Week 10
DIFD 321
Accounting & Finance
The action or business of promoting and selling products or services,
including market research and advertising.
WHAT IS MARKETING?
A Good Brand Answers:
Who Are
We?
Why
Should
You Care?
MY
BRAND
How We
Do It?
What We
Do?
Buying Happiness
• http://www.ted.com/talks/michael_norton_how_to_
buy_happiness.html
GAAP
• Generally Accepted Accounting
Principles
• The common set of accounting principles,
standards and procedures that companies use
to compile their financial statements. GAAP is a
combination of authoritative standards (set by
policy boards) and simply the commonly
accepted ways of recording and reporting
accounting information.
Basic Financial Statements
• Defined by GAAP
•
•
•
•
Balance Sheet
The Income Statement and Profitability
The Statement of Cash Flows
Equity Statement
Balance Sheet
• Balance Sheet = a summary of a person's or
organization's balances as of a specific date. It
is a snapshot of an organizations net worth
Owner’s Equity
• Assets – Liabilities = Owner’s Equity
• Equity = the monetary value of a
property or business beyond any
amounts owed on it in mortgages,
claims, liens, etc.
Assets
• Assets = items of ownership
convertible into cash; total
resources of a person or business,
as cash, notes and accounts
receivable, securities, inventories,
goodwill, fixtures, machinery, or
real estate
Liabilities
• Liabilities = moneys owed; debts or
pecuniary obligations
The Income Statement and
Profitability
• The income statement and profitability = a
report that shows the company’s
profitability.
• The first sections shows gross profit (sales
– cost of goods sold) and other incomes.
• The second section shows expenses.
Expenses are then deducted from gross
profits (income), along with other incomes
to get net profit before taxes. If the total
expenses exceed total income, then the
end result would be a net loss.
The Income Statement and
Profitability
Your Business Name
Income Statement
For Month Ended June 30, 2010
Revenues
Net sales
$5,000.00
Rental revenue
1,000.00
Total revenues
$6,000.00
Expenses
Wages expense
Cost of goods sold
$1,500.00
1,000.00
Utilities expense
250.00
Supplies expense
250.00
Total operating expenses
Net income/loss
3,000.00
$3,000.00
The Statement of Cash Flows
• The Statement of Cash Flows =
allows a business to stop in time and
take a snapshot of the company’s
ability to generate cash.
Statement of Cash Flow - Simple Example
for the period 01/01/2006 to 12/31/2006
Cash flow from operations
$4,000
Cash flow from investing
$(1,000)
Cash flow from financing
$(2,000)
Net increase (decrease) in
cash
$1,000
Equity Statement
• Equity Statement = explains the
changes in a company's retained
earnings over the reporting period.
It breaks down changes affecting
the account, such as profits or
losses from operations.
Equity Statement
Your Company Name
Statement of Owner's Equity
For Month Ended June 30, 2008
Joe Smith, capital, June 1, 2008
$10,000.00
Investment during the month
1,000.00
Net income
3,000.00
14,000.00
Withdrawals during the month
Joe Smith, capital, June 30, 2008
2,000.00
$12,000.00
FREE
• http://www.ted.com/talks/chris
_anderson_of_wired_on_tech_s
_long_tail.html?quote=1547
• http://www.youtube.com/watc
h?v=y-n-uw5GE7k
End of Class
• We’ll pick up with the rest of these slides next
time.
Break-Even Analysis
• Break-even analysis = A calculation
of the approximate sales volume
required to just cover costs.
• Breakeven Point = Fixed Costs/(Unit
Selling Price - Variable Costs)
• Profit = Unit Selling Price - Variable
Costs
• Contribution Margin = (Unit Selling
Price - Variable Costs) / Unit Selling
Price
Break-Even Point
• Fixed costs: These are costs that are the same
regardless of how many items you sell. All start-up
costs, such as rent, insurance and computers, are
considered fixed costs since you have to make these
outlays before you sell your first item.
• Variable costs: These are recurring costs that you
absorb with each unit you sell. For example, if you
were operating a greeting card store where you had
to buy greeting cards from a stationary company for
$1 each, then that dollar represents a variable cost.
As your business and sales grow, you can begin
appropriating labor and other items as variable
costs if it makes sense for your industry.
Financial Ratios
•
•
•
•
•
•
•
•
Current Ratio
Quick Ratio
Debt to Equity Ratio
EBIT/Interest Ratio
Gross Profit Margin
Net Profit Margin
Return on Assets
Return on Equity
Current Ratio
Current Ratio: The current ratio gauges how capable a
business is in paying current liabilities by using current assets
only. Current ratio is also called the working capital ratio. A
general rule of thumb for the current ratio is 2 to 1 (or 2:1 or
2/1). However, an industry average may be a better standard
than this rule of thumb. The actual quality and management of
assets must also be considered.
The formula is:
Total Current Assets
_____________________
Total Current Liabilities
Quick Ratio
Quick Ratio: Quick ratio focuses on immediate liquidity (i.e.,
cash, accounts receivable, etc.) but specifically ignores
inventory. Also called the acid test ratio, it indicates the extent
to which you could pay current liabilities without relying on the
sale of inventory. Quick assets are highly liquid and are
immediately convertible to cash. A general rule of thumb states
that the ratio should be 1 to 1 (or 1:1 or 1/1).
The formula is:
Cash + Accounts Receivable
( + any other quick assets )
_____________________
Current Liabilities
Debt to Equity Ratio
Debt to Equity: Debt to equity is also called debt to net worth.
It quantifies the relationship between the capital invested by
owners and investors and the funds provided by creditors. The
higher the ratio, the greater the risk to a current or future
creditor. A lower ratio means your client's company is more
financially stable and is probably in a better position to borrow
now and in the future. However, an extremely low ratio may
indicate that your client is too conservative and is not letting the
business realize its potential.
The formula is:
Total Liabilities (or Debt)
_____________________
Net Worth (or Total Equity)
EBIT/Interest Ratio
EBIT/Interest: This assesses the company's ability to meet
interest payments. It also evaluates the capacity to take on
more debt. The higher the ratio, the greater the company's
ability to make its interest payments or perhaps take on more
debt.
The formula is:
Earnings Before Interest & Taxes
________________________
Interest Charges
Gross Profit Margin
Gross Profit Margin: Gross profit margin indicates how well
the company can generate a return at the gross profit level.
It addresses three areas -- inventory control, pricing and
production efficiency.
The formula is:
Gross Profit
____________
Total Sales
Net Profit Margin
Net Profit Margin: Net profit margin shows how much net
profit is derived from every dollar of total sales. It indicates
how well the business has managed its operating expenses.
It also can indicate whether the business is generating
enough sales volume to cover minimum fixed costs and still
leave an acceptable profit.
The formula is:
Net Profit
_____________
Total Sales
Return on Assets
Return on Assets: This evaluates how effectively the
company employs its assets to generate a return. It
measures efficiency.
The formula is:
Net Profit Before Taxes
_____________________
Total Assets
Return on Equity
Return on Equity: This is also called return on investment
(ROI). It determines the rate of return on the invested capital. It
is used to compare investment in the company against other
investment opportunities, such as stocks, real estate, savings,
etc. There should be a direct relationship between ROI and
risk (i.e., the greater the risk, the higher the return).
The formula is:
Net Profit Before Taxes
_____________________
Net Worth
Home Work
• Create a fake business and using
MS Word or Excel make a balance
sheet, income statement,
statement of cash flows, and equity
statement. Then email me the 4
statements before next class along
with a short description of your
make believe company.
Next Time
• More Finance and Accounting Stuff.