Presentation on theme: "Week 10 DIFD 321 Accounting & Finance. WHAT IS MARKETING? The action or business of promoting and selling products or services, including market research."— Presentation transcript:
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$1,500.00 Cost of goods sold1,000.00 Utilities expense250.00 Supplies expense 250.00 Total operating expenses 3,000.00 Net income/loss$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 month1,000.00 Net income3,000.00 14,000.00 Withdrawals during the month 2,000.00 Joe Smith, capital, June 30, 2008$12,000.00
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.