AccountingAccounting

Leslie Lum

What’s Accounting?What’s Accounting?

Accounting is the language of business Allows us to look at a business and

understand how it has done Makes everyone report by the same rules so

that we know what we are looking at– Follow generally accepted accounting principles

– Rules set by Financial Accounting Standards Board

Management AccountingManagement Accounting

Within a company accounting allows a business to manage– Plan - Typically forecast profit and loss for the

next five years– Budget - profit and loss for the next year– Track what was actually spent against the budget– Allows management to try several alternatives

using numbers to see what will happen

Everyone Should be a Everyone Should be a Management AccountantManagement Accountant

Food $4,152 (Away $1762) Alcoholic Beverages $284 Housing $8,434 Apparel $1,546 Transportation $5,187 Health Care $1,407 Tobacco $261 Insurance $346 Pensions and SS $2,125 Other $4,000

Income StatementIncome Statement

Tells you what happened during the year Sales or Revenues are what came in Expenses are what went out Profit or Net Income is what was left The more sales, the better The less expenses, the better The more profit, the better

How did Joe do this year?How did Joe do this year?

What did he take in? What did he spend? What is his growth in revenues? What is his growth in expenses? What is his growth in profit?

How does it translate to a How does it translate to a company?company?

 5,124.2   5,027.9   4,851.6   4,453.1   4,113.5 

 3,359.8   3,344.9   3,295.8   3,082.0   2,806.2 

 1,764.5   1,682.9   1,555.8   1,371.0   1,307.3 

 1,491.0   1,405.3   1,322.9   1,217.6   1,120.8 

–  –  –  –  – 

–  –  –  –  – 

 50.4   47.1   34.2   39.4   39.3 

 (109.0)   (107.1)   (108.6)   (129.5)   (125.1) 

 4,792.2   4,690.2   4,544.4   4,209.6   3,841.2 

 332.1   337.7   307.2   243.5   272.3 

 332.1   337.7   307.2   243.5   272.3 

 129.5   131.0   121.0   96.0   107.2 

 202.6   206.7   186.2   147.5   165.1 

Income TaxIncome After Tax

Operating Income

Income Before Tax

Interest Expense (Income), Net Operating

Other Operating Expenses

Total Operating Expense

Selling/ General/ Administrative Expenses

Research & Development

Depreciation/ Amortization

Total Revenue

Cost of Revenue

Gross Profit

ANNUAL INCOME STATEMENT

In Millions of U.S. Dollars 12 Months Ending

01/31/00

12 Months Ending

01/31/99

12 Months Ending

01/31/98

12 Months Ending

01/31/97

12 Months Ending

01/31/96

Let’s Look at NordstromLet’s Look at Nordstrom

How did Nordstrom do?How did Nordstrom do?

What did Nordstrom take in? What did Nordstrom spend? What’s growth in revenues? What’s growth in expenses? What’s growth in profit?

Balance SheetBalance Sheet

Let’s you know about financial health Assets (Things the company owns) Liabilities (things the company owes) Equity or Net Worth (what’s owned free

and clear)

How’s Joe’s financial health?How’s Joe’s financial health?

What does he own? Are his assets earning money for him? What does Joe owe? What is his net worth?

How is Joe’s Net Worth How is Joe’s Net Worth compared to others?compared to others?

Age Average Net Worth Median Net WorthUnder 35 47,200 11,40035-44 144,500 48,50045-54 277,800 90,50055-64 356,200 110,800

How does it translate to a How does it translate to a company?company?

Assets - What the company Assets - What the company needs to do businessneeds to do business

Cash - Money the company has Accounts receivables - What customers owe Inventories - Product waiting to be sold Fixed Assets - Buildings, equipment, etc. the

company owns

Liabilities - What the company Liabilities - What the company borrows to do businessborrows to do business

Current liabilities– Accounts payable - what the company owes its

vendors Long Term liabilities - Long term debt

EquityEquity

What the shareholders own in the company Any profits not given to the shareholders in

cash is included

Let’s analyze Let’s analyze some retail some retail

apparel apparel companiescompanies

Analyzing the infoAnalyzing the info

Calculating ratios helps you compare to other companies:– Growth rates in revenues and net income

– Return on sales: Profit you make on every $1 of sales

– Debt to equity: Is the company in too much debt?

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Financial RatiosFinancial Ratios

Valuation ratios tell you whether or not you’re getting a good deal. Price equity.

Financial strength ratios let you know the state of the company’s financial health. Total debt to equity.

Profitability ratios let you know how the company does on the bottom line. Return on sales.

Management effectiveness and efficiency ratios tell you how well management is doing. Return on equity.

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Valuation RatiosValuation Ratios

Price equity is what you pay for every $1 of earnings.

All other factors being equal, lower valuation ratios tend to perform better.

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ProfitabilityProfitability

Profitability ratios come in many levels.

Return on sales or net profit margin is the bottom line profitability picture. It tells you what you make for every dollar of sales.

The higher the better.

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Financial Health - Debt to Financial Health - Debt to Equity RatioEquity Ratio

Variety of ratios show whether the company is able to handle yearly obligations

Total Debt to Equity ratio gives overall financial health

The lower the debt to equity, the better

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Management Effectiveness - Management Effectiveness - Return on EquityReturn on Equity

Return on Equity let you know how much the company earns on its net worth or book value.

The higher the ratio the better.