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Critical Success Factors Stakeholders Top Management Vision Strategy Mission Middle Management First-Line Management Planning Organizing Directing Controlling.

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Presentation on theme: "Critical Success Factors Stakeholders Top Management Vision Strategy Mission Middle Management First-Line Management Planning Organizing Directing Controlling."— Presentation transcript:

1 Critical Success Factors Stakeholders Top Management Vision Strategy Mission Middle Management First-Line Management Planning Organizing Directing Controlling EXTERNAL INTERNAL Economic Social Technological Political Marketing Finance Human Resources Operations

2 Critical Success Factors (Indicators of Business Success) Achieving financial performance Meeting customer needs Building quality products and services Encouraging innovation and creativity Gaining employee commitment

3 Accounting Comprehensive information system for collecting, recording, analyzing, summarizing, and reporting, in monetary terms, financial information Distinct from bookkeeping – recording only

4 Numerous Users Managers – set goals, make decisions Employees & unions – get paid and plan for benefits Investors & creditors – estimate returns, determine growth prospects Tax authorities – accurately determine tax liabilities Government regulatory agencies – fulfill duties, i.e. protect investors

5 Managerial –CMA –Internal users –specific info. –current & projected –in whatever form suits –No rules –speed important –info must be relevant, flexible, useful –Org’n presented in segments Financial –CA –External users –general info. –historical information –G.A.A.P. - C.I.C.A. –G.A.A.P. –precision important –info. must be complete as per GAAP, objective, verifiable –Org’n presented as whole Two Main Fields of Accounting

6 G.A.A.P. –Generally Accepted Accounting Principles –Cover range of issues such as revenue recognition and full disclosure –Ensure comparability, reliability, interpretation Audit –public companies by law –Independent third party –Check to ensure GAAP followed on a consistent basis over time & used proper procedures to prepare reports –Auditor’s Statement... –do NOT say statements are accurate - only fair, and no material errors

7 Concepts –Cost principle - assets shown at cost of construction or acquisition (historical cost) –Matching Principle - expenses matched with revenues –Objectivity - evidence to support value recorded –Conservatism - always use lower of cost or market value

8 Two Financial Statements Balance Sheet –Statement of Financial Position –snapshot of a point in time –“stock or status of firm’s resources and claims against those resources at certain pt. in time” –XYZ Company Ltd Balance Sheet as of December 31, X Income Statement –Profit and Loss Statement, Statement of Earnings –movie over a period of time –“flow of revenues and the costs associated with generating those revenues for a period of time” –XYZ Company Ltd. Income Statement for the period ended Dec.31,X

9 The Balance Sheet the financial position of a firm at a given point in time –ASSETS- What the firm owns –EQUITIES - what the firm owes to creditors ( ) and owners ( ) Accounting Equation –premise upon which the balance sheet is built ASSETS = EQUITIES ASSETS = LIABILITIES + OWNERS’ EQUITY ASSETS – LIABILITIES = OWNERS’ EQUITY

10 Balance Sheet Successful Company Ltd. Balance Sheet As of February 1, 2010 Current Assets - declining liquidity -consumed in <1 year Capital Assets - order of useful life - less accumulated amortization Other Assets - i.e. goodwill, patents, investments Current Liabilities - no particular order - due in < 1 year Long term Liabilities - due in > I year Shareholders’ Equity Sources: amount owners invest, profits earned

11 Assets Current Assets –cash or assets that will be converted to cash, sold or consumed within 1 year - liquid –placed in order of declining liquidity CASH MARKETABLE SECURITIES – distinct from Investments ACCOUNTS RECEIVABLE –less allowance for doubtful accounts - (contra account) NOTES RECEIVABLE INVENTORY - lower of cost or market SUPPLIES PREPAID EXPENSES* - benefit paid for, not yet received

12 Prepaid Expenses Example: Sept. 1 paid 1st year’s rent of $18,000 ($1,500 per month for 12 months) –What is your prepaid rent on Dec 31? Solution:

13 Capital (Fixed) Assets –assets that have useful life expectancy > 1 year –placed in order of declining life expectancy LAND BUILDINGS MACHINERY & EQUIPMENT FURNITURE & FIXTURES TRUCKS & AUTOMOBILES TOOLS –at historic cost (Objectivity principle) –cost amortized* over life of asset, except for land (Matching principle)

14 Amortization decreased value of capital asset due to wear and tear Used to yearly amount shown on income statement as Amortization expense total accumulated to date shows on balance sheet as Accumulated Amortization –contra asset account We use simple straight-line amortization

15 Example $100,000 building - 10 year useful life - $20,000 scrap value Calculate Amortization expense and Accumulated Amortization at the end of year 5 Cost - scrap value= Annual amortization years of useful life

16 1 2 34 5 $8,000 $0 Amortization Expense $8,000$16,000$40,000$32,000$24,000 Acc. Amor. Income Statement – yr.5 Amortization expense $8,000 Balance Sheet – Yr. 5 Building $100,000 Accum. Amort. $40,000 $60,000

17 Other Assets –INVESTMENTS long-term holdings of securities - intent –INTANGIBLES patents, trademarks, copyrights, etc. goodwill - must be bought - when one company buys another for more than the fair market value of its net assets amortized over 40 years or legal/useful life, whichever is shorter

18 EQUITIES Current Liabilities –due within 1 year, no specific order –KEY – –Example: Wages Payable –pay $10,000 in bi-weekly wages for work done during the pay period, year end falls at end of one week into pay period –current liability Dec. 31?

19 Example: Mortgage Payable –$160,000 mortgage on building payable over 10 years on Jan. 1st of each year starting ’05 = $16,000/year –current liability Dec 31, 2008? –current liability for one year only = Example: Interest Payable –interest on above mortgage is 15% of remaining balance owing payable at same time as principal

20 Solution: –building was purchased using $160,000 mortgage –Mortgage payments made Jan. 1/05, 06, 07,08 = 4 x $16,000 = $64,000 –for the year of ‘08 held $160,000 - 64,000 = $96,000 mortgage –Interest owing at 15% = $96,000 x.15 = $14,400 due Jan. 1/09 - incurred but not paid –Interest Payable = $14,400

21 Long-term Liabilities –due > 1 year –Example: What is the long term portion of Mortgage Payable on Dec. 31/08? –paid $64,000 by Dec. 31/08, $16,000 current –therefore $160,000 - 64,000 - 16,000 = $80,000 Mortgage Payable (long term)

22 Owners’ Equity –form depends on form of ownership Corporation – Shareholders’ Equity Sole proprietorship/partnership – Owners’/Partners’ Equity –all have same components… Beginning O/E + Investments + Profits - Withdrawals Ending O/E

23 –Proprietor’s Equity Paul Jones, Capital = total of all components –Partners’ Equity Peter Brown, Capital Susan Smith, Capital = investment – withdrawal + share of profit/loss Total Partners’ Equity –Shareholders’ Equity Common Stock Preferred Stock Retained Earnings = beginning R/E + profits - withdrawals / dividends ending R/E

24 Owner’s Equity Sole Proprietorship Owner’s Equity I. Havebucks, Capital$10,000 Total Owner’s Equity$10,000 Partnership Partners’ Equity I. Havebucks, Capital$7,000 U. Wantbucks, Capital 6,000 Total Partners’ Equity$13,000 O.E. = Investments + Net Profit - Withdrawals

25 Explanation of balances I. HavebucksU. Wantbucks Capital, Jan. 1, 2008$6,000$4,000 Investments$1,000 $500 Withdrawals$2,000 $500 Net Profit $4,000$2,000$2,000 Capital, Dec. 31, 2008$7,000$6,000 Net Loss of $6,000?

26 Corporation Shareholders’ Equity Preferred Stock$ 5,000,000 Common Stock12,000,000 Retained Earnings 7,000,000 Total Shareholders’ Equity$24,000,000 Retained earnings for year = Net Profit for year - Dividends paid Note: This is not the same as cash Common stock = existing balance + additional c.s. issued Preferred stock = existing balance + additional p.s. issued

27 Alice Cooper Guitar Repairs Balance Sheet As of March 31, 2008 Current AssetsCurrent Liabilities Cash$ 3,000Accounts Payable$ 1,600 Accounts Receivable2,300Long Term Liabilities Inventory4,600Bank Loan3,200 Total Current Assets9,900Total Liabilities4,800 Capital Assets Owner’s Equity Equipment37,000A. Cooper, Capital32,100 Less: Acc. Amortt.10,000 Total Capital Assets27,000Total Liabilities and Total Assets$36,900Owner’s Equity$36,900

28 April Transactions A. Cooper invested an additional $4,000 cash into the business Cooper purchased repair parts for $150 on credit L. Zeppelin brought in a guitar for repairs. It cost $250 which he put on his account L. Zeppelin, a customer, paid $70 cash on his account Cooper borrowed an additional $3,000 from the bank Cooper took $300 out of the business for personal use Cooper purchased a truck for $29,000 from Madonna Motors by making a down payment of $5,000 and signing a promissory note to pay the balance later in the year Prepare balance sheet as of April 30, 2008

29 Alice Cooper Guitar Repairs Balance Sheet As of April 30, 2008 Current AssetsCurrent Liabilities Cash$4,770Accounts Payable$ 1,750 Accounts Receivable2,480Notes Payable24,000 Inventory4,750Total Current Liabilities25,750 Total Current Assets12,000Long Term Liabilities Bank Loan6,200 Capital Assets Total Liabilities31,950 Equipment37,000 Owner’s Equity Less: Acc. Amortization10,000 A. Cooper, Capital36,050 Truck29,000 Total Capital Assets56,000Total Liabilities and Total Assets$68,000Owner’s Equity$68,000

30 Income Statement Keys: –Revenue – everything you earned –Expenses – everything you spent –matching revenues with expenses incurred to generate them –format Matching –Example: rent expense - year’s rent paid Sept. 1/08 = $18,000 or $1,500/month

31 Example: Amortization Expense - $10,000/year, Accumulated Amortization on Balance Sheet –$10,000 incurred to earn revenues of this year Example: Wage Expense - $10,000 bi-weekly = $260,000/year, $5,000 incurred but not paid Example: interest expense - held $96,000 for year @ 15% interest Example: mortgage expense - principal payment of $16,000/year

32 Format - service company Revenues - Operating Expenses Income from Operations +/- Other Income/Expenses Net Income before Taxes - Taxes Net Income

33 Lemons Inc. Income Statement Month ended June 15, 2008 Revenue Sales Comm Earned$17,460 Management Fees Earned 500 Total Revenues$17,960 Operating Expenses Office Salaries expense4,590 Advertising expense565 Rent expense1,490 Insurance expense405 Amortization - office equip.295 Total operating expenses7345 Net Income Before Taxes10,615 Taxes5,307 Net Income$5,308

34 Format - merchandising company Sales - Cost of Goods Sold Gross Profit - Operating Expenses Income from Operations +/- Other Income/Expenses Net Income before Taxes - Taxes Net Income Gross Sales - Returns & Allowances - Discounts Net Sales Selling & Distribution General & Admin. *

35 Cost of Goods Sold Beginning Inventory + Purchases* Cost of Goods Avail. for Sale - Ending Inventory Cost of Goods Sold Gross Purchases - Returns & Allowances - Discounts Net Purchases + Freight-in Net Cost of Purchases*

36 Merchandising Company Revenues Sales$200,000 Less: Sales returns5,000 Less: Sales discounts2,0007,000 Net Sales193,000 Cost of Goods Sold Merch. Inv. Jan. 1, 199920,000 Purchases30,000 Less: Purchase returns2,000 Less: Purchase discounts3,000 Net Purchases25,000 Add: Freight-In1,000 Net cost of purchases26,000 Cost of Goods Available46,000 Less: Ending Inventory5,000 Cost of Goods Sold41,000 Gross Profit152,000

37 Manufacturing Firm Two additional expenses: Three types of inventory:

38 Other Income/Expenses Item not expected to occur frequently Not typical of normal business activity

39 Combined Problems information included for both the Income Statement and the Balance Sheet –deal with the information only once for both the Balance Sheet and Income Statement –complete the Income Statement first - and use the net income to complete the retained earnings, tax, and dividend accounts for the Balance Sheet –Preparing statements for January 31, 2008

40 Furniture & fixtures for store bought February 1/03 for $4,500, salvage value $500, useful life 10 years… –($4,500 - 500) / 10 years = $400/yr. –I/S Operating Expense - S&D –5 years accumulated = $2,000 accum. amort. –B/S Capital Assets

41 Interest-free note to cover $4,500 cost of furniture & fixtures; principal paid in equal installments each year for 6 years starting February 1/04. –$4,500/6 years = $750/year

42 Payroll $3,500 monthly - 80% sales, 20% admin.; pay on 15th of month –$3,500 x 12 months = $42,000/yr. –I/S Operating Expense Selling & Distribution (80%) General & Administrative (20%) –last payment Jan. 15th, worked until Jan. 31 –2 weeks = $1,750 liability B/S

43 Rents store for $2,000/month; 10% used for office space –$2,000 x 12 months = $24,000/year –I/S Operating Expense Selling & Distribution (90%) General & Administrative (10%)

44 Insurance on store and office for $1,500/yr.; premiums paid every 6 months on Sept. 1 and March 1 – I/S Operating Expense Selling & Distribution (90%) General & Administrative (10%) –B/S Current Asset $750 every 6 months = $125/month last paid Sept.1 for Sept.-February -- as of Jan. 31, 1 month remaining

45 On May 1/07, purchased supplier for $9,000 to secure source of supply; 75% of price accounted for by net tangible assets, 25% for distribution network and contacts –B/S Other Assets

46 Paid $1,650 for shipping goods to store –I/S Cost of Goods Sold Beginning Inventory$ 3,000 Gross Purchases$42,000 less: Purchase Returns & Allowances 4,000 Net Purchases$38,000 add: Net Cost of Purchases$39,650 Cost of Goods Available for Sale$42,650 less: Ending Inventory 5,000 Cost of Goods Sold$37,650

47 25% tax rate, taxes for year not paid –I/S Income Taxes = 25% Net Income before Taxes –B/S Current Liability - Taxes Payable = 25% Net Income before Taxes

48 40% Net Income is retained, dividends paid on remainder; dividends payable Feb.18/08 –B/S Shareholders’ Equity - add 40% of Net Income to beginning Retained Earnings –B/S Current Liability - Dividends Payable = 60% Net Income

49 Tackling combined problems Try to write out the format of the Income Statement without looking at your notes. –Steps to compute net sales –COGS including steps to compute net purchases (remember what freight-in is) –S&D vs. G&A expenses –Don’t forget interest and taxes Develop a process for doing combined problems. How would you go about doing one step by step?

50 You know your stuff if: You can identify the users and uses of accounting information You can explain what amortization is, what GAAP it is associated with, BS vs. IS version of it, and how to calculate it You can describe transactions that affect various areas of the BS and IS You can identify what areas of the BS and/or IS specific transactions affect You can create a properly formatted BS and IS You can identify and apply the GAAP You can explain what an audit is, as well as its purpose You can calculate and adjust the financial statements for prepaid expenses, long-term & short-term liabilities (i.e. mortgage), and you can distinguish between investments, goodwill, marketable securities You can describe and contrast the two branches of accounting

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