Lonni Steven Wilson, Medaille College

chapter

2

Basic Financial Concepts

Key Chapter Objectives

• Distinguish between revenue and expenses.• Describe the difference between finance and

accounting.• Understand the objectives of an accounting

system.• Understand the basics of T-accounts and general

data-entry techniques.

Key Terms

revenues—Money coming in. Examples include tickets, broadcast contracts, concessions, and sponsorships.

expenses—Costs that are incurred. Examples included salaries, equipment, travel, rent, and insurance.

debt—Money owed to others.

Revenues and Expenses of a High School Athletic Program

REVENUES

• Local and city school taxes • Federal tax subsidies • State taxes • Participation fees • Donations • Booster clubs • Concession revenue • Attendance revenue

• Broadcasting revenue

• Advertising revenue • Fund-raising efforts

• Licensing revenue

• Sponsorship revenue

EXPENSES• Facility repair and maintenance

costs • Uniform and equipment costs • Travel and lodging costs • Insurance costs • Umpire costs • Utility costs • Salaries and benefits • Advertising costs • Promotional costs • Office supplies

Sources of Revenue and Expenses

The primary revenues in professional sport are derived from the following:

• Ticket sales• Broadcasting rights

Following are the primary expenses in professional sport:

• Salaries• Benefits

(continued)

Sources of Revenue and Expenses (continued)

Substantial revenue streams DO NOT necessarily indicate that a business is profitable. Why?

• Regardless of revenue, businesses must cover costs.

• Take, for example, the problems of Canadian NHL teams:– High taxes– Payment of players in American dollars– Lower value of the Canadian dollar

Financial Documents

Disclosure documents are required by federal regulators.

• 10-K (annual report)• 10-Q (quarterly report)

These are filed annually with the Securities and Exchange Commission (www.sec.gov).

Using the SEC Web Site

On this Web site (www.sec.gov) . . .

– Click on Search for Company Filings.

– Click on Companies & Other Filers.

– Type in the name of a company.

– You can access the company’s financial statements, read corporate objectives, and so on.

Types of Financial Statements

Budget: A road map or plan expressed in monetary terms that highlights all anticipated assets, debt, expenses, revenue, and net worth.

Income statement: A document that tracks a company’s revenue and expenses over any given period.

Balance sheet: A statement of financial condition prepared at the end of a set period of time that lists a company’s assets, liabilities, and owners’ equity.

Proper Documentation

• Proper documentation of revenues and expenses is crucial to a sport business’ ability to analyze and evaluate its performance.

• Record keeping is a tool; it should not be seen as an end in itself.

• Finance necessitates analyzing the financial feasibility of various projects based on the projected revenues to be gained, the expenses that will be incurred, and the availability of moneys to fund the project through to completion.

Financial Objectives

• Making the highest profit possible

• Keeping stockholders happy

• Returning the highest possible earnings to shareholders

• Increasing the value of stock

• Decreasing total debt

Key Term

accounting—The art of processing the revenue and expense numbers to develop appropriate reporting procedures upon which financial decisions are made.

Objective of Accounting

To provide information for• making decisions about the use of

limited resources,• effectively directing and controlling

human and material resources,• maintaining and reporting on

stewardship, and• contributing to the overall effectiveness

of the organization.

Facts about Accounting

• Accounting is performed by a controller who is responsible for documenting what happened, not what should have happened.

• Managerial accounting is a process utilized to develop financial forecasts and monitor various budgets and costing models (Spiro, 1996).

Key Terms

stock—Wealth in a variety of forms such as cash, assets, real estate, and accounts receivable (a balance sheet documents the value of a company at a specific point in time).

flow—Expenditures or receipts between two specific points in time (an income statement portrays the flow occurring in a company throughout a business year).

The T-System

Accountants have developed the T-system to document monetary transactions.

A company’s balance sheet provides the best example of the T-system.

Refer to figure 2.1 in the text.

Questions for In-Class Discussion

1. What is the difference between accounting and finance?

2. Why is accounting important for financial analysis?

3. What is the value of budgeting?

4. Develop a list of revenue and expense streams for a professional baseball team.