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“What I wish I knew about Accounting, when I was 20” & Case Method Overview. April 8 , 2014. Why is accounting important?. Insight into a company’s financial health Current and potential investors rely on financial statements to make decisions Common base metrics for comparison

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what i wish i knew about accounting when i was 20 case method overview

“What I wish I knew about Accounting, when I was 20” & Case Method Overview

April 8, 2014

E140A Accounting Workshop

why is accounting important
Why is accounting important?
  • Insight into a company’s financial health
  • Current and potential investors rely on financial statements to make decisions
  • Common base metrics for comparison
    • Compare to companies across industries
    • Compare financial ratios to determine liquidity, profitability, growth metrics
  • Helps executives plan ahead (cash burn rate) and build a narrative around numbers.

E140A Accounting Workshop

key accounting concepts
Key Accounting Concepts
  • Financial vs. Managerial Accounting
    • Financial Accounting focuses on external reporting
    • Managerial Accounting internal operations & budgeting
  • For Profit, Not for Profit, Governmental Accounting
    • Generally Accepted Accounting Principles (GAAP)
  • Accrual vs. Cash Basis
    • The timing of when revenue and expenses are reported.
    • Cash Basis: small companies and personal finances
    • Accrual Basis: large companies

E140A Accounting Workshop

basic financial statements
Basic Financial Statements

Income statement

Cash flow statement

Balance sheet

E140A Accounting Workshop

balance sheet basic principles
Balance Sheet: Basic Principles

How the ownership of assets was financed (by third parties or by the owners)

What the company owns (used to generate income)

Assets = Liabilities + Equity

E140A Accounting Workshop

balance sheet

Assets are economic resources

  • An asset has the ability to provide future benefits to the company
  • Liabilities are creditors’ claims on the assets of a firm. The claims result from benefits the firm has previously received from the creditors
  • Shareholders’ equity is the owners’ claim
  • Contributed capital (paid-in capital): the amount invested
  • Retained earnings: increase in equity due to operations
Balance Sheet

Balance Sheet of XYZ Corp. - 31 December of 2008 (in thousand $)

Accounts Payable

Salaries Payable

Accrued Expenses

Income Taxes Payable

Short Term debt

Cash

Accounts Receivable

Inventories

Current Liabilities

(payable in less than a year)

Long-Term Liabilities(bonds issued, bank loans)

Shareholders’ Equity

Current Assets

(liquid in less than a year)

Fixed Assets

Other Assets

Property, plant and equipment(less depreciation)

Intangibles(less depreciation)

Investment Securities

Common Stock

Additional Paid-in Capital

Retained Earnings

Total Assets =

Total Liabilities + Shareholders’ Equity

A snapshot of the investing and financing activities of a firm

E140A Accounting Workshop

what is stanford s biggest asset
What is Stanford’s biggest Asset?
  • Investments
  • Works of Art
  • Student Loans
  • Plant & Buildings
  • The Students

E140A Accounting Workshop

balance sheets comparison

Wal-Mart

HP

Google

Balance Sheets Comparison

($B)

($B)

($B)

6.6

5.9

40.7

-

1.8

55.0

112.3

20.7

5.5

193.4

55.9

6.3

-

62.3

47.1

12.3

121.7

71.3

193.4

8.0

21.4

7.5

-

14.1

51.0

12.3

55.5

10.8

129.5

34.3

8.1

8.1

50.4

22.6

17.5

90.9

38.6

129.5

10.0

6.4

-

34.6

1.7

52.8

9.6

8.9

0.8

72.6

7.1

1.2

0.5

8.9

3.0

2.6

14.4

58.1

72.6

Assets

Cash . . . . . . . . . . . . . . . . . . . . . . . . . .

Accounts Receivable . . . . . . . . . . . . . .

Inventories . . . . . . . . . . . . . . . . . . . . . .

Short Term Investments . . . . . . . . . . .

Other Current Assets . . . . . . . . . . . . . .

Total Current Assets: . . . . . . . . . . . . . . . . . .

Property, Plant and Equipment . . . . . .

Intangible Assets . . . . . . . . . . . . . . . . .

Other Long Term Assets . . . . . . . . . . .

Total Assets: . . . . . . . . . . . . . . . . . . . . . . . .

Liabilities and Shareholders’ Equity

Accounts Payable . . . . . . . . . . . . . . . . .

Notes Payable . . . . . . . . . . . . . . . . . . .

Other Current Liabilities . . . . . . . . . . . . .

Total Current Liabilities . . . . . . . . . . . . . . . .

Long Term Debt . . . . . . . . . . . . . . . . . . .

Other Noncurrent Liabilities . . . . . . . . . .

Total Liabilities . . . . . . . . . . . . . . . . . . . . . . .

Shareholders’ Equity . . . . . . . . . . . . . . . . . .

Total Liabilities and Shareholders’ Equity . .

E140A Accounting Workshop

evolution of a balance sheet
Evolution of a Balance Sheet
  • Liabilities and Equity
  • Contributed Capital …… $10,000
      • Total…………………… $10,000
  • Assets
  • Cash……………………… $10,000
      • Total…………………… $10,000

$10,000

$10,000

Ann’s Mini Mart

September 1, 2013

E140A Accounting Workshop

evolution of a balance sheet1
Evolution of a Balance Sheet
  • Liabilities and Equity
  • Note Payable ……...………$ 5,000
  • Paid-in Capital…..……… $10,000
      • Total…………………… $15,000
  • Assets
      • Cash………………………$15,000
      • Total…………………… $15,000

$5,000

$5,000

Ann’s Mini Mart

September 2, 2013

E140A Accounting Workshop

evolution of a balance sheet2
Evolution of a Balance Sheet
  • Liabilities and Equity
  • Note Payable ……...………$5,000
  • Paid-in Capital…..……… $10,000
      • Total…………………… $15,000
  • Assets
  • Cash……………………… $13,000
  • Inventory………………….. $2,000
      • Total…………………… $15,000

$2,000

$2,000

Ann’s Mini Mart

September 3, 2013

E140A Accounting Workshop

evolution of a balance sheet3
Evolution of a Balance Sheet
  • Liabilities and Equity
  • Note Payable ……...………$5,000
  • Paid-in Capital…..……… $10,000
  • Retained Earnings…………. $400
      • Total…………………… $15,400
  • Assets
  • Cash……………………… $14,100
  • Inventory………………….. $1,300
      • Total…………………… $15,400

$700

$1,100

$400

Ann’s Mini Mart

September 4, 2013

E140A Accounting Workshop

evolution of a balance sheet4
Evolution of a Balance Sheet
  • Liabilities and Equity
  • Accounts Payable…………$2,000
  • Note Payable ……...………$5,000
  • Paid-in Capital…..……… $10,000
  • Retained Earnings…………. $400
      • Total…………………… $17,400
  • Assets
  • Cash……………………… $14,100
  • Inventory………………….. $3,300
      • Total…………………… $17,400

$2,000

$2,000

Ann’s Mini Mart

September 5, 2013

E140A Accounting Workshop

evolution of a balance sheet5
Evolution of a Balance Sheet
  • Liabilities and Equity
  • Accounts Payable…………$2,000
  • Note Payable ……...………$5,000
  • Mortgage Payable………....$8,000
  • Paid-in Capital…..………. $10,000
  • Retained Earnings…………. $400
      • Total…………………… $25,400
  • Assets
  • Cash……………………… $12,100
  • Inventory………………….. $3,300
  • Land………………………. $10,000
      • Total…………………… $25,400

$8,000

$2,000

$10,000

Ann’s Mini Mart

September 6, 2013

E140A Accounting Workshop

balance sheet analysis
Balance Sheet Analysis
  • Liquidity Ratios: Measures of the ability to meet short term financial obligations
    • Current Ratio = Current Assets / Current Liabilities
    • Quick Ratio= (Current Assets – Inventory) / Current Liabilities
    • Debt to Assets = Total Debt/ Total Assets
  • OperationalEfficiencyMeasures
    • InventoryTurnover = Costof Sales per year / CurrentInventory
    • ReceivableTurnover= AccountsReceivable / Sales
    • AccountsPayableCollectionPeriod= AccountsPayable / Costof Sales
  • Working Capital: Cash needed to sustain business activity through the cash flow cycle while paying the company’s bills and employee’s salaries.

= Current Assets - Current Liabilities

E140A Accounting Workshop

balance sheet interactive
Balance Sheet Interactive

http://www.sec.gov/edgar/searchedgar/companysearch.html

Find 3 interesting trends that you would like to share with the class regarding the company’s balance sheet…

E140A Accounting Workshop

balance sheet and income statement
Balance Sheet and Income Statement

Assets = Liabilities + Equity

Contributed Capital

Assets = Liabilities

+

+

Retained Earnings

Contributed Capital

Retained Earnings, Beginning of Period

Net Income

for Period

Dividends for Period

Assets = Liabilities

+

+

+

-

Contributed Capital

Retained Earnings, Beginning of Period

Revenues - Expenses for Period

Dividends for Period

Assets = Liabilities

+

+

+

-

E140A Accounting Workshop

slide18

What is Stanford’s biggest source of revenue?

  • Student Tuition Income
  • Investment Income
  • Sponsored Research
  • Health Care Services (Stanford Hospital)
  • Gift Revenue

E140A Accounting Workshop

income statement

Income Statement of Bike Corp. – year 2013 $M % Rev.

  • + Revenues or Sales
  • - Cost of Revenue (product cost or COGS)
  • = Gross Profit
    • Sales and Marketing
    • General and Administrative
    • Research & Development
    • Depreciation and Amortization
  • = Operating Income (EBIT)
  • + Interest Income (expense) Net
  • = Net Income before Taxes
  • - Income Tax Provision
  • - Extraordinary Items
  • = Net Income
Income Statement

Reportstheeconomicresultsof a company over a time period. It shows thederivationofearningsorlosses.

100%

76%

24%

7%

5%

127.2

97.5

29.7

13.5

3.3

1.6

-

9.7

(0.7)

9.0

1.9

-

7.1

Net Income = Revenues– Expenses (Rev>Exp)

Net Loss = Revenues – Expenses (Rev<Exp)

E140A Accounting Workshop

income statement comparison

HP

Google

Wal-Mart

Income Statement Comparison

($B)

($B)

($B)

127.2

97.5

29.7

13.5

3.3

1.6

9.7

(0.7)

-

9.0

1.9

7.1

37.9

13.2

24.7

7.8

5.2

-

11.7

0.6

-

12.3

2.6

9.7

447.0

335.1

111.8

85.3

-

-

26.6

0.1

(2.3)

24.4

7.9

15.7

SG&A = Selling, General and Administrative Expenses

+ Revenues or Sales

- Cost of Revenue (COGS)

= Gross Profit

  • SG&A*
  • Research & Development
  • Depreciation and Amortization

= Operating Income

+ Other Income / Expenses Net

+ Interest Income (expense) Net

= Net Income before Taxes

- Income Tax Provision

= Net Income

E140A Accounting Workshop

income statement analysis
Income Statement Analysis
  • Other Important Measures:
    • Earnings Per Common Share (EPS) = Net Income / Common Shares
    • Price Earnings Ratio (P/E) = Market Price Per Share / Earnings Per Share
  • Some Profitability Measures:
    • Gross Margin =Gross Profit / Sales
    • Operating Margin = Operating Income / Sales
    • Profit Margin = Net Income / Sales

E140A Accounting Workshop

slide22

Google

($B)

Wal-Mart

($B)

Income Statement Comparison

37.9

13.2

24.7

7.8

5.2

-

11.7

0.6

-

12.3

2.6

-

9.7

447.0

335.1

111.8

85.3

-

-

26.6

0.1

(2.3)

24.4

7.9

-

15.7

Gross Margin:

Google: 65%

Wal-Mart: 25%

Operating Margin:

Google: 31%

Wal-Mart: 6%

SG&A = Selling, General and Administrative Expenses

+ Revenues

- Cost of Revenue (COGS)

= Gross Profit

  • SG&A*
  • Research & Development
  • Depreciation and Amortization

= Operating Income

+ Other Income / Expenses Net

+ Interest Income (expense) Net

= Net Income before Taxes

- Income Tax Provision

- Extraordinary Items

= Net Income

E140A Accounting Workshop

income statement interactive
Income Statement Interactive

finance.yahoo.com

Find 3 interesting trends that you would like to share with the class regarding the company’s income statement…

E140A Accounting Workshop

cash flow statement
Cash Flow Statement
  • Net Income vs. Cash:
    • Net Income = Revenues – Expenses (Accrual Basis)
    • Cash = (Cash Basis)
  • Timing: Revenues and costs are not necessarily recognized when cash is transacted (e.g. accounts receivable, depreciation etc.)
  • Three components: Operating, Financing, Investing Activities
    • Operating – cash spent to generate company sales/revenue
    • Financing – mostly cash inflows
      • includes cash received through debt or equity financings
      • cash spent on repayment of such obligations
    • Investing activities: mostly cash outflows (includes cash spent on acquiring company assets (equipment, buildings, etc)

E140A Accounting Workshop

cash burn rate
Cash Burn Rate
  • Burn Rate –
    • Measure of (negative) cash spent per month
    • The rate at which a new company uses it’s venture capital to finance it’s operations, before generating positive cash flow.
    • Ex. Period 6 months; Revenues =$100K, Expenses $220K; Capital Remaining $200K
      • What is the cash burn rate?
      • How many month’s of runway?

E140A Accounting Workshop

accounting from startup to ipo
Accounting – from Startup to IPO

Start-up

IPO

  • Higher emphasis on Financial Statements, internal controls, SOX compliance, S-1
    • Need A/R and A/P clerks, Tax accountants, Internal/External auditors
  • Looking at how to scale & remain profitable.
  • Cash still very important, but now you are thinking of how to re-invest it in the future of the business.
  • Rapid growth = many challenges with cash
  • Looking at company liquidity and maintaining a steady capital structure
  • Still need Financial Statements
    • Familiarity with Investors
    • If you need to get credit, most Banks or Merchants will not transact unless they think a company has cash
  • Higher emphasis on cash flow, burn rate, Income Statement (P&L) to stay solvent
  • Keeping good financial records
    • Equity agreements, tax filings, bank statements, contracts, stock options
  • Set internal controls to avoid embezzlement of funds and unaccountability in spending

E140A Accounting Workshop