Accounting Leslie Lum

What’s Accounting? l Accounting is the language of business l Allows us to look at a business and understand how it has done l Makes everyone report by the same rules so that we know what we are looking at –Follow generally accepted accounting principles –Rules set by Financial Accounting Standards Board

Management Accounting l Within a company accounting allows a business to manage –Plan - Typically forecast profit and loss for the next five years –Budget - profit and loss for the next year –Track what was actually spent against the budget –Allows management to try several alternatives using numbers to see what will happen

Everyone Should be a Management Accountant l Food$4,152(Away $1762) l Alcoholic Beverages $284 l Housing $8,434 l Apparel $1,546 l Transportation $5,187 l Health Care $1,407 l Tobacco $261 l Insurance $346 l Pensions and SS $2,125 l Other $4,000

Income Statement l Tells you what happened during the year l Sales or Revenues are what came in l Expenses are what went out l Profit or Net Income is what was left l The more sales, the better l The less expenses, the better l The more profit, the better

How did Joe do this year? l What did he take in? l What did he spend? l What is his growth in revenues? l What is his growth in expenses? l What is his growth in profit?

How does it translate to a company?

Let’s Look at Nordstrom

How did Nordstrom do? l What did Nordstrom take in? l What did Nordstrom spend? l What’s growth in revenues? l What’s growth in expenses? l What’s growth in profit?

Balance Sheet l Let’s you know about financial health l Assets (Things the company owns) l Liabilities (things the company owes) l Equity or Net Worth (what’s owned free and clear)

How’s Joe’s financial health? l What does he own? l Are his assets earning money for him? l What does Joe owe? l What is his net worth?

How is Joe’s Net Worth compared to others?

How does it translate to a company?

Assets - What the company needs to do business l Cash - Money the company has l Accounts receivables - What customers owe l Inventories - Product waiting to be sold l Fixed Assets - Buildings, equipment, etc. the company owns

Liabilities - What the company borrows to do business l Current liabilities –Accounts payable - what the company owes its vendors l Long Term liabilities - Long term debt

Equity l What the shareholders own in the company l Any profits not given to the shareholders in cash is included

Let’s analyze some retail apparel companies

Analyzing the info l Calculating ratios helps you compare to other companies: –Growth rates in revenues and net income –Return on sales: Profit you make on every $1 of sales –Debt to equity: Is the company in too much debt?

21 Financial Ratios l Valuation ratios tell you whether or not you’re getting a good deal. Price equity. l Financial strength ratios let you know the state of the company’s financial health. Total debt to equity. l Profitability ratios let you know how the company does on the bottom line. Return on sales. l Management effectiveness and efficiency ratios tell you how well management is doing. Return on equity.

22 Valuation Ratios l Price equity is what you pay for every $1 of earnings. l All other factors being equal, lower valuation ratios tend to perform better.

23 Profitability l Profitability ratios come in many levels. l Return on sales or net profit margin is the bottom line profitability picture. It tells you what you make for every dollar of sales. l The higher the better.

24 Financial Health - Debt to Equity Ratio l Variety of ratios show whether the company is able to handle yearly obligations l Total Debt to Equity ratio gives overall financial health l The lower the debt to equity, the better

25 Management Effectiveness - Return on Equity l Return on Equity let you know how much the company earns on its net worth or book value. l The higher the ratio the better.