CHAPTER 8: Accounting

1
CHAPTER 8 Accounting

• DECISION MAKING BY THE NUMBERS

2
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)

3
Financial statements the main output of
financial accounting

• Financial accounting includes three basic
  financial statements
• Balance Sheet
• assets value of the stuff the you or the
  organization controls
• liabilities debt claims against the stuff
• owners equity owners claims against the stuff
• Income Statement
• 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.

4
Lets 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?

5
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!

6
Balance sheet what we own and how we got it
Balance Sheet summarizes a firms financial
position at a specific point in time.
Liabilities indicates what the firm owes to
non-owners
Owners Equity the claims owners have
against their firms assets
Assets things of value that the firm owns


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Stuff claims against stuff

• Stuff
• Checking 1,500
• Savings 2,000

8
Stuff claims against stuff

• Stuff
• Checking 1,500
• Savings 2,000
• Tires 450
• Claims against stuff
• Credit Card 450

9
Stuff claims against stuff

• Stuff
• Checking 1,500
• Savings 2,000
• Tires 450
• Car 23,000
• Claims against stuff
• Credit Card 450
• Dave (owner) 3,000
• Credit Union (loan) 20,000

10
Stuff claims against stuff

• Stuff
• House 150,000
• Claims against stuff
• Bank (debt) 115,000
• Dave (owner) 35,000

11
Stuff claims against stuff

• Stuff
• Checking 1,500
• Savings 2,000
• New Tires 450
• Car 23,000
• Claims against stuff
• Credit Card 450
• Dave (owner) 3,000
• Credit Union (loan) 20,000

• Stuff
• House 150,000
• Claims against stuff
• Bank (debt) 115,000
• Dave (owner) 35,000

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Snap shot Personal Balance Sheet
Assets
Checking 1,500
Savings 2,000
Tires 450
Car 23,000
House 150,000
Total Assets 176,950

Liabilities
Credit Card 450
Car 20,000
Bank - mortgage 115,000
Equity (car and house and money) 41,000
Total Liabilities 176,950


13
The income statement how did we do?
Income Statement summarizes a firms operations
over a given period of time in terms of profit
and loss.
Net Income the profit or loss the firm earns
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
-

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OK You Have a Paycheck
Name Address City, State Zip Employee ID Department Location Marital Status Allowances Addl Addl Amt
Hours and Earnings ---Current----------------YTD----- Description Rate Hours Earnings Hours Earnings Total Hours and Earnings ---Current----------------YTD----- Description Rate Hours Earnings Hours Earnings Total Taxes Current YTD Fed Withholding Fed MED/EE Fed OASD/EE
Before Tax Deduction Parking Permit Retirement / 401K After Tax Deduction United Way Campaign Employer Paid Benefits Life Basic Retirement / 401K
Total Gross FED Taxable Gross Total Taxes Total Deduction Current YTD Total Gross FED Taxable Gross Total Taxes Total Deduction Current YTD Total Gross FED Taxable Gross Total Taxes Total Deduction Current YTD
YTD Hours VAC SICK FICA Taxable Gross Net Pay Distribution YTD Hours VAC SICK FICA Taxable Gross Net Pay Distribution YTD Hours VAC SICK FICA Taxable Gross Net Pay Distribution
Medicare Taxable Gross
15
w4
Fill Out Your W-4
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OK You Have a Paycheck Taxes and Deductions
Name Address City, State Zip Employee ID Department Location Marital Status Allowances Addl Addl Amt
Hours and Earnings ---Current---------------YTD------ Description Rate Hours Earnings Hours Earnings Total Hours and Earnings ---Current---------------YTD------ Description Rate Hours Earnings Hours Earnings Total Taxes Current YTD Fed Withholding 2013 Tax Tables Fed MED/EE 1.45 Fed OASD/EE 6.20
Before Tax Deduction Parking Permit Retirement / 401K After Tax Deduction United Way Campaign Employer Paid Benefits Life Basic Retirement / 401K
Total Gross FED Taxable Gross Total Taxes Total Deduction Current YTD Total Gross FED Taxable Gross Total Taxes Total Deduction Current YTD Total Gross FED Taxable Gross Total Taxes Total Deduction Current YTD
YTD Hours VAC SICK FICA Taxable Gross Net Pay Distribution YTD Hours VAC SICK FICA Taxable Gross Net Pay Distribution YTD Hours VAC SICK FICA Taxable Gross Net Pay Distribution
Medicare Taxable Gross
17
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
Hours and Earnings ---Current----------------YTD------- Description Rate Hours Earnings Hours Earnings Regular 3,750.00 40 22,500.00 Holiday Total Hours and Earnings ---Current----------------YTD------- Description Rate Hours Earnings Hours Earnings Regular 3,750.00 40 22,500.00 Holiday Total Taxes Current YTD Fed Withholding 471.15 2826.90 Fed MED/EE 54.38 326.28 Fed OASD/EE 232.50 1395.00
Before-Tax-Deduction Parking Permit Retirement / 401K 187.50 After-Tax-Deduction United Way Campaign 10.00 Employer Paid Benefits Life Basic 15.00 Retirement / 401K 187.50
Total Gross FED Taxable Gross Total Taxes Total Deduction Net Pay Current 3,750.00 3,750.00 758.03 197.50 2,794.47 YTD 22,500.00 22,500.00 4,548.36 1,185.00 16,766.82 Total Gross FED Taxable Gross Total Taxes Total Deduction Net Pay Current 3,750.00 3,750.00 758.03 197.50 2,794.47 YTD 22,500.00 22,500.00 4,548.36 1,185.00 16,766.82 Total Gross FED Taxable Gross Total Taxes Total Deduction Net Pay Current 3,750.00 3,750.00 758.03 197.50 2,794.47 YTD 22,500.00 22,500.00 4,548.36 1,185.00 16,766.82
YTD Hours VAC SICK FICA Taxable Gross Net Pay Distribution 0 0 22,500.00 2,794.47 YTD Hours VAC SICK FICA Taxable Gross Net Pay Distribution 0 0 22,500.00 2,794.47 YTD Hours VAC SICK FICA Taxable Gross Net Pay Distribution 0 0 22,500.00 2,794.47
Medicare Taxable Gross 22,500.00

• Assumptions
• Salary - 45,000
• Paid Monthly - 3,750
• Single
• 401K deduction - 5
• Employer match
• United Way - 120/yr

http//www.adp.com/tools-and-resources/calculators
-and-tools/payroll-calculators/salary-paycheck-cal
culator.aspx
18
Monthly Income Statement
Income
Wages 2,794
Expenditures for Donations
Church 100
Expenditures for Living Expenses
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

• 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

19
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

20
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

21
Strategies for investing in securities

• Investing for Income
• Market Timing
• Value Investing
• Investing for Growth
• Buying and Holding

22
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)

23
Financial statements the main output of
financial accounting

• Financial accounting includes three basic
  financial statements
• Balance Sheet
• assets value of the stuff that you or the
  organization controls
• liabilities debt claims against the stuff
• owners equity owners claims against the stuff
• Income Statement
• 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.

24
The Independent Auditors 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
• Auditors must be independent

Slight concern, but probably OK!
Seriously flawed, probably misleading and
unreliable
No problem here!
25
Checking Out the Notes to Financial Statements
Whats 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 Managements
  Discussion and Analysis

26
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 forms present condition. Provided reports dealing with past performance, but also involves making projections about the future when dealing with planning issues.
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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

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So Whats New or Different?
Office
People
Products
Factories
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What Do You Need To Do To Make Your Business
Successful?

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Types of Costs
Implicit costs opportunity costs not monetary
but what is given up
Out-of-pocket costs also called explicit costs
actual expenditures. Payments made to suppliers,
workers and rent for office space
Fixed costs do not changes with levels of
production
Variable costs rise and vary when the firm
produces goods and services
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Developing the Key Budget Components One Step
at a Time
Master Budget brings together all of the
budgets to represent the overall plan

• Operating Budgets identify sales and production
  goals.
• Sales Budget
• Production Budget
• Direct Labor Budget
• Financial Budgets focus on the firms financial
  objectives.
• Cash Budget
• Capital Budget

32
Balance sheet what we own and how we got it
Liabilities indicates what the firm owes to
non-owners
Owners Equity the claims owners have
against their firms assets
Assets things of value that the firm owns


33
Sample balance sheet
34
Foundation Accounting Numbers
Balance Sheet (in 000s) Total
Assets 12/31/08
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
Total Fixed Assets 9,552 45.8

Total Assets 20,852 100.0
35
Foundation Accounting Numbers
Liabilities Owner's Equity Total
Accounts Payable 2,855 13.7
Current Debt 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 Owners Equity 20,852 100.0
36
The income statement how did we do?
Income Statement summarizes a firms operations
over a given period of time in terms of profit
and loss.
Net Income the profit or loss the firm earns
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
-

37
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.
38
Foundation Accounting Numbers
Income Statement (in 000s)
Total
Sales 40,800 100.0

Variable Costs
Direct Labor 12,138 29.7
Direct Material 20,240 49.6
Inventory Carry 282 0.7
Total Variable Cost 32,660 80.0
Contribution Margin 8,140 20.0
39

Period Costs
Depreciation 960 2.4
SGA RD 0 0.0
Promotions 1,000 2.5
Sales 1,000 2.5
Administration 637 1.6
Total Period Costs 3,597 8.8
Net Margin 4,543 11.1

Other 0 0.0
EBIT 4,543 11.1
Short Term Interest 0 0.0
Long Term Interest 641 1.6
Taxes 1,365 3.3
Profit Sharing 51 0.1
Net Profit 2,485 6.1
40
Statement of cash flows show me the money

• 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

41
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.
42
Foundation Accounting Numbers
Cash Flows from Operating Activities (in 000S) 2011
Net Income (Loss) 2,485
Depreciation 960
Extraordinary gains/losses/writeoffs 0
Accounts Payable 855
Inventory (2,353)
Accounts Receivable 3,647
Net cash from operations 5,593
Cash Flows from Investing Activities  
Plant Improvements 0
Cash Flows from Financing Activities  
Dividends Paid (1,000)
Sales of Common Stock 0
Purchase of Common Stock 0
Cash from long term debt 0
Retirement of long term debt 0
Change in current debt (net) 0
Net cash from financing activities (1,000)
Net change in cash position 4,593
Closing cash position 5,593
43
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)

44
Balance Sheet Horizontal Analysis compares
information in a firms financial statement over
a period of 2 years or more.
ASSETS 2014 2013
Cash 2,826 5.3 4,256 11.9
Accounts Receivable 11,688 22.1 9,068 25.4
Inventory 4,153 7.8 0 0.0

Total Current Assets  18,667 35.2 13,324 37.3
         
Plant Equipment 44,834 84.6 30,208 84.5
Accumulated Depreciation (10,536) -19.9 (7,787) -21.8

Total Fixed Assets  34,298 64.8 22,421 62.7
Total Assets  52,964 100.0 35,745 100.0

LIABILITIES OWNERS' EQUITY        
         
Accounts Payable 5,426 10.2 4,204 11.8
Current Debt 0 0.0 867 2.4
Long Term Debt 4,333 8.2 4,333 12.1

Total Liabilities  9,759 18.4 9,404 26.3
         
Common Stock 18,105 34.2 8,978 25.1
Retained Earnings 25,100 47.4 17,362 48.6

Total Equity 43,205 81.6 26,340 73.7
Total Liab. O. Equity 52,964 100.0 35,745 100.0
45
Income Statement Vertical Analysis expresses
items on the balance sheet and income statement
as a percentage of a key value.
Able Asable Abe Amable Ale NA NA NA 2019Total
Sales 56,852 56,826 66,285 26,942 0 0 0 0 206,905 100.0
Variable Costs                    
Direct Labor 6,894 7,401 9,968 4,950 0 0 0 0 29,213 14.1
Direct Material 19,086 23,446 25,368 10,824 0 0 0 0 78,724 38.0
Inventory Carry 162 0 0 320 0 0 0 0 482 0.2
Total Variable 26,142 30,846 35,336 16,094 0 0 0 0 108,419 52.4
 
Contribution Margin 30,710 25,980 30,949 10,848 0 0 0 0 98,486 47.6
Period Costs                    
Depreciation 3,467 2,153 2,880 693 0 0 0 0 9,193 4.4
SGA RD 622 541 588 410 1,000 0 0 0 3,162 1.5
    Promotions 1,740 2,500 2,500 2,000 0 0 0 0 8,740 4.2
    Sales 3,000 3,000 3,000 1,500 0 0 0 0 10,500 5.1
    Admin 673 673 785 319 0 0 0 0 2,449 1.2
Total Period 9,502 8,867 9,753 4,922 1,000 0 0 0 34,044 16.5
 
Net Margin 21,208 17,113 21,196 5,925 (1,000) 0 0 0 64,442 31.1
                   
Other 1,301 0.6
EBIT 63,142 30.5
Short Term Interest 0 0.0
LongTerm Interest 1,258 0.6
Taxes 21,659 10.5
Profit Sharing 804 0.4
Net Profit 39,420 19.1