1. CHAPTER 8: ACCOUNTING DECISION MAKING BY THE NUMBERS

2. 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

3. FINANCIAL STATEMENTS: THE MAIN OUTPUT OF FINANCIAL ACCOUNTING  Financial accounting includes three basic financial statements:  Balance Sheet assets: value of the stuff 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  Corporations with publicly held stock must publish annual reports with all three statements

4. BALANCE SHEET: WHAT WE OWN AND HOW WE GOT IT Assets = Liabilities + Owner’s Equity Owner’s Equity – the claims owners have against their firm’s assets Balance Sheet – summarizes a firm’s financial position at a specific point in time. Assets – things of value that the firm owns Liabilities – indicates what the firm owes to non-owners

5. Stuff & claims against stuff Stuff Car $4,000 Claims against stuff Dave (owner) $3,000 Becky (loan)$1,000

6. Stuff & claims against stuff Stuff House $140,000 Claims against stuff Bank (debt) $115,000 Dave (owner) $ 25,000

7. Stuff & claims against stuff Stuff Car $4,000 Claims against stuff Dave (owner) $3,000 Becky (debt: 6 mo)$1,000 Stuff House $140,000 Claims against stuff Bank (debt) $115,000 Dave (owner) $ 25,000

8. Snap shot: The Balance Sheet Assets (stuff)  car 4,000  house140,000  total144,000 Liabilities and Owners Equity  short term liabilities (becky) 1,000  long term liabilities (bank)115,000  equity (car and house) 28,000  total144,000 $ $

9. SAMPLE BALANCE SHEET

10. Foundation & Accounting Numbers Balance SheetTotal% Assets 12/31/08 Cash$5,59326.8% Accounts Receivable$3,35316.1% Inventory$2,35311.3% Total Current Assets$11,29954.2% Plant & Equipment$14,40069.1% Accumulated Depreciation($4,848)-23.2% Total Fixed Assets $9,55245.8% Total Assets$20,852100.0%

11. Foundation & Accounting Numbers Liabilities & Owner's EquityTotal% Accounts Payable$2,85513.7% Current Debt$00.0% Long Term Debt$5,20024.9% Total Liabilities$8,05538.6% Common Stock$2,31311.1% Retained Earnings$10,48550.3% Total Equity$12,79861.4% Total Liability & Owner’s Equity$20,852100.0%

12. THE INCOME STATEMENT: HOW DID WE DO? Revenue – Expenses = Net Income Net Income – the profit or loss the firm earns Income Statement – summarizes a firm’s operations over a given period of time in terms of profit and loss. Revenue– the increase in the amount of assets the firm earns Expenses – the cash the firm spends or other assets it uses to generate revenue

13. SAMPLE INCOME STATEMENT

14. Foundation & Accounting Numbers Income Statement Total% Sales$40,800100.0 Variable Costs Direct Labor$12,13829.7 Direct Material$20,24049.6 Inventory Carry$2820.7 Total Variable Cost$32,66080.0 Contribution Margin$8,14020.0

15. Period Costs% Depreciation$9602.4 SGA: R&D $00.0 Promotions $1,0002.5 Sales $1,0002.5 Administration $6371.6 Total Period Costs$3,5978.8 Net Margin$4,54311.1 Other$00.0 EBIT$4,54311.1 Short Term Interest$00.0 Long Term Interest$6411.6 Taxes$1,3653.3 Profit Sharing$510.1 Net Profit$2,4856.1

16. STATEMENT OF CASH FLOWS: SHOW ME THE MONEY  Cash flowing into and out of the firm  Operations  Investing  Financing  Increase and decrease from all three sources  Total amount of cash on hand  Stakeholders want to know if there is adequate cash to pay workers, creditors, suppliers and IRS

17. SAMPLE STATEMENT OF CASH FLOWS

18. SARBANES-OXLEY ACT OF 2002  Commonly referred to as SOX  Banned relationships between CPA firms that might create conflict of interest  Created Public Company Accounting Oversight Board (PCOAB)

19. BEYOND THE STATEMENTS Horizontal Analysis – compares information in a firm’s financial statement over a period of 2 years or more. Vertical Analysis – expresses items on the balance sheet and income statement as a percentage of a key value. Ratio Analysis – compares selected items by computing percentages, rates or proportions.

20. MANAGERIAL ACCOUNTING VS. FINANCIAL ACCOUNTING