Chapter 14 Integrating Accounting, Finance, Marketing and Economics Accounting and Finance for Entrepreneurs EBD-301 Dr. David P. Echevarria Slide 1 All Rights Reserved

THE IMPORTANCE OF ECONOMICS Essential Elements of Macroeconomics –Supply and Demand Supply from perspective of producer Demand from perspective of consumer –Equilibrium: market clearing price S = D –Competition Perfect Monopoly Dr. David P. Echevarria Slide 2

: Supply vs Demand, and Equilibrium What causes a change in Equilibrium ? –Disruption in supply –Lower production costs –Decrease in demand –Increase in demand Dr. David P. Echevarria Slide 3 All Rights Reserved

THE IMPORTANCE OF ECONOMICS Essential Elements of Microeconomics –Efficient Scale of Plant Right size >>> lowest cost of production Capacity vs Utilization –Production Function Mix of Labor and Capital used in producing goods and/or services Labor vs Capital intensive production function Dr. David P. Echevarria Slide 4

All Rights Reserved THE IMPORTANCE OF MARKETING Consumer Behavior –Decision making process –Decision making criteria Construction the Marketing message –Communication the bundle of benefits –Importance of market research Getting the message out Dr. David P. Echevarria Slide 5

All Rights Reserved ESSENTIAL ELEMENTS OF FINANCIAL ANALYSIS Generally Accepted Accounting Principles –Rules by which transaction events are measured recorded reported –GAAP Standards permit orderly presentation uniformity across all companies (US) reliability (at least in theory) Dr. David P. Echevarria Slide 6

All Rights Reserved ESSENTIAL ELEMENTS OF FINANCIAL ANALYSIS Balance Sheet –Assets Current (Cash, A/R, INV, PPE) Fixed (property and equipment) –Liabilities Current (A/P, N/P, Accruals) Long-Term (mortgage debt, deferred taxes payable) –Owner’s Equity Capital Retained Earnings (profits reinvested in the business) Dr. David P. Echevarria Slide 7

All Rights Reserved Dr. David P. Echevarria Slide 8 INCOME STATEMENT Revenues - Net Sales Expenses –Direct Expenses Labor Materials –Indirect Expenses Selling, General and Administrative

All Rights Reserved Dr. David P. Echevarria Slide 9 INCOME STATEMENT Non-cash Expenses –Depreciation –Amortization Non-Operating Income and Expenses –Interest paid on amounts borrowed –Interest income on short-term investments

All Rights Reserved Dr. David P. Echevarria Slide 10 INCOME STATEMENT Taxes –Federal –State Distributions to equity capital providers –Cash dividends –Stock dividends (if incorporated) Earnings reinvested in business (retained)

All Rights Reserved Dr. David P. Echevarria Slide 11 STATEMENT OF CASH FLOWS Purpose –Reconcile changes in cash balance at the beginning of the fiscal year with the cash balance at the end of the fiscal year. –Identify where the cash came from and how it was utilized. –Three distinct activities are examined: Operations, Investing and Financing

All Rights Reserved Dr. David P. Echevarria Slide 12 STATEMENT OF CASH FLOWS Operating Sources and Uses of Cash –Uses of cash investing in inventory and accounts receivable paying amounts owed –Sources of cash collecting accounts receivable accruing wages and salaries payable, taxes payable Depreciation and amortization Deferred income taxes

All Rights Reserved Dr. David P. Echevarria Slide 13 STATEMENT OF CASH FLOWS Investing Sources and Uses of Cash –Uses of cash purchases of property and equipment making short-term investments –Sources of cash sales of property and equipment selling short-term investments for cash

All Rights Reserved Dr. David P. Echevarria Slide 14 STATEMENT OF CASH FLOWS Financing Sources and Uses of Cash –Uses of cash repayment of debt capital servicing (paying interest and dividends) –Sources of cash Bank borrowing Other sources of loans selling stock (equity)

All Rights Reserved Dr. David P. Echevarria Slide 15 ECONOMIC AND ACCOUNTING PROFITS Accounting profits do not consider the opportunity costs of invested capital. Opportunity cost is defined as the returns that could be earned in a different investment with similar risk. Economic profits = accounting profits minus opportunity cost of capital. Also termed residual income: see Eq. (3.2)