending,plus the value of exports, minus the value ofimports.

Intrastat:Statitics on the trade in goods between countries ofthe European Union. (Balance of Payments)



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External: Lenders (Banks)

They need to make sure a company is in a healthy financial

situation before they start to lend money.

Concerned with debt repayment

Prefer to deal with a financially strong company with ahealthy cash flow

CREDIT BUREAUS (for individuals)

CREDIT RATING AGENCIES (for corporations + sovereign debt):

Baa1, Baa2, Baa3, Ba1, Ba2, Ba3

A1, A2, A3

B++, B+, B, B-, C++, C+, C, C-,

A.M. Best, Dun & Bradstreet, Standard & Poor's, Moody's, Fitch Ratings



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External: Lenders (Banks)

Examples of SovereignCredit Ratings:

Credit rating determines how much interest you have to pay for your debt

Important to INSTITUTIONAL INVESTORS (pension funds, Insurance companies



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External: Suppliers

Suppliers will look at a companys balance sheet and profit and lossaccount to see if and how much credit they are willing to give:

METHODS OF PAYMENT IN INTERNATIONAL TRADE:

Rule (especially for international trade):

NEVER sell on open account to a new customer

(only against credit card or advance payment)



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External: The Public

Contribution to the local economy (number of people theyemployed)

Patronage of local suppliers

Although not everyone in the public might understandfinancial accountsfinancial statemens also includewritten outlook:


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Can you distinguish between managementaccounting and financial accounting?


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Overview Day 2

Users of Accounting Information

Accounting Principles

Financial Reports

Accounting Equation / Balance Sheet

How Transactions impact the Accounting Equation

Four basic types of transactions

The four core financial statements Accounts, Debits and Credits

The Journal The General Ledger

Posting

Chart of Accounts

Financial Statements from the Trial Balance

Accrual Accounting Revenue Recognition / Expense Recognition

Adusting Entries

l


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Question: Why have rules?

So that everyone plays the game the same way

What if owners and managers could prepare their business's

financial statements the way they felt like ?

If a business was wanting a loan or credit, they would have a tendency to

overstate the value of their assets and the value of their business. If it came to

taxes (we don't like to have to pay them), let's expense and write off everything.

As for measuring performance (profitability) and comparing businesses in thesame industry, you'd have no idea as to who was actually doing well and who

wasn't.

You couldn't even compare your own business from year to year

A i P i i l


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Rule making and standards setting organizations:

FASB: Financial Accounting Standards Board

= private sector organization in the United States that

establishes financial accounting and reporting standards.

Responsible for developingUS GAAP : Generally Accepted Accounting Principles

IASB: International Accounting Standards Board

= is an independent, privately-funded accounting standard-

setter based in London. Responsible for developing

IFRS: International Financial Reporting Standards

Harmonization Discussion: US - special accounting standards

for special industries

ll d l


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Generally Accepted Accounting Principles - GAAP

The most important accounting concepts are:

Economic Entity Assumption

Monetary Unit Assumption

Historical Cost Principle

Accruals Time Period Assumption

Dual Aspects

Matching Principle

Materiality

Going concern Consistency

Substance over form

Prudence

A ti P i i l B i E tit


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Accounting Principles - Business Entity

Definition The activities of the entity

are to be kept separate

from the activities of its

owner and all other

economic entities

Example Pharmacist records the

purchase of two boxes of

Listerine to be sold in the

shop.

On the other hand, she

cannot record 1kg ofbeef

she buys for Sunday lunch

as it is her and only her

private expense. PROBLEMS?

The income tax authorities have thousands of rules as to what may andmay not be included as a deduction from revenue

A i P i i l M U i A i


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Accounting Principles - Monetary Unit Assumption

Assumptions:

1) Stable currency is the unit of record:

Dollar's purchasing power has not changed over time. Accountants ignore

the effect of inflation

For example, dollars from a 1960 transaction are combined with dollars

from a 2010 transaction Example LAND

Realistic Assumption?

USD-Gold Exchange Rate vs. Consumer Price Index (= official inflation

rate)

2) Record only transactions that can be expressed in terms of money

If an asset cannot be expressed as a dollar amount, it cannot be entered

in the general ledger:

Skills of the management team EXAMPLES?

A ti P i i l M t U it A ti


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Accounting Principles - Monetary Unit Assumption

A ti P i i l Hi t i l C t P i i l


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Accounting Principles Historical Cost Principle

You record items at what you paid for them.

A ti P i i l Hi t i l C t P i i l


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Accounting Principles Historical Cost Principle

Historical Cost vs. Fair Value From an accountant's point of view, the term "cost" refers to the amount

spent when an item was originallyobtained, whether that purchase

happened last year or thirty years ago = historical cost

For example, land is initially recorded in the accounting records at its

purchase price. That historical cost will not be adjusted even if the fair

value is perceived as increasing. Difference to Monetary Unit Assumption?

While this enhances the "reliability" of reported data, it can also pose a

limitation on its "relevance.

An exception is certain investments in stocks and bonds that are actively

traded on a stock exchange (Mark-to-market valuation) If you want to know the current value of a company's long-term assets, you

will not get this information from a company's financial statementsyou

need to look elsewhere, perhaps to a third-party appraiser.

Accounting Principles Time Period Principle


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Accounting Principles Time Period Principle

The Time-period principle implies that the economicactivities of an enterprise can be divided into

artificial time periods


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Accounting Principles Matching


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Accounting Principles - Matching

Definition

Revenue for a given period

is matched against the costs

incurred in the same period

when generating this

revenue. This concept enables for a

true and fair view of profit

for the given period.

Examples:

Accrued Expenses

Deferred Expenses

Depreciation

ACCRUAL ACCOUNTING

vs.

CASH BASED ACCOUNTING

Example Deferred Expense:

You hold a CONFERENCE that you prepaid for in January, but the conference actually happens in March, you should

recognize the expense for it in March as well as the revenue for the attendees.

Example Depreciation:

If a machine is bought for $100,000, has a life span of 10 years, and can produce the same amount of goods each

year, then $10,000 of the cost of the machine is matched to each year, rather than charging $100,000 in the first

year and nothing in the next 9 years. So, the cost of the machine is offset against the sales in that year.

Accounting Principles Materiality


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Accounting Principles - Materiality

Definition Unless the item is significant

in value when compared to

the entitys size, it may be

excluded from the decision

making.

$5,000 might be immaterial

for a large, profitable

corporation (say General

Motors), but it will bematerial or significant for a

small company that has

very little profit

Example A classic example of the materiality

concept or the materiality principle is

the immediate expensing of a $10

wastebasket that has a useful life of

10 years. The matching principle

directs you to record the wastebasket

as an asset and then depreciate its

cost over its useful life of 10 years.

The materialityprinciple allows you

to expense the entire $10 in the year

it is acquired instead of recording

depreciation expense of $1 per year

for 10 years. The reason is that no

investor, creditor, or other interested

party would be misled by not

depreciating the wastebasket over a

10-year period.

Accounting Principles Going Concern


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Accounting Principles - Going Concern

Definition

The business entity will

continue in operations for

the foreseeable future (ruleof thumb 12 months).

Allows for the accruals

principle to be reasonable

Book values vs liquidation

values

EXAMPLES?

Example

With previous matching /

accruals principle it would

not make sense to recordthe rent prepayment as a

cost of the next period if the

entity were not going to

continue in operation.

Accounting Principles Consistency


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Accounting Principles - Consistency

Definition

The accounting policies

should be consistent over

time. I.e. similar items should be

treated in a similar manner

within one as well as over

several accounting periods.

This allows for reasonable

comparison over time.

Example

If the entity changes the

accounting currency every

month, the month-to-month comparison would

be impossible.

Examples:

Valuation of Inventory

(FIFO, LIFO)

Depreciation Methods



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Substance over form

Definition

The financial statements of

the entity should reflect the

business reality rather than

the legal form of the events

or transactions.

Example

A group of employees is sent

for one week trip to Africa.

They spend one day in training

and for the remaining time

they go for safari. The whole trip could be

expensed as seminar.

In fact and in accordance with

the Principle, it is an additionalbenefit for the employees and

should be taxed accordingly

When it is a cat but it was disguised in alegal form to look like a dog, then you

would still treat it as a cat.

Example: Sale-and-Lease-Back contracts

Accounting Principles - Prudence


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One should not try to make things look prettier than they are.

Typically, a revenue should be recorded only when it is certain and a

provision should be entered for an expense which isprobable.

Revenues should be recognized when they are to be realized withcertainty (100% sure about the revenue).

EXAMPLE: If there is a dispute about sales, the company is encouraged

not to report the disputed revenue.

Expenses should be recognized when they are probable to be incurred

(more than 50% chance that the cost will be incurred).

EXAMPLE: if there is a lawsuit that may require the company to pay

fines/fees, it has to be reported (at least in the notes).



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Accounting Principles - Conflict of the Principles


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Accounting Principles Conflict of the Principles

If the conflict arises, there is no right or

wrong answer, the accountant needs to use

his/her own judgment

In conflicts between the prudence

convention and any of the others, the

prudence principle should be considered as

the dominant one = OVERRIDING PRICIPLE

Accounting Principles - Conflict of the Principles


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Accounting Principles Conflict of the Principles

QUESTIONS?

Overview Day 2


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Overview Day 2



Financial Reports




The four core financial statements

Accounts, Debits and Credits

The Journal The General Ledger

Posting

Chart of Accounts


Accrual Accounting Revenue Recognition / Expense Recognition

Adusting Entries

Financial Reports


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Financial Reports

4 MAIN TYPES:

Balance sheet (BS)

Income statement (IS) or Profit & Loss S. (P&L) Statement of Retained Earnings

Cash Flow Statement (CF)

Financial Reports 5 Types of Accounts


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Financial Reports 5 Types of Accounts

Balance Sheet Accounts

Assets

Liabilities

Owners Equity (Stockholders Equity for a corporation)

Profit and Loss Accounts (= Income Statement Accounts)

Revenues Expenses

Double-entry accounting uses five and only five account types to

record all the transactions that can possibly be recorded in an accounting

system. There are sub-types of the following list, but all financialtransactions can be recorded using these five types of accounts.

The profit and loss accounts are temporary accounts which track revenues

and expenses for a yearlong fiscal period and are then closed, with balances

transferred to an equity account.


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Accounting Equation


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Accounting Equation

Why is Balance Sheet in Balance?

ASSETS = LIABILITIES + EQUITY

What exists? = Who owns it?

There cannot be anything that does not belong to anybody

Example: Money does not simply appear in the company:

1. You either earn it via a sale, then it is Equity

2. ...or you borrow it from the bank...then it would be a Liability


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Accounting Equation


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g q

ASSETS = LIABILITIES + EQUITY+ Revenues

- Expenses

+ Gains- Losses

+ Contributions

- Withdrawals

The additional items under Equity are tracked in temporaryaccounts until the end of the accounting period, at which time

they are closed to Equity.

Example:

What is special about these accounts?

Accounting Equation

S D fi iti


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Some Definitions

Revenues: Increases to owners equity resulting from main business operations(such as selling merchandise or providing services)

Expenses: Decreases to owners equity resulting from main business operations

Gains: Increases to owners equity resulting from non-business operations

(such as selling the old delivery truck, a storage building)

Losses: Decreases to owners equity resulting from non-business operations

Contributions: Increases to owners equity resulting from owner contributions

Withdrawals:Decreases to owners equity resulting from owner withdrawals


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Balance Sheet


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Gives an overview ofwhat the company owns and owes

Provides a snapshot of the entity at one particular moment

Summarizes the entitys assets, liabilities and equity

Indicates how much a company is worth "on the books.

Portrays financial position (or condition)


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Liabilities and Equity


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q y

Definition. An amount owed to an external party

Informal Definition: Other's claims to the business's good stuff. Amounts thebusiness owes to others.

Additional Explanation: Usually one of a business's biggest liabilities is to supplierswhere a business has bought goods and services and charged them.

Examples?

For a family, bank overdraft, credit card, or loan from parents would be consideredas liability that finances a purchase of a new washing machine. Familys savingsused for the same purpose would be considered as equity.

Money borrowed from a bank Rent for use of a building

Money owed to suppliers for materials

Payroll a company owes to its employees

Taxes owed to the government

Owners Equity


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Definition:The owner's rights to the property (assets) of the business; also called

proprietorship and net worth.

Informal Definition: What the business owes the owner. The good stuff left for theowner assuming all liabilities (amounts owed) have been paid.

Sub-categories:

Who are the owners? The answer to this question depends on the legal form ofthe entity


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Balance Sheet - Equity


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Types Of Business Organization

Sole Proprietorship

Partnership (General vs. Limited) Corporation


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Types Of Business Organization Corporation

is a very common entity form, with its ownership interest being

represented by divisible units of ownership called shares of stock. These

shares are easily transferable, with the current holder(s) of the stock being

the owners. The total owners equity (i.e., stockholders equity) of a

corporation usually consists of several amounts, generally corresponding

to the owner investments in the capital stock (by shareholders) and

additional amounts generated through earnings that have not been paid

out to shareholders as dividends (dividends are distributions to

shareholders as a return on their investment). Earnings give rise toincreases in retained earnings, while dividends (and losses) cause

decreases.

Examples?



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Types of Business organization - Factors toconsider:

Tax consequences

Degree of control

Liability

Ability to raise money

Type of business (license required ?)



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ASSETS = LIABILITIES + EQUITY

Let's use our accounting equation and get an overview of the types of

transactions that can occur and their effects on our equation:


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Transactions

Assets = Liabilities + Owner's Equity

Left Side Right Side Right Side

Increase Decrease Decrease Increase Decrease Increase

1. ABC mows a client's yard and receives a check fromthe customer for $50 for the service provided.

2. ABC purchases $100 worth of office supplies andstores them in their storage room. The office supplystore gives them an invoice that allows them to pay forthem in 15 days (on account).

3. ABC places an ad in the local newspaper receives theinvoice from the supplier and writes a check for $25 tothe newspaper.

4. ABC purchases five mowers for $10,000 and finances

them with a loan from the local bank.

5. ABC mows another customer's yard and sends thecustomer a $75 bill (invoice) for the service theyperformed. They allow their customer ten (10) days topay them for this service (on account).

6. The owner of ABC needs a little money to pay somepersonal bills and writes himself a check for $500.

7. ABC pays the office supply company $100 with acheck for the office supplies that they charged (promisedto pay).

8. ABC receives a check from the customer who theybilled (invoiced) $75 for services and allowed 10 days topay.

9. ABC purchased some mulch for $60 and received aninvoice from their supplier who allows them 15 days topay. The mulch was used on a customer's yard.

10. ABC bills (prepares an invoice) the customer $80 forthe mulch and mowing his yard and receives a check for$80 from the customer.

Totals $10,380 $700 $100 $10,160 $585 $205

Net Change $9,680 Increase $10,060 Increase $380 Decrease

Total Net Changes $9,680 Increase $9,680 Increase



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What do these transactions have in common?

2) You buy an asset against credit

4) You buy an asset with a bank loan7) You pay your debts

8) You collect an existing account receivable

Answer: They do not make you richer or poorer



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When do you get richer / poorer?

1) Richer:

You receive $50 for work done on your bank account

= REVENUE(Revenues are enhancements resulting from providing goods and services

to customers)

2) Poorer:

You spend money on advertisement= EXPENSE(Expenses can generally be regarded as costs of doing business)



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Distinguishing Between the Terms Revenue and Income:

REVENUE EXPENSE = INCOME



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All the transactions that make you richer or poorer affectyour EQUITY account.

It would be very impractical to post all the Revenues and

Expenses directly into the Equity Account.

(Important information gets lost!)

Therefore you use temporary (Profit and Loss) accounts.

They will tell you HOW the earnings / losses were achieved.

Equitys Kids


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Instead of recording transactions directly to Capital"

(Owner's Equity), proper bookkeeping actually uses Revenue,

Expense, and Withdrawals to record the increases and

decreases to "Capital" (Owner's Equity) in order to provide us

with the answers to the how and why the owner's claim to

the business's property increased or decreased.

These accounts are TEMPORARY (only exist during the year)

Revenues, Expenses, and Withdrawals eventually are allmerged together and become a part of the Ending Owner's

Equity Balance.

= CLOSING THE BOOKS


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Proper Recording Actually Uses Revenue,Expense & Draws Instead Of Owner's Equity Original Recording Proper Recording Uses

Transactions

Owner's Equity

Revenue Expense WithdrawalRight Side

Decrease Increase

RevenueIncreasesResulting Inan Increaseto Equity

ExpensesIncreaseResulting Ina Decreaseto Equity

WithdrawalsIncreaseResulting in aDecrease toEquity

1. ABC mows a client's yard and receives a check fromthe customer for $50 for the service provided. 50

3. ABC places an ad in the local newspaper receivesthe invoice from the supplier and writes a check for$25 to the newspaper. 25

5. ABC mows another customer's yard and sends thecustomer a $75 bill (invoice) for the service theyperformed. They allow their customer ten (10) days topay them for this service (on account). 75

6. The owner of ABC needs a little money to pay somepersonal bills and writes himself a check for $500. 500

9. ABC purchased some mulch for $60 and received aninvoice from their supplier who allows them 15 days topay. The mulch was used on a customer's yard. 60

10. ABC bills (prepares an invoice) the customer $80for the mulch and mowing his yard and receives acheck for $80 from the customer. 80



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CONCLUSION:

There are countless transactions, and each can be

described by its impact on assets, liabilities, and equity.

Importantly, no transaction will upset the balance of theaccounting equation.

The accounting equation holds at all times over the life of a

business. When a transaction occurs, the total assets of abusiness may change, but the equation will remain in

balance

The Four Core Financial Statements


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Balance Sheet

Income Statement

Statement of Retained Earnings Statement of Cash Flow


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Income Statement


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A single-step income statement is one of two commonlyused formats for the income statement or profit and lossstatement. It uses only one subtraction to arrive at net

income.

REVENUE EXPENSES = NET INCOME

An extremely condensed income statement in the single-

step format would look like this:

Income Statement


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A multiple-step income statement uses multiplesubtractions in computing the net income shown onthe bottom line.

The multiple-step profit and loss statementsegregates the operating revenues and operatingexpenses from the nonoperating revenues,nonoperating expenses, gains, and losses. Themultiple-step income statement also shows the gross

profit (net sales minus the cost of goods sold).


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Income Statement


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Statement of Retained Earnings

(Statement of Equity)


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The statement of retained earnings reports how

net income and dividends affected a company sfinancial position during the period.

Note that the Income Statement must be preparedbefore the Statement of Retained Earnings

Example: Statement of Equity


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Many companies provide an expanded statement of stockholders equity instead of the

required statement of retained earnings. The statement of stockholders equity portrays not

only the changes in retained earnings, but also changes in other equity accounts. Theseother equity accounts include capital stock and potentially a lot of other amounts related to

topics like par value, preferred stock, treasury stock, and the like


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Statement of Retained Earning


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Retained earnings will change over time because of

several factors. Which of the following factors would

explain an increase in retained earnings?

a. Net loss.

b. Net income.c. Dividends.

d. Investments by stockholders.

Statement of Cash Flows

cannot be manipulated with accounting tricks


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Financial Statements Connection:


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Quick Test: Financial Statements


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Accounts, debits and credits

ACCOUNTS


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TRANSACTIONS AFFECT TH

E ACCOUNTINGEQUATION

H

OW DOY

OU TRACK CH

ANGES ?

A SYSTEM IS NEEDED!


ACCOUNTS


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The records that are kept for the individual asset,

liability, equity, revenue, expense, and dividendcomponents are known as accounts.


DEBITS AND CREDITS


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The next basic accounting concept

For every transaction

DEBITS = CREDITS

The Double entry system requires that the same dollar amount of the

transaction must be entered on both the leftside of one account,

and on the rightside of another account. Instead of the word left,accountants use the word debit; and instead of the word right,

accountants use the word credit.


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DEBITS AND CREDITS


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ASSETS = LIABILITES + STOCKHOLDERS (or OWNERS) EQUITY

Just as assets are on the left side (or debit side) of the accounting

equation, the asset accounts have their balances on the left side. To

increase an asset account's balance, you put more on the left side of the

asset account. In accounting jargon, you debit the asset account. To

decrease an asset account balance you credit the account, that is, you

enter the amount on the right side.

Just as liabilities and stockholders' equity are on the right side (or credit

side) of the accounting equation, the liability and equity accounts have

their balances on the right side. To increase the balance in a liability orstockholders' equity account, you put more on the right side of the

account. In accounting jargon, you credit the liability or the equity

account. To decrease a liability or equity, you debit the account, that is,

you enter the amount on the left side of the account.


DEBITS AND CREDITS


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DEBIT CREDIT SOLL HABEN

DEBITO CREDITO

. . . .

LEFT RIGHT


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Accounts, Debits & Credits


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T-Account

Accounts, Debits and Credits


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QUICK TEST: Accounts, Debits and Credits

Overview Day 2


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Accounting Principles Financial Reports





Accounts, Debits and Credits The Journal The General Ledger

Posting

Chart of Accounts


Accrual Accounting

Revenue Recognition / Expense Recognition Adusting Entries


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THE GENERAL LEDGER


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The journal contains page after page of detailed accounting

transactions. In contrast, the general ledger contains a page foreach and every account in use by a company.

POSTING


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To POST means:

to copy the entries listed in the journal into

their respective ledger accounts.

recording amounts as credits, (right side), and

amounts as debits, (left side), in the pages of

the general ledger

POSTING


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To post means to copy the entries listed in the journal into

their respective ledger accou

nts.

POSTING Computerized Processing


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Source Documents


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No Posting without Source Document!

Source document is the original record of a transaction

Supports the underlying transaction

Examples:

Sale Invoice

Expense Receipt

Collection of accounts receivables - Bank Statement


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THE TRIAL BALANCE

After all transactions have been posted from the journal to the ledger, it


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p j g

is a good practice to prepare a trial balance. A trial balance is simply a

listing of the ledger accounts along with their respective debit or creditbalances:

THE TRIAL BALANCE

Since each transaction was journalized in a way that insured that


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debits equaled credits, one would expect that this equality would be

maintained throughout the ledger and trial balance. If the trialbalance fails to balance, an error has occurred and must be located.

THE TRIAL BALANCE

However, balanced trial balance is no guarantee of correctness:


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Transaction omissionTransaction duplication

Posting to the wrong accounts


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Overview Day 2


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Posting

Chart of Accounts


Accrual Accounting



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FINANCIAL STATEMENTS FROM THE TRIAL BALANCE


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Overview Day 2

U f A ti I f ti


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Posting

Chart of Accounts


Accrual Accounting



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EXAMPLE PROBLEM


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STEP 1:Classify the accounts as assets, liabilities, equity,

revenue or expenses.


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revenue or expenses:


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ASSETS


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revenue or expenses:

SS S S Q Y S


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ASSETS, LIABILITES, EQUITY, REVENUES,

EXPENSES


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STEP 3:Prepare the Statement of Retained Earning


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STEP 4:Prepare the Balance Sheet


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EXAMPLE PROBLEM


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EXAMPLE PROBLEM


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Now try yourself


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The periodicity assumption and itsaccounting implications

Under the accrual basis of accounting,

revenues are reported on the income


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revenues are reported on the income

statement when they are earned. (not

when the cash is received.)

Under the accrual basis of accounting,

expenses are matched with the related

revenues and/or are reported when the

expense occurs, not when the cash is

paid. The result of accrual accounting is

an income statement that bettermeasures the profitability of a company

during a specific time period.


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Overview Day 2




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Financial Reports






Posting

Chart of Accounts


Accrual Accounting



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The adjusting process and related entries

A common characteristic of an adjusting entry is that it will


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involve one income statement account and one balance sheetaccount. (The purpose of each adjusting entry is to get both the

income statement and the balance sheet to be accurate.)

Sometimes an adjusting entry is needed because:

1 Revenue has been earned but it has not yet been recorded


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1. Revenue has been earned, but it has not yet been recorded.

2. An expense may have been incurred, but it hasnt yet been

recorded.

3. A company may have paid for six-months of insurance coverage,

but the accounting period is only one month. (This means that five

months of insurance expense is prepaid and should not be

reported as an expense on the current income statement.)

4. A customer paid a company in advance of receiving goods or

services. Until the goods or services are delivered, the amount is

reported as a liability. After the goods or services are delivered, an

entry is needed to reduce the liability and to report the revenues.


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The adjusting process and related entriesExample: Prepaid insurance

A three-year insurance policy was purchases on January 1, 20x1, for$9,000. The following entry would be needed to record the transactionon January 1:


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on January 1:

The adjusting process and related entriesExample: Prepaid Rent

Assume a two-month rent is entered and rent paid in advance on March 1, 20X1,for $3,000. By March 31, 20X1, half of the rental period has lapsed, and financial


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$ , y , , p p ,

statements are to be prepared. The following entries would be needed to recordthe transaction on March 1, and adjust rent expense and prepaid rent on March31:

The adjusting process and related entriesHow often are adjustments needed?


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Adjustments should be made every time

financial statements are prepared


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The adjusting process and related entriesDepreciation

FIXED ASSETS: Buildings, machinery, equipment, furniture,computers, parking lots, cars, and trucks are examples of assets that


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computers, parking lots, cars, and trucks are examples of assets thatwill last for more than one year.

During each accounting period (year, quarter, month, etc.) a portionof the cost of these assets is being used up. The portion being usedup is reported as Depreciation Expense on the income statement.

In effect depreciation is the transfer of a portion of the asset's costfrom the balance sheet to the income statement during each yearof the asset's life = ADJUSTING ENTRY

Depreciation Expense1

00

Asset

(or Contra Account Accumulated Depreciation)

100

The adjusting process and related entriesDepreciation


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The adjusting process and related entriesUnearned revenue

Often, a business will collect monies in advance of providing goodsor services. For example, you sell a one-year software licence and


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collect the full payment at the beginning of the subscription period:

EXAMPLES?

The adjusting process and related entriesACCRUALS

Accruals are expenses and revenues that


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gradually accumulate throughout an accountingperiod (salaries, interest, rent, utilities)

The adjusting process and related entriesACCRUALS Accrued salaries

Few, if any, businesses have daily payroll. Typically, businesses will pay employees

once or twice per month. Therefore, salary obligations gradually accumulate


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When creating financial statements you have to ESTABLISH A LIABILITY for theaccumulated obligations:

The journal entry on the actual payday needs to extinguish the previously

established liability (Liabilities decrease, Cash decreases):

Salaries Payable 3,000

Cash 3,000


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The adjusting process and related entriesACCRUALS Accrued interest


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The adjusting process and related entriesACCRUALS Accrued rent

Accrued rent = opposite of prepaid rent


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Accrued rent relates to rent that has not yet been paid, even though utilization of theasset has already occurred. For example, assume that office space is leased, and the

terms of the agreement stipulate that rent will be paid within 10 days after the end of

each month at the rate of $400 per month.

During December of 20X1, Cabul Company occupied the lease space, and the

appropriate adjusting entry for December follows:

The adjusting process and related entriesACCRUALS Accrued revenue

Many businesses provide services to clients under an understanding that


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they will be periodically billed for the hours (or other units) of serviceprovided. As a result, money has been earned during a month, even though

it wont be billed until the following month. Accrual accounting concepts

dictate that such revenues be recorded when earned. The following entry

would be needed at the end of December to accrue revenue for services

rendered to date (even though the physical billing of the client may not occur

until January):

EXAMPLES?

The adjusting process and related entriesACCRUALS Questions


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QUESTIONS?


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Summary



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Posting

Chart of Accounts


Accrual Accounting

Revenue Recognition / Expense Recognition

Adusting Entries


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EXAMPLE:Financial Statements from the adjusted trial balance


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EXAMPLE: Post Entries to the LedgerFinancial Statements from the adjusted trial balance


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Prepare Adjusted Trial Balance from LedgerFinancial Statements from the adjusted trial balance


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Prepare Balance SheetFinancial Statements from the adjusted trial balance


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Overview Day 3

Classified Balance Sheets

Current Assets

I


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Inventory

Accounts Receivable

Fixed Assets


Intangibles & Goodwill

Current Liabilites Accounts Payable

Ratio Analysis

Compliance

Internal Controls

VAT What to expect in an Audit


To facilitate proper analysis, accountants will often divide the balance

sheet into categories or classifications. The result is that important groups

of accounts can be identified and subtotaled. Such balance sheets are

ll d l ifi d b l h t


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called classified balance sheets.


The asset side of the balance sheet may be divided into the following SUB-

CATEGORIES:

Current assets; Fixed Assets; Intangible assets; Other assets.


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Classified Balance SheetsCurrent Assets

Current Assets include cash and those assets that will be converted into cash

or consumed in a relatively short period of time; specifically, those assets that

will be converted into cash or consumed within one year or the operating

cycle whichever is longer


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cycle, whichever is longer.

Classified Balance SheetsCurrent Assets

The operating cycle for a particular company is the period of time it takes

to convert cash back into cash (i.e., purchase inventory, sell the inventory

on account, and collect the receivable); this is usually less than one year.


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It is determined by adding the number of days inventory is held and the

collection period for accounts receivable


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Inventory

Investors want as little money as possible tied up in inventory.It is fine to have a lot of inventory on the balance sheet if it isbeing sold at a fast enough rate there is little risk of becoming


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being sold at a fast enough rate there is little risk of becomingobsolete or spoiled.

Just -in-time Delivery

INVENTORY Inventory Valuation

You dont write:

7000 bottles of wine


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7000 bottles of wine

but rather:Wine 30.000 EUR

Therefore you have to assign a value to your inventory

Ending inventory= Beginning inventory + Purchases during the period - Cost of goods sold

How much is Cost of Goods Sold / Value of Ending Inventory?(different purchases are stored together / get mixed up)

Different inventory valuation methods (FIFO, LIFO, HIFO)

INVENTORY Perpetual Inventory System


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Scanners scan the products and automatically update

the sales and inventory records


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PERPETUAL vs. PERIODICAL INVENTORY

Which dealer would you rather deal with ?


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Which dealer would you rather deal with ?

The one who can call it up on their computer and determine

immediately if they have any and give you the price or the

dealer that puts you on hold and has to look around his storeand try to physically locate the item and determine the price?

BUT: Also Perpetual Inventory Systems need to have a

physical count WHY?

Perpetual Inventory Systems are only as good as the people

who maintain it - verify that they actually do have the part



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INVENTORY Perpetual vs. Periodic


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INVENTORY


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Quick Test Inventory Methods


First-In, First-Out(FIFO)


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Valuation method in which the assets acquired first

are sold first.


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Average Cost Method


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values inventory costs as the average unitcost between the assets in the beginning inventoryand the newly acquired assets.

INVENTORY Cost of Goods sold


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An inventory count on October 30 showed 500 units in the warehouse.

1) What is the cost of goods sold for October under the FIFO method?

2) What is the cost of goods sold for October under the LIFO method?

3) What is the cost of goods sold for October under the weighted average method?

INVENTORY


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Quick Test Costing Methods

INVENTORY - RATIOS

Inventory Turnover Ratio


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Shows how many times a company's inventory is sold and replaced

over a period.

A low turnover implies poor sales and, therefore, excess inventory.

A high ratio implies either strong sales or ineffective buying.

FMCG vs. CAR DEALER

Days in Inventory = 365 / Inventory Turnover Ratio Measures the average number of days the company holds its

inventory before selling it.

INVENTORY - RATIOS


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Overview Day 3


Current Assets

Inventory


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y Accounts Receivable

Fixed Assets




Ratio Analysis

Compliance

Internal Controls



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Current Assets Accounts ReceivableA typical invoice contains:

Invoice Requirements:


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The word INVOICE

Unique identification number

Company Name, Adress

Product Description Date

Amount

Currency

VAT amount (if applicable)

Rate of VAT per Item (if applicable)

VAT registration number (if applicable)

Current Assets Accounts Receivableec.europa.eu/taxation_customs/vies/vieshome.do


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Current Assets Accounts Receivable


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How to improve Cash

Flow?

The sooner a seller receives the

cash, the earlier he can put the

money back into the business to

buy more supplies and/or growthe company further.


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Flow? Factoring

= financial transaction whereby a

business sells its accounts receivable

(i.e., invoices) to a third party (calleda factor at a discount in exchange for

immediate money

Invoice discounting= borrowing where the receivable is

used as collateral

Cash discounts

the company further.


How do you estimate the amount of uncollectible accounts

receivable?


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Aging Analysis, Percentage of Credit Sales based on

experience

Prudence Principle: Create Allowance for Doubtful Debt


Bad Debt

is an amount that is written off by the business as a loss to the businessd l ifi d b th d bt d t th b i i


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and classified as an expense because the debt owed to the business isunable to be collected, and all reasonable efforts have been exhausted tocollect the amount owed. This usually occurs when the debtor hasdeclared bankruptcy or the cost of pursuing further action in an attemptto collect the debt exceeds the debt itself

Doubtful Debt

Doubtful debts are those debts which a business or individual is unlikely tobe able to collect. The reasons for potential non payment can include

disputes over supply, delivery, and conditions of goods, the appearance offinancial stress within customers operation. When such a dispute occurs itis prudent s add this debt or portion thereof to the doubtful debt reserveWhen there is no longer any doubt that a debt in uncollectable the debtbecomes bad.


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Allowance for Doubtful AccountsJournal Postings

1. The allowance for doubtful accounts is normally recorded at the beginning of

the companys fiscal year after the estimated calculation is made. The

following is the general journal entry at the beginning of the fiscal year.Bad Debts E pense Debit (e pense increase)


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- Bad Debts Expense Debit (expense increase)

- Allowance for Doubtful Accounts Credit (asset decrease)

2. Once an account becomes delinquent (bad), a journal entry needs to be made

to decrease accounts receivable for that specific customer = WRITE OFF

- Allowance for Doubtful Accounts - Debit (asset increase)

- Accounts Receivable Credit (asset decrease)



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Overview Day 3


Current Assets

InventoryA t R i bl


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Accounts Receivable

Fixed Assets




Ratio Analysis

Compliance

Internal Controls


Balance Sheet Details: Fixed Assets

Assets intended to be in use for period

longer than one year


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Property, Plant & EquipmentLand, buildings, cars, furniture, computers, etc...

Characteristics? Cannot easily be converted into cash

Are not directly sold to a firm's consumers


How to determine the cost of asset?:

The cost of property, plant, and equipment includesthe purchase price of the asset and all


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the purchase price of the asset and all

expenditures necessary to prepare the asset for its

intended use.

Example COST OF LAND:

Land purchases often involve real estate commissions,

legal fees, bank fees, title search fees, and similar

expenses. To be prepared for use, land may need to be

cleared of trees, drained and filled, graded to remove

small hills and depressions, and landscaped. In addition,old buildings may need to be demolished before the

company can use the land. Such demolition expenses are

considered part of the land's cost.


Example:

Cost of land:


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Cost of land :

Land is not depreciated because

it does not have an expected

useful life

Land improvement:

Separate asset on the balance

sheet, with definite liveExample: Parking lot



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Balance Sheet Details: Fixed AssetsRepetition: Capitalization vs. Expense

CAPEX (Capital Expenditure)


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are expenditures creating future benefits. A capitalexpenditure is incurred when a business spends money eitherto buy fixed assets or to add to the value of an existing fixed

asset with a useful life that extends beyond the taxable year.In accounting, a capital expenditure is added to an ASSETaccount (CAPITALIZED")

For tax purposes, capital expenditures are costs that cannotbe deducted in the year in which they are paid or incurredand must be capitalized (= recorded as an asset).

Depreciation is then periodically booked as an expense

Balance Sheet Details: Fixed AssetsRepetition: Capitalization vs. Expense

OPEX (Operational Expenditure)


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is an ongoing cost for running a product, business, or

system.

are immediately treated as an EXPENSE

Example:

The purchase of a photocopier is the CAPEX, and the annualpaper, toner, power and maintenance cost is the OPEX.

Balance Sheet Details: Fixed AssetsSteps to follow when Capitalizing an Asset


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1. Estimate Useful Life

2. Chose Rate of Depreciation

Overview Day 3


Current Assets

Inventory Accounts Receivable


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Accounts Receivable

Fixed Assets




Ratio Analysis

Compliance

Internal Controls


Fixed Assets - Depreciation Methods

Example EXCEL

When a company buys a large asset such as a piece of

machinery, accounting rules specify how the asset shouldbe expensed each year. This is called depreciation.


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p y p

EXCEL offers four common methods for calculating

depreciation:

Straight-line (SLN)

Declining-balance (DB)

Double-declining-balance (DDB) Sum-of-years-digits (SYD)


By selecting the depreciation time, method,

companies can manage the effects on profiti i f i


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over time most companies prefer to write

off as fast as possible:

Reason:

Less profits now = less taxes now

More profits later = more taxes later

Fixed Assets - Depreciation MethodsCzech Republic Depreciation on Fixed Assets


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Depreciation as a Policy Instrument


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Depreciation as a Policy Instrument


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Cost = This is the initial cost of the asset. For example the

machinery might cost $120.000


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Useful life = This is how long you expect to use the asset. If

you think the machinery will be used for 10 years before

being replaced, the useful life is 10 years

Salvage value = This is the value of the asset at the end of

the useful life. Perhaps after 10 years you can sell the

machine to a scrap dealer for $1.000. This is the salvagevalue.


Accumulated Depreciation = CONTRA ASSET ACCOUNT

An asset account which is expected to have a credit balance (which is contrary

to the normal debit balance of an asset account). The contra asset account isrelated to another asset account. For example, the contra asset accountAllowance for Doubtful Accounts is related to Accounts Receivable The contra


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Allowance for Doubtful Accounts is related to Accounts Receivable. The contraasset account Accumulated Depreciation is related to a constructed asset(s)

Journal Posting

The net of the asset and its related contra asset account is referred to as theasset's book value or carrying value.

Balance Sheet View

Reason: You dont want to lose the information for how much the asset waspurchased in the first place

Fixed Assets Fixed Asset Schedule

Because businesses usually have several fixed assets

purchased at different times, with different useful lives anddifferent depreciation methods, it is necessary to keep a


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separate schedule of these assets called a fixed asset

schedule.

An example of a portion of a fixed asset schedule is:



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Exkurs: Present Value

If you received $100 today and deposited it into a savings

account, it would grow over time to be worth more than

$100. This fact of financial life is a result of the time valueof money a concept which says it's more valuable to


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of money, a concept which says it s more valuable to

receive $100 now rather than a year from now. To put it

another way, the present value of receiving $100 one year

from now is less than $100.

DISCOUNTED CASH FLOW ANALYSIS Standard method to

analyze long-term projects

Example: You invest in 2010 in a project that returns from 2011 to

2016 every year 200 EUR. Discount rate = 10%. How much would

you spend to invest in this project?

Overview Day 3


Current Assets

Inventory Accounts Receivable


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Fixed Assets




Ratio Analysis

Compliance

Internal Controls

VAT

What to expect in an Audit

Balance Sheet Details: Intangibles and Goodwill

Assets that cannot be seen,

touched, nor physically measured


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Intangible assets

Patents, Copyright, Trademark etc.

The process of expense recognition for this category of assets iscalled amortization.

Goodwill

T

he difference between the acquisition price and book asset valueof purchased business entity

Premium" for buying a business



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What are Patents, Trademarks and Copyrights?

Example: You invent a time machine

You would have a PATENT on the technique

You would have a COPYRIGHT on the design

If you call it TIMINATORyou would have a

TRADEMARK on the name

Licenses are the contractual rights to use another's property, whether it be a

patent, trademark or copyright


Patents


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Has to be registerd - gets checked

The right to exclude others from making, using, offering for sale, selling or

importing an invention

Granted for a limited period of time in exchange for a public disclosure ofan invention

Question:WHY?


Trademarks

A Trademark is the means by which a business makes itself visible in the


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A Trademark is the means by which a business makes itself visible in the

marketplace.

The essential function of a trademark is to exclusively identify the

commercial source or origin of products or services

A trademark is typically a name, word, phrase, logo, symbol, design,

image, or a combination of these elements

Trademark rights may be used to prevent others from using a confusinglysimilar mark, but not to prevent others from making the same goods or

from selling the same goods or services under a clearly different mark.