Review Notes First Midterm Exam EBD – 301 Accounting and Finance For Entrepreneurs

From the Beginning Basics –Accounting: keeping the books If you are not keeping records, you won’t know if you are making or losing money. If you’re losing money you’ll need to take corrective actions and fast If you’re making money, you want to know how much.

From the Beginning –Finance: analyzing the numbers Gross Profit Margins (GPM) Operating Profit Margins (OPM) Net Profit Margins (NPM) Form of Business Organization –Sole Proprietorship: max liability –Partnership: less personal liability (maybe) –Limited Liability Company: combining aspects of partnership and corporate forms

Chapter 1 Basics of Record Keeping Timely and accurate financial records help to; –Monitor the progress of the business –Prepare financial statements –Identify sources of revenues and expenses –Provide data for preparing tax returns

Chapter 1 Basics of Record Keeping Two Areas of Focus –Financial Accounting Systematic recording of all business transactions Prepare Financial Statement –Balance Sheet –Income Statement (P&L) –Managerial Accounting Using accounting data to analyze the business

Chapter 1 Basics of Record Keeping Two Basic Methods –Single-Entry (best for cash only business) –Double-Entry (Debits and Credits) Decision Criteria –Complexity of the business –IRS requirements Accrual based accounting requires double-entry

Chapter 1 Basics of Record Keeping Double-Entry most popular for recording transactions –Each account has two columns Debit Credit –Each transaction recorded in two accounts The first gets a credit entry The second gets a debit entry Verification of all entries when Debits = Credits

Chapter 1 Basics of Record Keeping G ENERAL J OURNAL –Book of original entry –Special Journals  Ledgers Asset accounts: Cash, Receivables, Inventory Liability Accounts: Payables, Loans Owner’s Equity: Capital, Retained Earnings, Draw Revenues Expenses: Rent, wages, utilities, etc.

C HAPTER 2 Basics of Financial Accounting The systematic recording of transactions that affect the financial aspects of the business –The Fundamental Relationship Assets = Liabilities + Owner’s Equity + Revenues - Expenses –Profits (Losses) = Revenues – Expenses Profits increase the cash account Losses decrease the cash account

C HAPTER 2 Basics of Financial Accounting Double-Entry Accounting –Assets ~ carry debit balances –Liabilities and Equity ~ carry credit balances –Expenses ~ carry debit balances –Revenues ~ carry credit balances

C HAPTER 2 Basics of Financial Accounting T-Account Model –Every transaction will result in at least one debit entry and one credit entry Example #1: Cash Sale –Debit the Cash account –Credit the Revenue account Example #2: Pay a Bill –Debit an Expense account –Credit Cash account

C HAPTER 2 Basics of Financial Accounting

Chapter 3 Financial Statements A.All us own things and owe money B.If we own more than we owe – we are said to have a positive net worth. C.In Accounting & Finance: –What we own are called Assets. –What we owe are called Liabilities. –If our Assets exceed our Liabilities then we have [positive] Equity. –Accordingly: Assets = Liabilities + Equity –Savings are the difference between what we earn and what we consume: S = E – C

Chapter 3 Financial Statements Balance Sheet (2 questions) –How has the business invested its capital (money)? Current Assets (cash, receivables, inventory) Fixed Assets (plant, property, equipment) –How has the business financed its investment? Personal Funds (owner’s capital) Borrowing: short-term (current liabilities) and/or long-term (loan paid back over several years) Trade Credit from suppliers Later: Reinvesting a portion of profits in the business

Chapter 3 Financial Statements Income Statement –Information relating to the firm’s Revenues and Expenses –Revenues have Credit Balances and Expenses have Debit Balances

Chapter 3 Financial Statements Revenues - Cost of Goods Sold Labor + Materials = Gross Profit - Overhead Expenses Utilities, rent, advertising, etc. = Operating Profits (= EBITDA) - Depreciation Expense (non-cash!) = Earnings before Interest & Taxes (EBIT) - Interest Expense = Net Income or Net Profit (2 more steps if corporation)

Chapter 4 Working Capital Management Working Capital Definitions –Working Capital Current assets of the firm. –Net Working Capital (NWC) Current Assets minus Current Liabilities. the unencumbered s-t assets of the business. –Working Capital Management Efficient Allocation of capital resources to short-term asset investment as well as the use of current liabilities, debt, and owner’s capital to finance a portion of current asset investment.

Chapter 4 Working Capital Management WCM Strategy Objectives –To hold just enough cash to pay the bills, –just enough inventory to meet sales demands, –and just enough accounts receivable to support its credit policy. –Any increase above the optimal amounts would increase asset investment without a proportional increase in return. –To hold less than the optimal amounts would result in unpaid bills and lost sales opportunities.

Chapter 4 Working Capital Management Cash Conversion Cycle –Inventory Conversion Period ICP = [INV/COGS] * 365 The time from the acquisition of raw materials to the sale of the end product –Receivable Collection Period RCP = [AR/Cr Sales]*365 The average length of time it takes to turn receivables into cash. –Payables Deferral Period PDP = {Payables + Accruals} / Cash Opng. Exp.] * 365 CCC = ICP + RCP - PDP

First Midterm Exam Multiple Choice: 10 True False: 10 Fill in the blank: 18 –Financial Statements (putting accounts in the proper place: B/S, I/S, Revenues and Expenses Recording Transactions: 12 –General Ledger Entries