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CHAPTER 8: Accounting

CHAPTER 8: Accounting. DECISION MAKING BY THE NUMBERS. Market Information. How can you tell how well you are doing? Measure individual transactions Put them all together – How much “stuff” (acquired wealth) do you have Where did it come from? (assets = liabilities + owners equity)

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CHAPTER 8: Accounting

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  1. CHAPTER 8: Accounting DECISION MAKING BY THE NUMBERS

  2. Market Information • How can you tell how well you are doing? • Measure individual transactions • Put them all together – • How much “stuff” (acquired wealth) do you have • Where did it come from? (assets = liabilities + owners equity) • How much new wealth are you creating with it?(revenue - expense = profit) • Goal of business: To create wealth • Competing for transactions in the market

  3. Financial statements: the main output of financial accounting • Financial accounting includes three basic financial statements: • Balance Sheet • assets: value of the stuff the you or the organization controls • liabilities: debt claims against the stuff • owners’ equity: owners’ claims against the stuff • Income Statement • revenues ($ coming in) • expenses ($ going out) • Statement of Cash Flows • Companies with more than $10 million in assets and a class of equity securities that is held by more than 500 owners must file annual and other periodic reports, regardless of whether the securities are publicly or privately traded. • The 10-K includes information such as company history, organizational structure, executive compensation, equity, subsidiaries, and audited financial statements, among other information. • Nike

  4. Let’s Look At It From a Personal Perspective • What are Your Personal Goals? • Do you use a personal budget? • How do you monitor your budget? • What software/tools do you use? • What type of costs do you categorize? • What short and long-term goals are you aiming for? • Is it evident in your budget? • How do you manage your finances for the future?

  5. Personal Financial Planning • Financial planning starts with outlined goals for companies and individuals. • If you want to have a million dollars by age 65. • If you save $286 per month at age 25, you will have a million dollars by age 65. • But, you would need to save $488 or $1,689 at ages 35 and 45 to reach that amount. • With an 8% return, planning to be a millionaire is very possible!

  6. Balance sheet: what we own and how we got it Balance Sheet – summarizes a firm’s or individuals financial position at a specific point in time. Liabilities – indicates what the firm owes to non-owners Assets – things of value that the firm owns Owner’s Equity – the claims owners have against their firm’s assets = +

  7. Stuff & claims against stuff Stuff • Checking $ 1,500 • Savings $ 2,000 Claims against stuff • Credit Card $ 500

  8. Stuff & claims against stuff Stuff • Checking $ 1,500 • Savings $ 2,000 • Car $23,000 Claims against stuff • Credit Card $ 500 • Dave (owner) $ 3,000 • Credit Union (loan) $20,000

  9. Stuff & claims against stuff Stuff • House $150,000 Claims against stuff • Bank (debt) $115,000 • Dave (owner) $ 35,000

  10. Stuff & claims against stuff • Stuff • Checking $ 1,500 • Savings $ 2,000 • Car $23,000 • Claims against stuff • Credit Card $ 500 • Dave (owner) $ 3,000 • Credit Union (loan) $20,000 Stuff • House $150,000 Claims against stuff • Bank (debt) $115,000 • Dave (owner) $ 35,000

  11. Snap shot: Personal Balance Sheet

  12. The income statement: how did we do? Income Statement – summarizes a firm’s or individuals operations over a given period of time in terms of profit and loss. Revenue– the increase in the amount of assets the firm earns Expenses – the cash the firm spends or other assets it uses to generate revenue Net Income – the profit or loss the firm earns - =

  13. OK… You Have a Paycheck Fed MED/EE is the employee (EE) Federal Medical Insurance Fed OASDI/EE is the employee Federal Old Age Survivors Disability tax

  14. w4 Fill Out Your W-4

  15. OK… You Have a Paycheck – Taxes and Deductions

  16. OK… You Have a Paycheck – Net Pay Calculation • Assumptions: • Salary - $45,000 • Paid Monthly - $3,750 • Single • 401K deduction - 5% • Employer match • United Way - $120/yr http://www.adp.com/tools-and-resources/calculators-and-tools/payroll-calculators/salary-paycheck-calculator.aspx

  17. Monthly Income Statement • Assumptions: • Salary - $45,000 • 30 Yr Mortgage 3.835% • Principal & Interest - $562 • Property Taxes - $150 • Homeowners Insurance - $67 • Auto Loan • 4 years • 1.9% interest

  18. Personal investing • What are your short-term and long-term goals? • Given your budget, how much are you able to invest? • How long can you leave your money invested? • How concerned are you about the tax implications of your investments? • How much tolerance do you have for risk? • DIVERSIFICATION

  19. Direct stock purchase plans • Many Corporations offer Direct Stock Purchase Plans • Purchase stock direct from company • Dividend Reinvestment Plans (DRIPS) allow current stockholders to reinvest dividends to purchase additional stock

  20. Strategies for investing in securities • Investing for Income • Market Timing • Value Investing • Investing for Growth • Buying and Holding

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