CHAPTER 8: ACCOUNTING DECISION MAKING BY THE NUMBERS

Market Information  How can you tell how well you are doing?  Measure individual transactions  Put them all together – How much “stuff” (acquired wealth) do you have Where did it come from? (assets = liabilities + owners equity) How much new wealth are you creating with it? (revenue - expense = profit)  Goal of business: To create wealth  Competing for transactions in the market

Financial statements: the main output of financial accounting  Financial accounting includes three basic financial statements:  Balance Sheet assets: value of the stuff the you or the organization controls liabilities: debt claims against the stuff owners’ equity: owners’ claims against the stuff  Income Statement revenues ($ coming in) revenues ($ coming in) expenses ($ going out) expenses ($ going out)  Statement of Cash Flows

Let’s Look At It From a Personal Perspective  What are Your Personal Goals?  Do you use a personal budget?  How do you monitor your budget? What software/tools do you use?  What type of costs do you categorize?  What short and long-term goals are you aiming for? Is it evident in your budget?  How do you manage your finances for the future?

Personal Financial Planning  Financial planning starts with outlined goals for companies and individuals.  If you want to have a million dollars by age 65.  If you save $286 per month at age 25, you will have a million dollars by age 65.  But, you would need to save $488 or $1,689 at ages 35 and 45 to reach that amount.  With an 8% return, planning to be a millionaire is very possible!

Balance sheet: what we own and how we got it Net Worth– difference between your assets and liabilities Balance Sheet – summarizes a firm’s or individual’s financial position at a specific point in time. Assets – things of value that you own Liabilities – indicates what the you owe to others =+

Stuff & claims against stuff Stuff Checking $ 1,500 Savings $ 2,000 Claims against stuff Credit Card$ 500

Stuff & claims against stuff Stuff Checking $ 1,500 Savings $ 2,000 Car $23,000 Claims against stuff Credit Card$ 500 Dave (owner) $ 3,000 Credit Union (loan)$20,000

Stuff & claims against stuff Stuff House $150,000 Claims against stuff Bank (debt) $115,000 Dave (owner) $ 35,000

Stuff & claims against stuff Stuff Checking $ 1,500 Savings $ 2,000 Car $23,000 Claims against stuff Credit Card$ 500 Dave (owner) $ 3,000 Credit Union (loan )$20,000 Stuff House $150,000 Claims against stuff Bank (debt) $115,000 Dave (owner) $ 35,000

Snap shot: Personal Balance Sheet Assets Checking $1,500 Savings 2,000 Car 23,000 House 150,000 Total Assets$176,500 Liabilities Credit Card $500 Credit union – car loan 20,000 Bank - mortgage 115,000 Total Liabilities$135,500 Net Worth$41,000

The income statement: how did we do? Net Income – the profit or loss earned Income Statement – summarizes a firm’s or individual’s operations over a given period of time in terms of profit and loss. Revenue– the amount of Income you earn Expenses – the cash you spend or other assets you use to generate revenue -=

OK… You Have a Paycheck Name Address City, State Zip Employee ID: Department: Location: Marital Status: Allowances: Addl %: Addl Amt: Hours and Earnings ---Current YTD Description Rate Hours Earnings Hours Earnings Total Taxes: Current YTD Fed Withholding Fed MED/EE Fed OASD/EE Before Tax Deduction Parking Permit Retirement / 401K After Tax Deduction United Way Campaign Employer Paid Benefits Life Basic Retirement / 401K Total Gross FED Taxable Gross Total Taxes Total Deduction Current: YTD: YTD Hours VAC SICK FICA Taxable Gross Net Pay Distribution Medicare Taxable Gross Fed MED/EE is the employee (EE) Federal Medical Insurance Fed OASDI/EE is the employee Federal Old Age Survivors Disability tax

w4 Fill Out Your W-4

OK… You Have a Paycheck – Taxes and Deductions Name Address City, State Zip Employee ID: Department: Location: Marital Status: Allowances: Addl %: Addl Amt: Hours and Earnings ---Current YTD Description Rate Hours Earnings Hours Earnings Total Taxes: Current YTD Fed Withholding 2013 Tax Tables Fed MED/EE 1.45% Fed OASD/EE 6.20% Before Tax Deduction Parking Permit Retirement / 401K After Tax Deduction United Way Campaign Employer Paid Benefits Life Basic Retirement / 401K Total Gross FED Taxable Gross Total Taxes Total Deduction Current: YTD: YTD Hours VAC SICK FICA Taxable Gross Net Pay Distribution Medicare Taxable Gross

OK… You Have a Paycheck – Net Pay Calculation Pay Begin Date: 6/01/2013 Pay End Date: 6/30/2013 Name Address City, State Zip Employee ID: Department: Location: Marital Status: Single Allowances: 1 Addl %: 0 Addl Amt: 0 Hours and Earnings ---Current YTD Description Rate Hours Earnings Hours Earnings Regular 3, , Holiday Total Taxes: Current YTD Fed Withholding Fed MED/EE Fed OASD/EE Before-Tax-Deduction Parking Permit Retirement / 401K After-Tax-Deduction United Way Campaign Employer Paid Benefits Life Basic Retirement / 401K Total Gross FED Taxable Gross Total Taxes Total Deduction Net Pay Current: 3, , , YTD: 22, , , , , YTD Hours VAC SICK FICA Taxable Gross Net Pay Distribution , , Medicare Taxable Gross 22, Assumptions: Salary - $45,000 Paid Monthly - $3,750 Single 401K deduction - 5% Employer match United Way - $120/yr tools/payroll-calculators/salary-paycheck-calculator.aspx

Monthly Income Statement Income Wages $ 2,794 Expenditures for Donations $ Church 100 Expenditures for Living Expenses $ Food 500 Mortgage – principal, interest, taxes, insurance 778 Utilities – gas, electric, water 150 Credit Card 100 Car loan 439 Insurance – car 150 Gas 200 Medical 125 Clothing 50 Entertainment 200 Total Expenditures $2,792 Total Income Less Expenditures $2 Assumptions: Salary - $45, Yr Mortgage 3.835% Principal & Interest - $562 Property Taxes - $150 Homeowners Insurance - $67 Auto Loan 4 years 1.9% interest

Personal investing  What are your short-term and long-term goals?  Given your budget, how much are you able to invest?  How long can you leave your money invested?  How concerned are you about the tax implications of your investments?  How much tolerance do you have for risk?  DIVERSIFICATION

Direct stock purchase plans  Many Corporations offer Direct Stock Purchase Plans  Purchase stock direct from company  Dividend Reinvestment Plans (DRIPS) allow current stockholders to reinvest dividends to purchase additional stock

Strategies for investing in securities  Investing for Income  Market Timing  Value Investing  Investing for Growth  Buying and Holding