Foundations of Business Thought

Collection
Analysis Communication
Initial Records
• Sales invoices
• Cash receipts
• Purchases
• Credit sales
Intermediate Records
• Cash
• Accounts / receivable
• Accounts / payable
Financial Records
• Cash
• Accounts / receivable
• Accounts / payable
• Inventory
Financial Statements
• Balance sheet
• Income statement
• Statement of cash
Flow
Foundations of Business Thought

Transaction is recorded (a sale, salary earned, purchase goods)
Financial statements for decision makers inside and outside the company are prepared (balance sheet, income statement, statement of cash flow)
Transactions are posted to a journal as they occur
Internal reports for decision makers are prepared (sales, debt, inventory)
Journal entries are posted to ledger by type of account and balances are totaled
Foundations of Business Thought

Current Investors
Potential Investors
Creditors
Managers
Unions
Government
Agencies
Evaluate income and cash flow generated by the company; evaluate management's performance.
Estimate the company’s future growth potential and the risk of investing in the company.
Evaluate prospective borrower’s ability to repay principal and interest.
Determine allocation of resources; evaluate management’s performance; compare actual results with budgeted plans.
Review company’s financial condition in order to negotiate benefits and wages.
Establish the company’s tax liability.
Foundations of Business Thought

Foundations of Business Thought

Foundations of Business Thought

“Who does nothing makes no mistakes; who makes no mistakes learns nothing.”
Pacioli, Summa De Arithmetica, Geometria,
Proportioni et Proportionalita (1494)
Foundations of Business Thought

Debit means an entry on the left side of an account. Credit means an entry on the right side of an account. … A debit or charge indicates (1) an increase in an asset, (2) a decrease in a liability, or (3) a decrease in a shareholders’ equity item. A credit indicates (1) a decrease in an asset, (2) an increase in a liability, or (3) an increase in a shareholders’ equity item.”
Stickney, Weil, & Davidson, Financial Accounting
Foundations of Business Thought

Income Statements
Sportswear International, Inc.
Income Statement
For the Year Ended December 31, 1998
Revenues:
Gross Revenue
Less: Sales returns and Allowance
Net Revenue
Cost of Sales:
Beginning Inventory
Purchases
Cost of Goods Available for Sale
Less: Ending Inventory
Cost of Sales
Gross Profit
Operating Expenses:
Selling Expense
Advertising
65,000
30,000
1,480,000
35,000
150,000
1,210,000
1,360,000
145,000
95,000
General and Administrative Expenses:
Adminstrative Salaries
Rent
Utilities
Insurance
Depreciation
Total General Expense
Total Operating Expense
Income from Operations
Interest Expense
Income Before Taxes
Income Tax Expense ( 36% )
Net Income
30,000
25,000
10,000
3,000
12,250
80,250
1,515,000
1,215,000
300,000
175,250
124,750
9,850
114,900
41,364
$ 73,536
Foundations of Business Thought

Balance Sheets
Sportswear International, Inc.
Balance Sheet
At December 31, 1998
Current Assets:
Cash
Accounts Receivable
Less: Allowance for Doubtful
Accounts
Inventory
Total Current Assets
Fixed Assets:
Store Equipment
Less Accumulated Depreciation
Assets
Furniture and Fixtures
Less Accumulated Depreciation
Total Fixed Assets
Total Assets
72,500
15,000
47,000
13,500
140,000
55,000
332,000
57,500
42,000
33,500
85,000
431,500
118,500
$550,000
Liabilities
Current Liabilities:
Accounts Payable
Long-term Liabilities:
Notes Payable in 2003
Total Liabilities
Capital Stock
Retained Earnings
Total Owner's Equity
Total Liabilities and Owner's Equity
Owner's Equity
Foundations of Business Thought
110,000
350,000
65,000
25,000
460,000
90,000
$ 550,000

Anything of value owned by the company
=
+
Amounts owed by the company
Claims of owners, partners, and shareholders against the firm’s assets
Foundations of Business Thought

Objectives of Financial Reporting
Financial reporting should...
...provide information useful for making rational investment and credit decisions.
...provide information to help investors and creditors assess the amount, timing, and uncertainty of cash flows.
...provide information about the economic resources of a firm and the claims on those resources.
...provide information about a firm’s operating performance during a period.
...provide information about how an enterprise obtains and uses cash.
...provide information about how management has discharged its stewardship responsibility to owners.
...include explanations and interpretations to help users understand the financial information provided.
Stickney, Weil & Davidson, Financial Accounting
Foundations of Business Thought

Financial Ratios
Liquidity ratios - ability to pay short-term debts
Current ratio
Quick ratio
Current assets
Current liabilities
Cash + Accounts receivable
Current liabilities
2:1 ratio considered favorable
1:1 ratio considered adequate
Activity ratios - how efficiently assets are used
Accounts receivable turnover
Inventory turnover
Net sales
Average net A/R
Cost of goods sold
Average inventory per period
Varies with payment terms
Varies by industry
Foundations of Business Thought

Financial Ratios Continued
Profitability ratios - overall operating success
Return on sales
Return on
Equity
Net income
Net sales
Net income
Equity
Varies by industry
Varies by industry
Debt ratios - ability to pay long-term debts
Debt to total assets
Total liabilities
Total Assets
The lower the better for lenders
Times interest earned
Income before interest
& taxes
Interest + Expense
The higher the better for lenders
Foundations of Business Thought

Financial Accounting
“A firm’s financial accounting system is concerned with EXTERNAL users of information - consumer groups, unions, stockholders, and government.”
Managerial Accounting
“Managerial accounting serves
INTERNAL users of a company’s financial information.”
Ronald Ebert & Ricky Griffin, Business Essentials 2nd Edition (1998)
Foundations of Business Thought

…provide standards from which performance can be measured.
…inform and often motivate employees.
…can force managers to be future oriented.
…allow top managers to get a better overall perspective.
…allow managers to recognize and anticipate problems.
…facilitate communication among departments.
Source: UNDERSTANDING BUSINESS , 3/e by Nickels, McHugh, and McHugh
Foundations of Business Thought

Transactions
Procedures
Processes
Computers Decision
Making
Foundations of Business Thought

Management Process
Goal
Accounting Process
Information Needs
Strategy Inputs
Tactics Storage / Processing
(Models)
Activities
Information Needs
Evaluate
Reports
Evaluate
Improve
Foundations of Business Thought
Improve

Input
Raw Materials
Processing
Manufacturing
Process
Output
Finished Goods
Data Input
Process Data into
Information with
Information Systems
Information
Foundations of Business Thought

Data Input
Information
Process Data into Information
• alphanumeric
• audio
• video
• text
• calculating
• updating
• adding
• sorting
• reports
• displays
• documents
Foundations of Business Thought

+
• Increased access to information
• Increased reliance on technology
• Increased speed
• Decreased size
• Increased portability
_
• Increase in computer crime
• Increased pace
• Decrease in privacy
Foundations of Business Thought

Poet’s Point/Counterpoint about Accounting
Point
“Double-entry bookkeeping is one of the most beautiful discoveries of the human spirit…It came from the same spirit which produced the systems of Galileo and Newton and the subject matter of modern physics and chemistry. By the same means, it organizes perceptions into a system, and one can characterize it as the first Cosmos constructed purely on the basis of mechanistic thought…Without too much difficulty, we can recognize in double-entry bookkeeping the ideas of gravitation, or the circulation of the blood and the conservations of matter.”
Counterpoint
Juann Wolfgagn von Goethe, 1796.
Reprinted in the Wall Street Journal,
3/17/93 (Editorial Page)
The Hardship of Accounting
Never ask of money spent
Where the spender thinks it went.
Nobody was ever meant
To remember or invent
What he did with every cent
Robert Frost, 1936
A Further Range
Foundations of Business Thought