Transcript CHAPTER 8: Accounting - Texas Christian University

CHAPTER 8: ACCOUNTING
DECISION MAKING BY THE NUMBERS
Market Information
 Goal of business: To create wealth
 Competing for transactions in the market
 What are Your Personal Goals?

How can you tell how well you are doing?
Measure individual transactions
 Put them all together –

How much “stuff” (acquired wealth) do you have
 Where did it come from? (assets = liabilities + owners equity)
 How much new wealth are you creating with it?
(revenue - expense = profit)

Financial statements: the main output of
financial accounting

Financial accounting includes three basic financial statements:

Balance Sheet




Income Statement





assets: value of the stuff the you or the organization controls
liabilities: debt claims against the stuff
owners’ equity: owners’ claims against the stuff
revenues ($ coming in)
expenses ($ going out)
Statement of Cash Flows
Companies with more than $10 million in assets and a class of equity securities that is
held by more than 500 owners must file annual and other periodic reports, regardless of
whether the securities are publicly or privately traded.
The 10-K includes information such as company history, organizational structure, executive
compensation, equity, subsidiaries, and audited financial statements, among other
information.
Let’s Look At It From a Personal Perspective

Do you use a personal budget?

How do you monitor your budget?

What software/tools do you use?

What type of costs do you categorize?

What short and long-term goals are you aiming for?


Is it evident in your budget?
How do you manage your finances for the future?
4
Personal Financial Planning


Financial planning starts with outlined goals for companies and
individuals.
If you want to have a million dollars by age 65.

If you save $286 per month at age 25, you will have a million dollars
by age 65.

But, you would need to save $488 or $1,689 at ages 35 and 45 to
reach that amount.

With an 8% return, planning to be a millionaire is very possible!
Balance sheet: what we own and how we
got it
Balance Sheet – summarizes a firm’s financial position at a
specific point in time.
Assets –
things of
value that
the firm owns
=
Liabilities –
indicates what
the firm owes to
non-owners
+
Owner’s
Equity –
the claims owners
have against
their firm’s
assets
Stuff & claims against stuff
Stuff
• Checking
• Savings
$ 1,500
$ 2,000
Stuff & claims against stuff
Stuff
• Checking
• Savings
• Tires
$ 1,500
$ 2,000
$ 450
Claims against stuff
• Credit Card
$
450
Stuff & claims against stuff
Stuff
• Checking
• Savings
• Tires
• Car
Claims against stuff
• Credit Card
• Dave (owner)
• Credit Union (loan)
$ 1,500
$ 2,000
$ 450
$23,000
$ 450
$ 3,000
$20,000
Stuff & claims against stuff
Stuff
• House
$150,000
Claims against stuff
• Bank (debt)
$115,000
• Dave (owner)
$ 35,000
Stuff & claims against stuff
Stuff
• Checking
• Savings
• New Tires
• Car
Claims against stuff
• Credit Card
• Dave (owner)
• Credit Union (loan)
$ 1,500
$ 2,000
$ 450
$23,000
$ 450
$ 3,000
$20,000
Stuff
• House
$150,000
Claims against stuff
• Bank (debt)
$115,000
• Dave (owner)
$ 35,000
Snap shot:
Personal Balance Sheet
Assets
•
Checking
•
Savings
•
Tires
•
Car
•
House
Total Assets
$
1,500
2,000
450
23,000
150,000
$
176,950
$
450
Liabilities
•
Credit Card
•
Car
•
Bank - mortgage
•
Equity (car and house and money)
Total Liabilities
20,000
115,000
41,000
$
176,950
The income statement: how did we do?
Income Statement – summarizes a firm’s operations over a
given period of time in terms of profit and loss.
Revenue–
the increase in
the amount of
assets the firm
earns
-
Expenses –
the cash the firm
spends or other
assets it uses to
generate
revenue
=
Net Income –
the profit or loss
the firm earns
OK… You Have a Paycheck
Name
Address
City, State Zip
Description Rate
Employee ID:
Department:
Location:
Marital Status:
Allowances:
Addl %:
Addl Amt:
Hours and Earnings
---Current----------------YTD----Hours Earnings Hours Earnings
Taxes:
Current
Fed Withholding
Fed MED/EE
Fed OASD/EE
Total
Before Tax Deduction
Parking Permit
Retirement / 401K
Total Gross
After Tax Deduction
United Way Campaign
FED Taxable Gross
Total Taxes
Employer Paid Benefits
Life Basic
Retirement / 401K
Total Deduction
Current:
YTD:
YTD Hours
VAC
SICK
FICA Taxable Gross
Medicare Taxable Gross
Net Pay Distribution
YTD
w4
Fill Out Your W-4
OK… You Have a Paycheck – Taxes and
Deductions
Name
Address
City, State Zip
Description Rate
Employee ID:
Department:
Location:
Marital Status:
Allowances:
Addl %:
Addl Amt:
Hours and Earnings
---Current---------------YTD-----Hours Earnings Hours Earnings
Taxes:
Current
YTD
Fed Withholding 2013 Tax Tables
Fed MED/EE
1.45%
Fed OASD/EE
6.20%
Total
Before Tax Deduction
Parking Permit
Retirement / 401K
Total Gross
After Tax Deduction
United Way Campaign
FED Taxable Gross
Total Taxes
Employer Paid Benefits
Life Basic
Retirement / 401K
Total Deduction
Current:
YTD:
YTD Hours
VAC
SICK
FICA Taxable Gross
Medicare Taxable Gross
Net Pay Distribution
OK… You Have a Paycheck – Net Pay
Calculation
Pay Begin Date: 6/01/2013
Pay End Date: 6/30/2013
Name
Address
City, State Zip
Employee ID: 123456
Department:
Location:
Marital Status: Single
Allowances: 1
Addl %: 0
Addl Amt: 0
Assumptions:
•
•
•
•
•
•
Salary - $45,000
Paid Monthly - $3,750
Single
401K deduction - 5%
Employer match
United Way - $120/yr
Description Rate
Regular
Holiday
Hours and Earnings
---Current----------------YTD------Hours Earnings Hours Earnings
3,750.00
40
22,500.00
Taxes:
Current
YTD
Fed Withholding 471.15 2826.90
Fed MED/EE
54.38 326.28
Fed OASD/EE
232.50 1395.00
Total
Before-Tax-Deduction
Parking Permit
Retirement / 401K
187.50
Current:
YTD:
YTD Hours
Total Gross
3,750.00
22,500.00
VAC
0
After-Tax-Deduction
United Way Campaign 10.00
FED Taxable Gross
3,750.00
22,500.00
SICK
0
Total Taxes
758.03
4,548.36
FICA Taxable Gross
22,500.00
Employer Paid Benefits
Life Basic
15.00
Retirement / 401K
187.50
Total Deduction
197.50
1,185.00
Net Pay
2,794.47
16,766.82
Net Pay Distribution
2,794.47
Medicare Taxable Gross
22,500.00
http://www.adp.com/tools-and-resources/calculators-andtools/payroll-calculators/salary-paycheck-calculator.aspx
Monthly Income Statement
Income
•
Wages
$
Expenditures for Donations
$
•
Assumptions:
• Salary - $45,000
• 30 Yr Mortgage 3.835%
• Principal & Interest - $562
• Property Taxes - $150
• Homeowners Insurance - $67
• Auto Loan
• 4 years
• 1.9% interest
Church
Expenditures for Living Expenses
2,794
100
$
•
Food
500
•
Mortgage – principal, interest, taxes, insurance
778
•
Utilities – gas, electric, water
150
•
Credit Card
100
•
Car loan
439
•
Insurance – car
150
•
Gas
200
•
Medical
125
•
Clothing
50
•
Entertainment
200
Total Expenditures
$
2,792
Total Income Less Expenditures
$
2
Personal investing

What are your short-term and long-term goals?

Given your budget, how much are you able to invest?

How long can you leave your money invested?

How concerned are you about the tax implications of your
investments?

How much tolerance do you have for risk?

DIVERSIFICATION
Direct stock purchase plans



Many Corporations offer Direct
Stock Purchase Plans
Purchase stock direct from company
Dividend Reinvestment Plans (DRIPS)
allow current stockholders to
reinvest dividends to purchase
additional stock
Strategies for investing in securities

Investing for Income

Market Timing

Value Investing

Investing for Growth

Buying and Holding
From a Business Perspective
 Goal of business: To create wealth
 Competing for transactions in the market

How can you tell how well you are doing?
Measure individual transactions
 Put them all together –

How much “stuff” (acquired wealth) do you have
 Where did it come from? (assets = liabilities + owners equity)
 How much new wealth are you creating with it?
(revenue - expense = profit)

Financial statements: the main output of
financial accounting

Financial accounting includes three basic financial statements:

Balance Sheet




Income Statement





assets: value of the stuff that you or the organization controls
liabilities: debt claims against the stuff
owners’ equity: owners’ claims against the stuff
revenues ($ coming in)
expenses ($ going out)
Statement of Cash Flows
Companies with more than $10 million in assets and a class of equity securities that is
held by more than 500 owners must file annual and other periodic reports, regardless of
whether the securities are publicly or privately traded.
The 10-K includes information such as company history, organizational structure, executive
compensation, equity, subsidiaries, and audited financial statements, among other
information.
The Independent Auditor’s Report:
A Necessary Stamp of Approval
• Publicly traded corporations are required
to have a CPA firm perform an external
audit
 Rigorous Process
 Check figures and methods
 Physical Counts
• The auditor will issue an unqualified,
qualified or adverse opinion
•
Slight concern,
Seriouslybut
flawed, probably
Auditors
must
be independent
probably
misleading
OK!
and unreliable
No problem here!
Checking Out the Notes to Financial
Statements: What’s in the Fine Print?
Additional information may be required to explain the
numbers, and notes can be very revealing:
 Can be many pages…

Additional information about operations

Clarify and supplement numbers

Explain accounting methods or changes

Detail status of lawsuits
Another important section: Management’s Discussion and
Analysis
Managerial Accounting vs.
Financial Accounting
Financial Accounting
Managerial Accounting
Purpose
Primarily intended to provide information
to external stakeholders; stockholders,
creditors, and government regulators.
Information is generally available to the
general public.
Primarily intended to provide information
to internal stakeholders; managers of
specific departments or divisions.
Information is proprietary and is not
available to the general public.
Type of Information
Presented
Focuses almost exclusively on financial
information.
Provides both financial and nonfinancial
information.
Nature of Reports
Prepares a standard set of financial
statements.
Prepares customized reports to deal with
specific problems or issues.
Timing of Reports
Presents financial statements on a
predetermined schedule – usually
quarterly and annual.
Creates repots upon request rather than
on a predetermined schedule.
Adherence to
Accounting Standards
Governed by a set of Generally
Accepted Accounting Principles - GAAP
Uses procedures developed internally
that are not required to follow GAAP
Time period Focus
Summarizes past performance and its
impact on the form’s present condition.
Provided reports dealing with past
performance, but also involves making
projections about the future when
dealing with planning issues.
Looking for Trends in
Comparative Statements


The SEC requires publicly traded companies
to provide comparative financial statements

2-3 years of figures side-by-side

View changes over a period of time

Trace what has happened to key assets and liabilities
Comparative analysis is a form of horizontal
analysis
So What’s New or Different?
Office
People
Products
Factories
What Do You Need To Do To Make Your
Business Successful?








Types of Costs
Out-of-pocket costs –
also called explicit
costs; actual
expenditures.
Payments made to
suppliers, workers
and rent for office
space
Variable costs– rise and
vary when the firm
produces goods and
services
Implicit costs–
opportunity costs; not
monetary but what is
given up
Fixed costs– do not
changes with levels of
production
Developing the Key Budget Components:
One Step at a Time
Operating Budgets identify sales and
production goals.
• Sales Budget
• Production Budget
• Direct Labor Budget
Financial Budgets focus on the firm’s
financial objectives.
• Cash Budget
• Capital Budget
Master Budget –
brings together all
of the budgets to
represent the
overall plan
Balance sheet: what we own and how we
got it
Assets –
things of
value that
the firm owns
=
Liabilities –
indicates what
the firm owes to
non-owners
+
Owner’s
Equity –
the claims owners
have against
their firm’s
assets
Sample balance sheet
Foundation & Accounting Numbers
Balance Sheet
(in 000’s)
Total
%
12/31/08
Assets
Cash
$5,593
26.8%
Accounts Receivable
$3,353
16.1%
Inventory
$2,353
11.3%
Total Current Assets
$11,299
54.2%
Plant & Equipment
$14,400
69.1%
Accumulated Depreciation
($4,848)
-23.2%
$9,552
45.8%
$20,852
100.0%
Total Fixed Assets
Total Assets
Foundation & Accounting Numbers
Liabilities & Owner's Equity
Total
Accounts Payable
$2,855
13.7%
$0
0.0%
Long Term Debt
$5,200
24.9%
Total Liabilities
$8,055
38.6%
Common Stock
$2,313
11.1%
Retained Earnings
$10,485
50.3%
Total Equity
$12,798
61.4%
Total Liability & Owner’s Equity
$20,852
100.0%
Current Debt
%
The income statement: how did we do?
Income Statement – summarizes a firm’s operations over a
given period of time in terms of profit and loss.
Revenue–
the increase in
the amount of
assets the firm
earns
-
Expenses –
the cash the firm
spends or other
assets it uses to
generate
revenue
=
Net Income –
the profit or loss
the firm earns
Sample income statement
Capsim calls this
Contribution Margin
New Cash infused
into the company
Depreciation is a loss in value of an asset,
and so is treated as an expense here.
However, no cash exchanges hands.
Foundation & Accounting Numbers
Income Statement (in 000’s)
Total
Sales
%
$40,800
100.0
Direct Labor
$12,138
29.7
Direct Material
$20,240
49.6
Inventory Carry
$282
0.7
$32,660
80.0
$8,140
20.0
Variable Costs
Total Variable Cost
Contribution Margin
Period Costs
Depreciation
%
$960
2.4
$0
0.0
Promotions
$1,000
2.5
Sales
$1,000
2.5
$637
1.6
Total Period Costs
$3,597
8.8
Net Margin
$4,543
11.1
$0
0.0
$4,543
11.1
Short Term Interest
$0
0.0
Long Term Interest
$641
1.6
$1,365
3.3
$51
0.1
$2,485
6.1
SGA: R&D
Administration
Other
EBIT
Taxes
Profit Sharing
Net Profit
Statement of cash flows: show me the
money
Operations
Investing
Financing

Increase and decrease from all three sources

Total amount of cash on hand

Stakeholders want to know if there is adequate cash to pay workers,
creditors, suppliers and IRS
Sample statement of cash flows
New cash from the
income statement
Remember that we treated this as an
expense in the income statement and
so subtracted it from our incoming
revenue. However, no cash
exchanged hands, so we add this back
in to show that.
Foundation & Accounting Numbers
Cash Flows from Operating Activities: (in 000’S)
Net Income (Loss)
Depreciation
Extraordinary gains/losses/writeoffs
Accounts Payable
Inventory
2011
$2,485
$960
$0
$855
($2,353)
Accounts Receivable
$3,647
Net cash from operations
$5,593
Cash Flows from Investing Activities:
Plant Improvements
Cash Flows from Financing Activities:
Dividends Paid
($1,000)
Sales of Common Stock
Purchase of Common Stock
Cash from long term debt
Retirement of long term debt
Change in current debt (net)
Net cash from financing activities
$0
$0
$0
$0
$0
($1,000)
$0
Net change in cash position
$4,593
Closing cash position
$5,593
Sarbanes-Oxley act of 2002



Commonly referred to as SOX
Banned relationships between CPA
firms that might create conflict of
interest
Created Public Company Accounting
Oversight Board (PCOAB)
Balance Sheet Horizontal Analysis – compares information in a
firm’s financial statement over a period of 2 years or more.
ASSETS
Cash
Accounts Receivable
Inventory
2014
$2,826
$11,688
$4,153
5.3%
22.1%
7.8%
2013
$4,256
$9,068
$0
11.9%
25.4%
0.0%
Total Current Assets
$18,667
35.2%
$13,324
37.3%
$44,834
($10,536)
84.6%
-19.9%
$30,208
($7,787)
84.5%
-21.8%
Total Fixed Assets
$34,298
64.8%
$22,421
62.7%
Total Assets
$52,964
100.0%
$35,745
100.0%
Accounts Payable
Current Debt
Long Term Debt
$5,426
$0
$4,333
10.2%
0.0%
8.2%
$4,204
$867
$4,333
11.8%
2.4%
12.1%
Total Liabilities
$9,759
18.4%
$9,404
26.3%
Common Stock
Retained Earnings
$18,105
$25,100
34.2%
47.4%
$8,978
$17,362
25.1%
48.6%
Total Equity
Total Liab. & O. Equity
$43,205
$52,964
81.6%
100.0%
$26,340
$35,745
73.7%
100.0%
Plant & Equipment
Accumulated Depreciation
LIABILITIES & OWNERS'
EQUITY
Income Statement
Vertical Analysis – expresses items on the
balance sheet and income statement as a percentage of a key value.
Sales
Variable Costs:
Direct Labor
Direct Material
Inventory Carry
Total Variable
$56,852
$56,826
$66,285
$26,942
$0
$0
$0
$0
2019
Total
$206,905
$6,894
$19,086
$162
$26,142
$7,401
$23,446
$0
$30,846
$9,968
$25,368
$0
$35,336
$4,950
$10,824
$320
$16,094
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$29,213
$78,724
$482
$108,419
14.1%
38.0%
0.2%
52.4%
Contribution Margin
Period Costs:
Depreciation
SG&A: R&D
Promotions
Sales
Admin
Total Period
$30,710
$25,980
$30,949
$10,848
$0
$0
$0
$0
$98,486
47.6%
$3,467
$622
$1,740
$3,000
$673
$9,502
$2,153
$541
$2,500
$3,000
$673
$8,867
$2,880
$588
$2,500
$3,000
$785
$9,753
$693
$410
$2,000
$1,500
$319
$4,922
$0
$1,000
$0
$0
$0
$1,000
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$9,193
$3,162
$8,740
$10,500
$2,449
$34,044
4.4%
1.5%
4.2%
5.1%
1.2%
16.5%
Net Margin
$21,208
$17,113
$21,196
$5,925
($1,000)
$0
$0
$0
$64,442
31.1%
$1,301
$63,142
$0
$1,258
$21,659
$804
$39,420
0.6%
30.5%
0.0%
0.6%
10.5%
0.4%
19.1%
Able
Other
EBIT
Short Term Interest
LongTerm Interest
Taxes
Profit Sharing
Net Profit
Asable
Abe
Amable
Ale
NA
NA
NA
100.0%