Chapter 3 Financial Management

1. Chapter 3 Financial Management BCN 4753 Summer 2007

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. Financial Management • Recording Transactions • Exchange of value • Specific accounts • Must be recorded according to GAAP EXAMPLE:

9. 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

10. 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

11. 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

12. 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

13. 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

14. Financial Management • Prepaid Expenses • Assets • Become expenses over time • Insurance policy • Should cost evenly across the whole year • Supplies • Matching? • Ending Inventory – Beginning Inventory

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. Financial Management • Determining Gross Earnings • Regular Pay • Overtime Pay • Salary • Tips • Commissions • Taxable Benefits • Vacation Pay

25. Financial Management • Employee Deductions • FIT • SIT • Social Security Tax (OASDI) • Medicare Tax (HI) • SUTA • SDI • Local • Union • Medical • Dental

26. 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.”

27. 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

28. Financial Management • Inventory ownership • FOB • FAS • CIF • Inventory Control • FIFO • LIFO • AVG cost • Item by Item

29. 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