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Chapter 3 Financial Management BCN 4753 Summer 2007 Financial Reports Why is it important to be able to understand financial reports? Will help you as a manager to: Plan Control Organize Identify Errors Uncover omitted items Financial Management

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chapter 3 financial management

Chapter 3 Financial Management

BCN 4753 Summer 2007

financial reports
Financial Reports
  • Why is it important to be able to understand financial reports?
    • Will help you as a manager to:
      • Plan
      • Control
      • Organize
      • Identify Errors
      • Uncover omitted items
financial management
Financial Management
  • What is the difference between Accounting and bookkeeping?
    • Bookkeeping – recording of business and financial data in a certain manner, all records or specific projects
    • Accounting – design of the system of records, preparation of reports on the data
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Financial Management
  • Owned vs Owed
    • Assets vs Liabilities
      • Everything else is owner’s equity
  • Assets = Liabilities + Owners Equity
  • Assets go up then Liabilities + Equity must?
  • Go Up
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Financial Management
  • Changes in Equity
    • Investments or Withdrawals
    • Earnings or Losses
    • Changes in equity are listed separately under their own categories
  • Revenues Vs Expenses
    • Sales
    • Expenses are incurred to produce sales
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Financial Management
  • Accrual Method
    • Account for revenue and Expenses when earned or incurred
    • Accurately match earnings with the activity that generated them
  • Accounts
  • Debits vs Credits
    • Debit balance or Credit balance
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Financial Management
  • When do you get revenue?
    • Is recorded when customer takes ownership
    • Not when you are paid for it
    • So, revenue occurs when you complete the contract and bill the customer
    • Becomes an Account Receivable
  • When are expenses are recorded?
      • Time they are incurred
      • Or if they can be matched to certain revenues
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Financial Management
  • Recording Transactions
    • Exchange of value
    • Specific accounts
    • Must be recorded according to GAAP

EXAMPLE:

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Financial Management
  • Income Statement
    • Shows earnings in particular period
    • Earnings on the Balance Sheet = Net income year-to date
    • Debits and credits to revenue affect income
    • Previous Year’s Earnings
    • Current Year’s Earnings
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Financial Management
  • Journal
    • Lists by date of all transactions
    • Primary Record
    • Ensures record of all transactions
    • Includes: date, who involved, if $ received, paid or earned and activity that resulted in the transaction
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Financial Management
  • The Ledger
    • Detailed record of one account I.e. A/R
  • Posting
    • Transferring from the Journal to ledger
    • Compare balances of ledger
      • Trial Balance
      • Work-sheet
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Financial Management
  • Income Statement
    • Revenues, Expenses and Income
    • Categorized by the type of goods or services provided
      • Operating Expenses
      • Administrative Expenses
    • Determine income on income statement
      • Add to earnings section should make balance sheet balance
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Financial Management
  • Adjusting Entries
    • Needed to comply with Accrual method
    • Helps to match revenues and expenses
    • Should try to match revenues and expenses to the same accounting period
    • Ex: End of year statements have not come in; must close out books
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Financial Management
  • Prepaid Expenses
    • Assets
    • Become expenses over time
    • Insurance policy
    • Should cost evenly across the whole year
  • Supplies
    • Matching?
    • Ending Inventory – Beginning Inventory
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Financial Management
  • Bad Debt
    • Set-up account for Allowance for Doubtful Accounts
    • Is subtracted from A/R
  • Depreciation
    • Expense allocated over the life of the asset
    • Like using up inventory
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Financial Management
  • The MACRS Depreciation System
    • Modified Acceleration Cost Recovery System
    • Assigns specific number of years depending on the type of asset
    • Has specific guidelines pertaining to each type of asset
  • ACRS Asset Cost Recovery System
    • Old system
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Financial Management
  • Expensing Equipment
    • Allowed 24,000 in year of purchase
    • This is an alternative to depreciating it
    • Does not benefit large purchases
    • Does benefit smaller purchases
    • Improves cash flow by tax deduction
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Financial Management
  • Amortization
    • What is it?
    • Refers to intangible assets
    • Same as straight line depreciation
    • Equal amounts over life of intangible asset
    • Most are done over 15 years
    • Some exceptions – computer software 36 months
    • Start-up costs and organization costs 60 months
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Financial Management
  • Accrued Expenses
    • Have incurred, not received a bill or invoice
    • Use adjusting entries to record unpaid
    • Can use reversing entry to account for this
    • You reverse the adjusting entry and enter the expense as if the adjusting entry was never made
    • Accrued Revenues work same way
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Financial Management
  • Closing the books
    • All revenue and expense accounts must = Zero
    • So new accounting period does not reflect any revenues or expenses from last period
    • This is done by a lengthy journal entry
    • The balance is retained in Previous Year’s Earnings account i.e. Retained earnings
  • Opening the Books
    • Asset, liabilities, and OE are same as previous balance Not Revenue or Expense
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Financial Management
  • Differences in Organizations
    • Partnerships will have separate accounts for their initial deposits
    • Owners equity is Stockholders Equity for Corporation
    • Preferred Stock
    • Common Stock
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Financial Management
  • Subsidiary Ledger
    • Account for each customer, supplier, employee, etc.
    • Keeps main ledger uncluttered
    • Keeps detailed info on accounts
      • When paid
      • How Paid
      • How much paid
      • Still outstanding
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Financial Management
  • Payroll
    • Determine gross earnings for pay period
    • Determine employee deductions
    • Calculate employer’s association expenses
    • Update employee payroll records
    • Create Journal entries
    • Remit funds to relevant government agencies
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Financial Management
  • Determining Gross Earnings
    • Regular Pay
    • Overtime Pay
    • Salary
    • Tips
    • Commissions
    • Taxable Benefits
    • Vacation Pay
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Financial Management
  • Employee Deductions
    • FIT
    • SIT
    • Social Security Tax (OASDI)
    • Medicare Tax (HI)
    • SUTA
    • SDI
    • Local
    • Union
    • Medical
    • Dental
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Financial Management
  • SUTA
    • “The Florida SUTA unemployment insurance tax applies to the first $8000 of wages. The 2005 rate for a new company is 2.7%. After that the rate can vary between .1% and 5.4% depending on payroll totals and the number of UI claims.”
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Financial Management
  • Remitting Funds
    • IRS
      • Send check for total amount FIT an Medicare, accounted for in journal entry
      • Must be accompanied by an explanation of check
      • Separate check for FUTA
      • Look at the Circular E, Employer’s Tax Guide
      • Can go to IRS web site
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Financial Management
  • Inventory ownership
    • FOB
    • FAS
    • CIF
  • Inventory Control
    • FIFO
    • LIFO
    • AVG cost
    • Item by Item
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Financial Management
  • Maximizing Cash Flow\
    • Bill customers Promptly
    • Deposit cash daily
    • Keep close watch on credit customers
    • Add late charges
    • Pay bills just before due date
    • Keep inventory low
    • Look at slow moving inventory Items
    • Consider leasing
    • Control Taxes
    • Money market accounts