Financing the Business Chapter 36

How are they different? The easiest way to separate accounting and finance is to think of accounting as the past and finance as the future.The easiest way to separate accounting and finance is to think of accounting as the past and finance as the future. Accounting is a record of past and current business transactions.Accounting is a record of past and current business transactions. Finance may utilize accounting documents, but is focused on finding capital to operate the company, assessing risks, and choosing between business opportunities.Finance may utilize accounting documents, but is focused on finding capital to operate the company, assessing risks, and choosing between business opportunities.

Accounting Accounting is a critical component of a business operation. Legally businesses are required to keep records of their financial transactions for tax purposes.Accounting is a critical component of a business operation. Legally businesses are required to keep records of their financial transactions for tax purposes. It includes payroll, expenses, sales, investment, and operations costs.It includes payroll, expenses, sales, investment, and operations costs. Information can be powerful when its used to assist future decision making.Information can be powerful when its used to assist future decision making. Ex: A company can look back and determine if payroll is too high, or they are spending too much on utilities.Ex: A company can look back and determine if payroll is too high, or they are spending too much on utilities.

Important Accounting Documents Income statement – summary of your business income and expenses during a specific period, such as a month, a quarter, or a year.Income statement – summary of your business income and expenses during a specific period, such as a month, a quarter, or a year. As businesses operate they generate revenue (sales) and incur expenses (costs).As businesses operate they generate revenue (sales) and incur expenses (costs). Income Statements are also known as Profit and Loss statements.Income Statements are also known as Profit and Loss statements.

Income Statement Contd Total Sales Total Sales - Returns and Allowances = Net Sales - Cost of Goods Sold = Gross Profit - Expenses of Operating the Business = Net Income from Operations - Income Taxes = Net Profit Calculating Net SalesCalculating Net Sales The total of all sales for any period of time is called gross sales.The total of all sales for any period of time is called gross sales. Net sales represents gross sales minus all sales returns and allowances (credit granted to customers for damaged or defective goods kept by the customer).Net sales represents gross sales minus all sales returns and allowances (credit granted to customers for damaged or defective goods kept by the customer).

Important Financial Documents Balance Sheet – is a summary of a business assets (resources), liabilities (debts), and owners equity (ownership/investment).Balance Sheet – is a summary of a business assets (resources), liabilities (debts), and owners equity (ownership/investment). Assets – are anything of monetary value that you own.Assets – are anything of monetary value that you own. Liabilities – current or long term debts.Liabilities – current or long term debts. Owners Equity – Investment in a business. Also called Net worth.Owners Equity – Investment in a business. Also called Net worth. Assets-Liabilities = Net worth (Equity)Assets-Liabilities = Net worth (Equity)

What do they tell you? Figures on a balance sheet shows you information about a stockholders equity. This tells what an ownerships interest and the financial strength of a business are on a given date.Figures on a balance sheet shows you information about a stockholders equity. This tells what an ownerships interest and the financial strength of a business are on a given date. Snapshot Snapshot Figures on the income statement can give you an idea of how well the business is operating over a period of time.Figures on the income statement can give you an idea of how well the business is operating over a period of time. Video Recording Video Recording

Finance Contd The basic financial documents like Income Statements and Balance Sheets also play an important role in Finance.The basic financial documents like Income Statements and Balance Sheets also play an important role in Finance. Internal Uses –Internal Uses – Performance evaluation.Performance evaluation. Manager compensation and evaluations are often tied to company performance.Manager compensation and evaluations are often tied to company performance. Companies also use these documents for future planning.Companies also use these documents for future planning.

Finance Contd External Uses –External Uses – Short-term and Long-term creditors and investors.Short-term and Long-term creditors and investors. Choosing suppliers.Choosing suppliers. Credit ratings.Credit ratings. Evaluating Competitors.Evaluating Competitors. Acquiring other firms, identifying targets and deciding what to offer.Acquiring other firms, identifying targets and deciding what to offer. Common theme is that financial statements are a prime source of information about a firms financial health.Common theme is that financial statements are a prime source of information about a firms financial health.

Re-emphasizing - How are they different? The easiest way to separate accounting and finance is to think of accounting as the past and finance as the future.The easiest way to separate accounting and finance is to think of accounting as the past and finance as the future. Accounting is a record of past and current business transactionsAccounting is a record of past and current business transactions Finance may utilize accounting documents, but is focused on finding capital to operate the company, assessing risks, and choosing between business opportunities.Finance may utilize accounting documents, but is focused on finding capital to operate the company, assessing risks, and choosing between business opportunities.