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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

BCN 4753 Summer 2007

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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

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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


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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