Financing Unit 6

Unit 6 Vocabulary 30-Day Accounts Asset Balance Sheet Budget Accounts Cash Flow Statement Collateral Credit Credit Union Debt Capital Equity Capital Finance Charge Gross Sales Income Statement Installment Accounts Interest Liability Net Worth Net Sales Net Income New Balance Personal Financial Statement Principal Revolving Accounts Start-up Costs Unpaid Balance

Unit 6 Essential Question How is financial knowledge and skill employed to facilitate marketing decisions?

Essential Question 1 Financing What is the role of finance in business?

Financing Getting the money needed to finance the operation of a business.

Accounting Businesses must (keep track of) account for every dollar used. By law, businesses, regardless of type of ownership, are required to use Generally Accepted Accounting Practices (GAAP).

Accounting There are three primary statements that need to be prepared at the end of every accounting cycle (usually annually) Income Statement: A summary of income and expenses during a specific period of time. Balance Sheet: A summary of a business’s assets, liabilities, and owner’s equity Cash Flow Statement: Tracks the sources of cash coming into a business and cash payouts from a business on a monthly basis.

Essential Question 2 Financing What is the difference between business finance and personal finance?

Business Finance Business finance is concerned with the financial well being and health of a business and its operations. Allows lenders and investors to see what monies are needed to start and operate a business as well as what may need to be borrowed.

Personal Finance Personal finance is concerned with the financial well being and health of an individual person. Customer credit increases an individuals purchasing power.

Essential Question 3 Financing What are the types and purposes of credit?

Credit Credit: The privilege of buying something now, with the agreement to pay later, or borrowing money with the promise to pay it back later. Advantages of Credit Provide emergency funds. Increases buying power. More convenient, faster, and safer than cash.

Credit Disadvantages of Credit Financial cost of credit. Decreases amount of comparison shopping by limiting customers to stores that accept credit. Future income is tied up in paying off credit. Can lead to overspending.

Types of Credit 30-day Accounts: Accounts must be paid in full within 30 days of billing. Installment Accounts: Allow payment over a specified period time. Budget Accounts: Allow payment over a short period of time (typically 90 days) with no finance charge. Revolving Accounts: Establishes a credit limit and minimum payment. Customers may make purchases with in those restrictions

The Cost of Credit The cost of credit can be determined by using the simple interest formula, APR formula, previous balance method, adjusted balance method, or the average daily balance method.

The Cost of Credit Computing Simple Interest Computed using the formula I = PRT. I - Interest P - Principal R - Rate T – Time Finance Charge: The amount you pay if the last balance has not been paid in full. Is calculated using the simple interest formula. The principal is the unpaid balance. Time is always equal to one.

The Cost of Credit Unpaid Balance: Any of the last balance that was not paid. Is calculated by: Unpaid Balance = Last Balance – Payment New Balance: The amount owed after adding the finance charge and new purchases to the unpaid balance. Is calculated by: New Balance = Unpaid Balance + Finance Charge + New Charges

The Cost of Credit Adjusted Balance Method: The finance charge is applied only to the amount owed after your payment is applied each month. Previous Balance Method: The finance charge is imposed on the entire amount owed from the previous month, then your payment is applied.

The Cost of Credit Average Daily Balance Method: The finance charge is based on the balance of each day of the billing cycle added together then divided by the number of days of the billing cycle.

The Cost of Credit Annual Percentage Rate Formula: Used in determining payments and interest with installment credit. APR: Annual percentage rate. n: Number of payment periods in one year. f: Total dollar cost of credit (Finance Charge). P: Principal or net amount borrowed. N: Total number of payments to pay off the amount borrowed.

Essential Question 4 Financing What are the various types of financial records that should be analyzed in making marketing decisions?

The Income Statement The Income Statement is a summary of the business’s income and expenses and is used to calculate Net Profit. Gross Sales: The total of all sales for a given period of time. Net Sales: Gross sales less returns and allowances.

The Income Statement Gross Sales Returns and Allowances = Net Sales Cost of goods Sold = Gross Profit Operating Expenses = Net Income from Operations + Other Income Other Expenses = Net Profit Before Taxes Income Taxes = Net Profit

The Income Statement Cost of Goods Sold is calculated by: Beginning Inventory + Purchases = Goods Available for Sale Ending Inventory = Cost of Goods Sold

The Balance Sheet A balance sheet is a summary of a business’s assets, liabilities, and owner’s equity. Asset: Anything of Monetary value that person or business owns. Liability: A debt that a person or business owes to another. Assets = Liabilities + Owner’s Equity

The Balance Sheet A balance sheet consists of: Assets: Liabilities: Current assets Fixed assets Liabilities: Current liabilities Long-term liabilities Owner’s Equity

Cash Flow Statement Cash Flow Statement is a monthly plan that shows when you anticipate cash coming into the business and when you expect to pay out cash. Cash Flow also helps you see if you will have enough money when you need to pay your bills.

Essential Question 5 Financing How do profit, cash flow, margin, and sales relate to the financial plan?

The Financial Plan The financial plan shows the amount of sales necessary to make a profit while maintaining solvency. The income statement shows the relation of profit to sales. It also shows the margin, or profitability, by comparing net profit to revenue. The cash flow statement shows whether the company will maintain solvency.