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Accounting

Accounting. Leslie Lum. What’s Accounting?. Accounting is the language of business Allows us to look at a business and understand how it has done Makes everyone report by the same rules so that we know what we are looking at Follow generally accepted accounting principles

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Accounting

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  1. Accounting Leslie Lum

  2. What’s Accounting? • Accounting is the language of business • Allows us to look at a business and understand how it has done • Makes everyone report by the same rules so that we know what we are looking at • Follow generally accepted accounting principles • Rules set by Financial Accounting Standards Board

  3. Management Accounting • Within a company accounting allows a business to manage • Plan - Typically forecast profit and loss for the next five years • Budget - profit and loss for the next year • Track what was actually spent against the budget • Allows management to try several alternatives using numbers to see what will happen

  4. Everyone Should be a Management Accountant • Food $4,152 (Away $1762) • Alcoholic Beverages $284 • Housing $8,434 • Apparel $1,546 • Transportation $5,187 • Health Care $1,407 • Tobacco $261 • Insurance $346 • Pensions and SS $2,125 • Other $4,000

  5. Income Statement • Tells you what happened during the year • Sales or Revenues are what came in • Expenses are what went out • Profit or Net Income is what was left • The more sales, the better • The less expenses, the better • The more profit, the better

  6. How did Joe do this year? • What did he take in? • What did he spend? • What is his growth in revenues? • What is his growth in expenses? • What is his growth in profit?

  7. How does it translate to a company?

  8. Let’s Look at Nordstrom

  9. How did Nordstrom do? • What did Nordstrom take in? • What did Nordstrom spend? • What’s growth in revenues? • What’s growth in expenses? • What’s growth in profit?

  10. Balance Sheet • Let’s you know about financial health • Assets (Things the company owns) • Liabilities (things the company owes) • Equity or Net Worth (what’s owned free and clear)

  11. How’s Joe’s financial health? • What does he own? • Are his assets earning money for him? • What does Joe owe? • What is his net worth?

  12. How is Joe’s Net Worth compared to others?

  13. How does it translate to a company?

  14. Assets - What the company needs to do business • Cash - Money the company has • Accounts receivables - What customers owe • Inventories - Product waiting to be sold • Fixed Assets - Buildings, equipment, etc. the company owns

  15. Liabilities - What the company borrows to do business • Current liabilities • Accounts payable - what the company owes its vendors • Long Term liabilities - Long term debt

  16. Equity • What the shareholders own in the company • Any profits not given to the shareholders in cash is included

  17. Let’s analyze some retail apparel companies

  18. Analyzing the info • Calculating ratios helps you compare to other companies: • Growth rates in revenues and net income • Return on sales: Profit you make on every $1 of sales • Debt to equity: Is the company in too much debt?

  19. Financial Ratios • Valuation ratios tell you whether or not you’re getting a good deal. Price equity. • Financial strength ratios let you know the state of the company’s financial health. Total debt to equity. • Profitability ratios let you know how the company does on the bottom line. Return on sales. • Management effectiveness and efficiency ratios tell you how well management is doing. Return on equity.

  20. Valuation Ratios • Price equity is what you pay for every $1 of earnings. • All other factors being equal, lower valuation ratios tend to perform better.

  21. Profitability • Profitability ratios come in many levels. • Return on sales or net profit margin is the bottom line profitability picture. It tells you what you make for every dollar of sales. • The higher the better.

  22. Financial Health - Debt to Equity Ratio • Variety of ratios show whether the company is able to handle yearly obligations • Total Debt to Equity ratio gives overall financial health • The lower the debt to equity, the better

  23. Management Effectiveness - Return on Equity • Return on Equity let you know how much the company earns on its net worth or book value. • The higher the ratio the better.

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