Income Statement

An income statement should always be dated, and it is preferable that it states which currency its calculations were performed in.

Historical Cost Example

Let's say for example that you purchased a POS (Point of Sale) machine for $10,000 in 2001. Software, as we all know can be easily backed up and copied. If we keep the same operating system, chances are the software will not become obsolete. Therefore, the software should not lose any value. The hardware may change, but the software can still run, provided the copy of Windows did not come with the machine, thereby forcing you to upgrade. The added value to the software may include the scanned barcodes and the hardware and miscellaneous software configuration. The POS companies charge a great deal of money for installation and training, so we cannot fault businesses for trying to save money. Therefore, there are many businesses that choose to start from a clean slate and scan each item individually by themselves. They would also prefer to set up the hardware and software by themselves just to save some money. However, the process can take months, especially without proper training of the software. That is where the backup files of a POS come in handy. That backup file should theoretically add three months of value to the POS machine. Historical cost, the cost typically reported in the accounting of a company, will report the value of the POS machine to be $10,000, the cost they initially paid for it. When purchasing a business, one must look for this added value.

Discrete and Continuous data

There are two types of data: Discrete and Continuous data. Both data types can be quantitative in nature, while only discrete data can be qualitative. This means that continuous data cannot be put into categories or groups. Also, continuous data can be presented as a fraction or decimal, while discrete data cannot. Discrete data has gaps in its values, while continuous data does not. Anything that can be counted is discrete data, and discrete data does not have an infinite number of possibilities. An example of discrete data that can be categorized would be shares of a company's stock. There is a finite amount and it can be categorized into preferred or common stock. There is no such thing as a half of a share of stock. Stock price would be continuous data, because it can have decimals, and is quantitative in nature.

Importance of Cash Flows

Any business that has a difficult time creating cash flows, either right now or in the future, should be regarded as a red flag. It shows investors that either the company is struggling in its industry, or there is very poor management at the company. Either way, investors should avoid companies like that. There are plenty of companies that do not have problems creating cash flows, and even consistently pay out dividends to its shareholders (cash outflow) without hurting its business. Those companies are the ones worth investing

The Matching Principle

The matching principle is basically matching up all the expenses and any other costs of doing business that a company incurred during the current accounting period with all the revenue that the company took in during that same time. However, it should be noted that in order to understand the matching principle, the revenue recognition principle has to be understood, because expenses incurred in order to create revenue should be reported when the revenue is recognized. Some companies try to use revenue recognition principle to their advantage. For instance, a salesperson for Cisco Systems can make arrangements with a customer to order surplus inventory that gets delivered and invoiced right before the current accounting period is over. This way the salesman can get a bonus, and the customer can return the goods at the start of the next reporting period. The matching principle has to be applied in a situation where an equipment has to be depreciated over the expected useful life. Also, the principle should be applied when a company pays for insurance or licensing fees. Typically, the company gets billed every 6 months or every one year, but they enjoy the licensing and the insurance coverage every month, so the monthly cost should be matched to the corresponding revenue.

IRS information on depreciation

Cne question comes to mind as I read the IRS website's information on depreciation. When the IRS website says that property must have a determinable useful life in order to be depreciated, do they mean software as well? Some software programs cost more than the computer itself, and software programs, like land, do not go bad or have any wear and tear. Although certain software programs do become obsolete after a certain amount of years, there are those software programs, like a word processing program, that do not need updates or upgrades, because they perform universally simple functions efficiently enough for business purposes. Even if the computer breaks down, the software program can be used on the new computer.

Three form of business entities

A corporation is essentially a tax shelter for rich people. A corporation is treated as a person under law. There was a documentary that compared corporations to a psychotic person. The documentary showed how maximizing profit, which is the main objective of a corporation, was hurting our society. The people that form corporations use such business entities to exploit the workforce of third world countries and harm the environment by forming key alliances with friendly government officials. However, it should be noted that the rich people of this country get richer every day, so we should acknowledge that corporations are a great way to do business by minimizing the risks. Corporations cost more to form, but the small cost is worth it. Some corporations issue stock to raise capital, so they can be more competitive in their respective industries, as opposed to the limited capital of a sole proprietorship and partnership.A partnership exists when two or more people decide to go into business together. They both are financially liable for the debts of the business. However, some entrepreneurs circumvent this by forming a limited partnership whereas certain members can retain control over the business without risking their personal assets. A partnership can be riskier than a sole proprietorship in that all debts that a company builds up during the course of business is owed by all partners. However, if your partner(s) disappear to another country, you are left with the entire bill. It would be a mistake to think that going into a partnership with a person splits the risk of doing business, when in fact it doubles the risk, especially if your partner leverages your business without your knowledge. There have been numerous examples of business owners owing gambling debts incurred by their partners. In a situation like that, a corporation would have protected your personal assets if your company files for bankruptcy. A sole proprietorship is essentially a business entity that allows the owner of a business to get sued if someone is hurt financially, emotionally, or physically by his organization. It is not advisable to form a sole proprietorship given the many frivolous lawsuits that make it through the court system nowadays. Many new business owners try not to take on more risk than is necessary when they first start a business. However, many do not realize that by forming a sole proprietorship, they are essentially putting their exposing their valued personal assets (such as a house or car) to unnecessary risks.