Chapter 3 Financial Management BCN 4753 Summer 2007

Chapter 3 Financial ManagementChapter 3 Financial Management

BCN 4753 Summer 2007BCN 4753 Summer 2007

Financial ReportsFinancial Reports

Why is it important to be able to Why is it important to be able to understand financial reports?understand financial reports?Will help you as a manager to:Will help you as a manager to:

PlanPlanControlControlOrganizeOrganizeIdentify ErrorsIdentify ErrorsUncover omitted itemsUncover omitted items

Financial ManagementFinancial Management

What is the difference between Accounting What is the difference between Accounting and bookkeeping?and bookkeeping?Bookkeeping – recording of business and Bookkeeping – recording of business and

financial data in a certain manner, all records financial data in a certain manner, all records or specific projectsor specific projects

Accounting – design of the system of records, Accounting – design of the system of records, preparation of reports on the datapreparation of reports on the data


Owned vs OwedOwned vs OwedAssets vs Liabilities Assets vs Liabilities

Everything else is owner’s equityEverything else is owner’s equity

Assets = Liabilities + Owners EquityAssets = Liabilities + Owners EquityAssets go up then Liabilities + Equity Assets go up then Liabilities + Equity

must?must? Go UpGo Up


Changes in EquityChanges in Equity Investments or WithdrawalsInvestments or WithdrawalsEarnings or LossesEarnings or Losses Changes in equity are listed separately under their Changes in equity are listed separately under their

own categoriesown categories

Revenues Vs ExpensesRevenues Vs ExpensesSalesSalesExpenses are incurred to produce salesExpenses are incurred to produce sales


Accrual MethodAccrual MethodAccount for revenue and Expenses when Account for revenue and Expenses when

earned or incurredearned or incurredAccurately match earnings with the activity Accurately match earnings with the activity

that generated themthat generated themAccountsAccountsDebits vs CreditsDebits vs Credits

Debit balance or Credit balanceDebit balance or Credit balance


When do you get revenue?When do you get revenue? Is recorded when customer takes ownershipIs recorded when customer takes ownership Not when you are paid for itNot when you are paid for it So, revenue occurs when you complete the contract So, revenue occurs when you complete the contract

and bill the customerand bill the customer Becomes an Account Receivable Becomes an Account Receivable

When are expenses are recorded? When are expenses are recorded? Time they are incurredTime they are incurred Or if they can be matched to certain revenuesOr if they can be matched to certain revenues


Recording TransactionsRecording TransactionsExchange of valueExchange of valueSpecific accountsSpecific accountsMust be recorded according to GAAPMust be recorded according to GAAP

EXAMPLE:EXAMPLE:


Income StatementIncome StatementShows earnings in particular periodShows earnings in particular periodEarnings on the Balance Sheet = Net income Earnings on the Balance Sheet = Net income

year-to dateyear-to dateDebits and credits to revenue affect incomeDebits and credits to revenue affect incomePrevious Year’s EarningsPrevious Year’s EarningsCurrent Year’s Earnings Current Year’s Earnings


JournalJournalLists by date of all transactionsLists by date of all transactionsPrimary RecordPrimary RecordEnsures record of all transactionsEnsures record of all transactions Includes: date, who involved, if $ received, Includes: date, who involved, if $ received,

paid or earned and activity that resulted in the paid or earned and activity that resulted in the transactiontransaction


The LedgerThe LedgerDetailed record of one account I.e. A/RDetailed record of one account I.e. A/R

PostingPostingTransferring from the Journal to ledgerTransferring from the Journal to ledgerCompare balances of ledger Compare balances of ledger

Trial BalanceTrial BalanceWork-sheetWork-sheet


Income StatementIncome StatementRevenues, Expenses and IncomeRevenues, Expenses and IncomeCategorized by the type of goods or services Categorized by the type of goods or services

providedprovidedOperating ExpensesOperating ExpensesAdministrative ExpensesAdministrative Expenses

Determine income on income statementDetermine income on income statementAdd to earnings section should make balance Add to earnings section should make balance

sheet balancesheet balance


Adjusting EntriesAdjusting EntriesNeeded to comply with Accrual methodNeeded to comply with Accrual methodHelps to match revenues and expensesHelps to match revenues and expensesShould try to match revenues and expenses Should try to match revenues and expenses

to the same accounting periodto the same accounting periodEx: End of year statements have not come in; Ex: End of year statements have not come in;

must close out booksmust close out books


Prepaid ExpensesPrepaid ExpensesAssetsAssetsBecome expenses over timeBecome expenses over time Insurance policyInsurance policyShould cost evenly across the whole yearShould cost evenly across the whole year

SuppliesSuppliesMatching?Matching?Ending Inventory – Beginning InventoryEnding Inventory – Beginning Inventory


Bad DebtBad DebtSet-up account for Allowance for Doubtful Set-up account for Allowance for Doubtful

Accounts Accounts Is subtracted from A/RIs subtracted from A/R

DepreciationDepreciationExpense allocated over the life of the assetExpense allocated over the life of the assetLike using up inventoryLike using up inventory


The MACRS Depreciation SystemThe MACRS Depreciation SystemModified Acceleration Cost Recovery SystemModified Acceleration Cost Recovery SystemAssigns specific number of years depending Assigns specific number of years depending

on the type of asseton the type of assetHas specific guidelines pertaining to each Has specific guidelines pertaining to each

type of assettype of assetACRS Asset Cost Recovery SystemACRS Asset Cost Recovery System

Old system Old system

Expensing EquipmentExpensing EquipmentAllowed 24,000 in year of purchaseAllowed 24,000 in year of purchaseThis is an alternative to depreciating itThis is an alternative to depreciating itDoes not benefit large purchasesDoes not benefit large purchasesDoes benefit smaller purchasesDoes benefit smaller purchases Improves cash flow by tax deductionImproves cash flow by tax deduction



AmortizationAmortization What is it?What is it? Refers to intangible assetsRefers to intangible assets Same as straight line depreciationSame as straight line depreciation Equal amounts over life of intangible assetEqual amounts over life of intangible asset Most are done over 15 yearsMost are done over 15 years Some exceptions – computer software 36 monthsSome exceptions – computer software 36 months Start-up costs and organization costs 60 monthsStart-up costs and organization costs 60 months


Accrued ExpensesAccrued ExpensesHave incurred, not received a bill or invoiceHave incurred, not received a bill or invoiceUse adjusting entries to record unpaidUse adjusting entries to record unpaidCan use reversing entry to account for thisCan use reversing entry to account for thisYou reverse the adjusting entry and enter the You reverse the adjusting entry and enter the

expense as if the adjusting entry was never expense as if the adjusting entry was never mademade

Accrued Revenues work same way Accrued Revenues work same way


Closing the booksClosing the books All revenue and expense accounts must = ZeroAll revenue and expense accounts must = Zero So new accounting period does not reflect any So new accounting period does not reflect any

revenues or expenses from last periodrevenues or expenses from last period This is done by a lengthy journal entryThis is done by a lengthy journal entry The balance is retained in Previous Year’s Earnings The balance is retained in Previous Year’s Earnings

account i.e. Retained earnings account i.e. Retained earnings

Opening the BooksOpening the Books Asset, liabilities, and OE are same as previous Asset, liabilities, and OE are same as previous

balance Not Revenue or Expensebalance Not Revenue or Expense


Differences in OrganizationsDifferences in OrganizationsPartnerships will have separate accounts for Partnerships will have separate accounts for

their initial depositstheir initial depositsOwners equity is Stockholders Equity for Owners equity is Stockholders Equity for

CorporationCorporationPreferred StockPreferred StockCommon StockCommon Stock


Subsidiary LedgerSubsidiary LedgerAccount for each customer, supplier, Account for each customer, supplier,

employee, etc.employee, etc.Keeps main ledger unclutteredKeeps main ledger unclutteredKeeps detailed info on accountsKeeps detailed info on accounts

When paidWhen paidHow PaidHow PaidHow much paidHow much paidStill outstandingStill outstanding


PayrollPayrollDetermine gross earnings for pay periodDetermine gross earnings for pay periodDetermine employee deductionsDetermine employee deductionsCalculate employer’s association expensesCalculate employer’s association expensesUpdate employee payroll recordsUpdate employee payroll recordsCreate Journal entriesCreate Journal entriesRemit funds to relevant government agenciesRemit funds to relevant government agencies


Determining Gross EarningsDetermining Gross EarningsRegular PayRegular PayOvertime PayOvertime PaySalarySalaryTipsTipsCommissionsCommissionsTaxable BenefitsTaxable BenefitsVacation PayVacation Pay


Employee DeductionsEmployee Deductions FITFIT SITSIT Social Security Tax (OASDI)Social Security Tax (OASDI) Medicare Tax (HI)Medicare Tax (HI) SUTASUTA SDISDI LocalLocal UnionUnion MedicalMedical DentalDental


SUTASUTA ““The Florida SUTA unemployment insurance The Florida SUTA unemployment insurance

tax applies to the first $8000 of wages. The tax applies to the first $8000 of wages. The 2005 rate for a new company is 2.7%. After 2005 rate for a new company is 2.7%. After that the rate can vary between .1% and 5.4% that the rate can vary between .1% and 5.4% depending on payroll totals and the number of depending on payroll totals and the number of UI claims.”UI claims.”


Remitting FundsRemitting Funds IRSIRS

Send check for total amount FIT an Medicare, Send check for total amount FIT an Medicare, accounted for in journal entryaccounted for in journal entry

Must be accompanied by an explanation of checkMust be accompanied by an explanation of checkSeparate check for FUTASeparate check for FUTALook at the Circular E, Employer’s Tax GuideLook at the Circular E, Employer’s Tax GuideCan go to Can go to IRS web siteIRS web site


Inventory ownershipInventory ownershipFOBFOBFASFASCIFCIF

Inventory ControlInventory ControlFIFOFIFOLIFOLIFOAVG costAVG cost Item by ItemItem by Item


Maximizing Cash Flow\Maximizing Cash Flow\ Bill customers PromptlyBill customers Promptly Deposit cash dailyDeposit cash daily Keep close watch on credit customersKeep close watch on credit customers Add late charges Add late charges Pay bills just before due datePay bills just before due date Keep inventory lowKeep inventory low Look at slow moving inventory ItemsLook at slow moving inventory Items Consider leasingConsider leasing Control TaxesControl Taxes Money market accountsMoney market accounts

Documents

Chapter 3 Financial Management BCN 4753 Summer 2007