Financial Accounting Fundamentals: Key Concepts

Liabilities

Liabilities represent the monetary valuation of resources that have helped finance the property and rights of the asset. These include, for example, contributions from owners and the company's debts with banks and suppliers.

Classification by Enforceability

Items are typically ordered from lowest to highest enforceability:

Fixed Liabilities

These include elements with lower enforceability:

• Unenforceable: Resources that the company does not owe to any specific creditor (e.g., owner contributions, reinvested earnings).
• Long-Term Liabilities: Resources for which there is a commitment to return within a period longer than one year.

Current Liabilities

These include debts with a maturity set equal to or less than one year (e.g., callable short-term debt).

Amortization

Amortization accounts reflect losses incurred due to the irreversible value depreciation of various fixed assets. These are represented in assets with a negative sign.

Working Capital

Working Capital is calculated as: Current Assets - Current Liabilities.

The Income Statement

The Income Statement reflects the outcome of the financial period, i.e., the profit or loss that the company has obtained over a specific period of time.

Operating Results

• Operating Revenue (e.g., sales, income from miscellaneous services)
• Less: Purchasing, External, and Operating Expenses (e.g., purchases, supplies)
• Equals: Added Value of the Company
• Less: Other Costs (e.g., salaries, rent)
• Equals: EBITDA (Gross Margin)
• Less: Depreciation and Provisions
• Equals: Net Operating Income

Financial Results

• Financial Income (e.g., discounts on purchases)
• Less: Financial Expenses (e.g., interest expenses)
• Equals: Financial Result

Ordinary Result

• Net Operating Income
• Plus: Financial Result
• Equals: Ordinary Result

Extraordinary Result

• Extraordinary Benefits and Revenue (e.g., from sales of property, plant, and equipment for an amount exceeding their net book value)
• Less: Extraordinary Losses and Expenses (e.g., from accidents, sale of fixed assets for a price below their net book value)
• Equals: Extraordinary Result

Profit Before Tax

• Ordinary Result
• Plus: Extraordinary Result
• Equals: Profit Before Tax

Profit for the Year

• Profit Before Tax
• Less: Corporate Tax
• Equals: Profit for the Year

Fixed and Variable Costs

Fixed Costs: These are independent of the company's level of activity.

Variable Costs: These depend on the company's level of activity.

Breakeven Point

The Breakeven Point is the sales level at which the company begins to generate profit.

The Breakeven Quantity (Q) can be calculated using the following formula:

Q = C_F / (P_v - C_uv)

Where:

• Q: Breakeven Quantity
• C_F: Total Fixed Costs
• P_v: Per-Unit Selling Price
• C_uv: Per-Unit Variable Cost

At the Breakeven Point:

Total Revenue (TR) = Total Costs (TC)

Additional related formulas:

• C_u = P_vu * Q (Total Variable Cost)
• C_T = C_F + C_u (Total Cost)