Chapter 3 Financial Management BCN 4753 Summer 2007.
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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
Financial ManagementFinancial Management
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
Financial ManagementFinancial Management
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
Financial ManagementFinancial Management
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
Financial ManagementFinancial Management
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
Financial ManagementFinancial Management
Recording TransactionsRecording TransactionsExchange of valueExchange of valueSpecific accountsSpecific accountsMust be recorded according to GAAPMust be recorded according to GAAP
EXAMPLE:EXAMPLE:
Financial ManagementFinancial Management
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
Financial ManagementFinancial Management
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
Financial ManagementFinancial Management
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
Financial ManagementFinancial Management
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
Financial ManagementFinancial Management
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
Financial ManagementFinancial Management
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
Financial ManagementFinancial Management
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
Financial ManagementFinancial Management
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
Financial ManagementFinancial Management
Financial ManagementFinancial Management
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
Financial ManagementFinancial Management
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
Financial ManagementFinancial Management
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
Financial ManagementFinancial Management
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
Financial ManagementFinancial Management
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
Financial ManagementFinancial Management
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
Financial ManagementFinancial Management
Determining Gross EarningsDetermining Gross EarningsRegular PayRegular PayOvertime PayOvertime PaySalarySalaryTipsTipsCommissionsCommissionsTaxable BenefitsTaxable BenefitsVacation PayVacation Pay
Financial ManagementFinancial Management
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
Financial ManagementFinancial Management
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.”
Financial ManagementFinancial Management
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
Financial ManagementFinancial Management
Inventory ownershipInventory ownershipFOBFOBFASFASCIFCIF
Inventory ControlInventory ControlFIFOFIFOLIFOLIFOAVG costAVG cost Item by ItemItem by Item
Financial ManagementFinancial Management
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
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