ENGM 661– Fall 2012

1. ENGM 661– Fall 2012 • Instructor:Paula Jensen • Phone: 394 – 1770 • E-mail: paula.jensen@sdsmt.edu • Office Hrs: • M, W: 1:30 -2:30 PM (CM 320) • T, Th 10:30-11:30 (IER) • F by appointment • Class website: • http://pjensen.sdsmt.edu

2. Syllabus

3. ENGM 661Engineering Economics for Managers Financial Statements

4. Learning Objectives • Understand the meaning and usefulness of the accounting equation • The kind of information recorded on each financial statement and the way the financial statements are related to each other. • Be able to do a break even analysis and separate fixed and variable costs.

5. History • Where did this accounting come from?? • Mesoopotamians 3000 BC • Clay tablets & taxes • “The Summa” written by Fra. Luca Pacioli in 1494(included illustrations by L. Da Vinci)\ • Venice • Double Entry System- Published did not invent • Best Seller of day. • Merchant and Friar

6. Industrial Revolution • Outside Investors started Audits in mid 19 century England • Auditors trained in England Came to US late 19th Century

7. US Accounting Profession • Early 1900s • Established Certification Laws • Standard Audit Procedures • 1932-1934 (post 1929 Crash) • American Institute of Certified Accountants • NYStock Exchange • Five Pricinples of Accounting

8. SEC • Securities and Exchange Commission • Established in 1933 with the Securities Act of 1933 • Objective: Securities Market Operates in a fair and orderly manner with their customers • Corporations make public all material information about themselves so that investors can make informed investment decisions.

9. Sarbanes–Oxley Act of 2002 - SOX • Reaction to: Enron, Tyco, Aldephia, Peregrine Systems, WorldCom. • It does not apply to privately held companies. • Auditor Independence • (New) Public Company Oversight Board & SEC • Criminal Penalties • Internal Control assessment • Enhanced financial disclosure.

10. Terms to define! • Bookkeeping accumulate the results of an entities financial activities • Financial Accounting external evaluation of financial statements of an entity • Managerial Accounting use of economic & financial information to plan and control activities of an entity • Cost Accounting determines product, process, or service costs; a subset of managerial accounting

11. Terms • Tax Accounting the preperation of income tax returns as a specialized field within accounting - tax planning • Auditing external review and evaluation of an entitys’s financial records and health internal audits government audits IRS audits

12. Functions of Accounting • Internal Control all measures used by an organization to guard against errors, waste and fraud • Audits of Financial Statements investigation of a company’s financial statements to determine the fairness of these statements • Annual Reports comparative financial statements enable user’s to identify trends in the company’s performance and financial position

13. Principles of Accounting • Principles of accounting dictate that financial statements must show • financial position at end of accounting period • earnings for the accounting period • cash flows during that period • investments by & distribution to owners

14. Transactions Approach • In recording economic activities, accountants focus on completed transactions - those that cause an immediate change in the financial resources or obligations of a company • purchasing raw materials • sales of finished goods • Strength - the reliability of the information that is recorded, based on past events, objectivity

15. Financial Statements • Balance Sheet financial position of a company indicating resources it owns, debts, and the amount of owner’s equity • Income Statement profitability of the business over the preceeding accounting period • Statement of Owner’s Equity explains changes in the amount of owner’s equity in the business • Statement of Cash Flows summarizes cash receipts and cash payments of business over the preceeding accounting period

16. Balance Sheet • Statement of financial position • does not show the current market value of an entity’s assests • Assets economic resources owned by a business and are expected to benefit future operations • cost principle • going concern • objectivity principle • stable dollar assumption Current Assets - convertible to cash within 1 yr.

17. Balance Sheet • Liabilities probable future sacrifices of economic benefits as result of current obligations Current Liabilities - must be paid within 1 yr. • Owner Equity ownership right of proprietors or stockholders Changes in OE by • investment by owner • earnings from profitable operation of business • withdrawals of cash of other assets • losses from business

18. Accounting Equation Owner Equity = Assets - Liabilities

19. Accounting Connections

20. Balance Sheet • Statement of financial position • does not show the current market value of an entity’s assests • Assets economic resources owned by a business and are expected to benefit future operations • cost principle • going concern • objectivity principle • stable dollar assumption Current Assets - convertible to cash within 1 yr.

21. Balance Sheet • Liabilities probable future sacrifices of economic benefits as result of current obligations Current Liabilities - must be paid within 1 yr. • Owner Equity ownership right of proprietors or stockholders Changes in OE by • investment by owner • earnings from profitable operation of business • withdrawals of cash of other assets • losses from business

22. Accounting Equation Owner Equity = Assets - Liabilities

24. Income Statement • Projects profit/loss of an entity over a period of time • Net Sales - gross sales less returns, defects, etc. • Cost-of-Goods sold - cost of raw material & direct labor • Selling, Gen, Admin - operating expenses of an entity which do not directly contribute to product (sales people, managers, ...) • Interest Expense - interest paid on long/short term debt. • Net Income/share - net income (after tax) divided by outstanding shares

26. Changes to Owner Equity • Begin Balance - last year’s ending balance • Paid-in Capital - sold 10,000 shares at $19 /share stock par value of $10 / share. common stock = 10,000 x $10 = $100,000 addition paid in =10,000 x ($19-$10) = $ 90,000 • Retained Earnings - cumulative net income which has been retained for business • Dividends - distribution of earnings to stockholders

27. Changes to Owner Equity Balance Sheet Income Statement Balance Sheet 8/31/96 Revenues 8/31/97 - Expenses Net Income Statement of OE A =L +OE Begin Balance Paid in capital changes Retained earnings + Net Income - Dividends Ending Balances A = L + OE

28. Retained (97) = Retained (96) + $18,000 = $93,900

30. Statement of Cash Flows • Identify the sources and use of cash during year • Operating Activities • net income $18,000 from income statement • depreciation expense $16,400 from balance sheet added back in because it is not an actual cash outlay

34. You Can Go Broke Making Money!

35. Financial Statement Analysis • Liquidity Measures • current ratio • quick ratio • working capital • Long Term Credit Risk • debt to assets ratio • debt to equity

36. Financial Statement Analysis • Profitability Measures • return on assets • return on equity • net profit margin • earnings per share • Activity Ratios • accounts receivable turnover • inventory turnover

37. = - WC Current Assets Current Liabilitie s = - 123 , 300 67 , 400 = 55 , 900 Liquidity • Working Capital

38. = - WC Current Assets Current Liabilitie s = - 123 , 300 67 , 400 = 55 , 900 Liquidity • Working Capital Q: Is $55,900 sufficient working capital to cover 2-3 months of expenses?

39. Current Assets = CR Current Liabilitie s 123 , 300 = 67 , 400 = 1 . 83 Liquidity • Current Ratio (Industry > 2.0)

40. - Current Assets Inventory = QR Current Liabilitie s - 123 , 300 54 , 200 = 67 , 400 = 1 . 03 Liquidity • Quick Ratio (Industry > 1.0)

41. Total Liabilitie s = DA Total Assets 193 , 200 = 387 , 100 = 0 . 50 Long Term Credit Risk • Debt to Assets (Industry < 33%)

42. Total Liabilitie s = DA Total Assets 193 , 200 = 387 , 100 = 0 . 50 Long Term Credit Risk • Debt to Assets (Industry < 33%) 1996 0.54

43. Total Liabilitie s = DE Owner ' s Equity 193 , 200 = 193 , 900 = 0 . 996 Long Term Credit Risk • Debt to Equity Ratio (Industry 33-50%)

44. Total Liabilitie s = DE Owner ' s Equity 193 , 200 = 193 , 900 = 0 . 996 Long Term Credit Risk • Debt to Equity Ratio (Industry 33-50%) 1996 1.182

45. Net Income = ROA Total Average Assets 18 , 000 = + 387 , 100 383 , 800 2 = 0 . 047 Profitability Measures • Return on Assets (Industry 8-10%)

46. Net Income = ROE Average Owner Equity 18 , 000 = + ( 193 , 900 175 , 900 ) / 2 = 0 . 097 Profitability Measures • Debt to Equity (Industry 12-15%)

47. Net Income = NPM Net Sales 18 , 000 = 574 , 800 = 0 . 031 Profitability Measures • Net Profit Margin (Industry 4-6%) (Industry Specific)

48. Net Income = EPS Common Shares Outs tan ding 18 , 000 = 1 , 000 = 18 Profitability Measures • Earnings per Share (Industry Specific)

49. Net Sales = ART Avg Accounts Re ceivable 574 , 800 = + ( 46 , 800 38 , 600 ) / 2 = 13 . 46 Activity Ratios • Accounts Receivable Turnover (Industry Specific)

50. Cost of Goods Sold = IT Average Inventory 428 , 300 = + ( 54 , 200 48 , 200 ) / 2 = 8 . 365 Activity Ratios • Inventory Turnover (Industry > 10)