1. Financing and Tracking Business Operations Better Business 1st Edition Poatsy · Martin © 2010 Pearson Education, Inc.1 chapter 15 Slide presentation prepared by Pam Janson Stark State College of Technology

2. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. © 2010 Pearson Education, Inc.2

3. Learning Objectives 1.What are the implications of financial management, and how do financial managers fulfill their responsibilities? 2.How do companies finance their short-term business needs through trade credit, commercial banks, commercial finance companies, and commercial paper? 3.What is the purpose of each type of long-term financing for companies? 4.What are the functions of corporate accounting, tax accounting, auditing, financial accounting, managerial accounting, and government and not-for-profit accounting? 5.How is double-entry bookkeeping used to maintain the balance of the fundamental accounting equation? 6.What is the function of balance sheets, income statements, and statements of cash flow? © 2010 Pearson Education, Inc.3

4. Financial Management Developing plans that outline the company’s financial short-term and long-term needs Defining the sources and uses of funds that are needed to reach the goals Monitoring the cash flow of a company to ensure that obligations are paid and funds owed to the company are collected Investing any excess funds so that those funds can grow and be used for future developments Raising capital for future growth and expansion © 2010 Pearson Education, Inc. Publishing as Prentice Hall 4

5. Planning for Financial Needs Forecast financial needs Develop budgets and plans to meet financial needs Establish controls to ensure that the budgets and plans are being followed © 2010 Pearson Education, Inc. Publishing as Prentice Hall 5

6. Financing Short-Term Business Needs Short-term financing is repaid within a year Small companies may ask friends and family or use credit cards to cover short-term gaps Large companies get trade credit from suppliers, interim credit from banks, or issue commercial paper Other options: oLine of credit oSecured loan oUnsecured loan oCommercial finance company loan oFactoring © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6

7. Financing Long-Term Business Needs Debt financing oLoans oSecured bonds oUnsecured bonds Equity oRetained earnings oIssuing stock oVenture capitalists © 2010 Pearson Education, Inc. Publishing as Prentice Hall 7

8. Deciding Between Debt and Equity Financing Most companies use debt to finance operations, which increases leverage oLeverage is the amount of debt used to finance a firm’s assets with the intent that the rate of return on the assets is greater than the cost of the debt oAn acceptable leverage ratio is twice as much equity as debt Equity financing may oReduce the company’s financial assets oIncrease the number of business owners © 2010 Pearson Education, Inc. Publishing as Prentice Hall 8

9. Accounting Fundamentals Accounting tracks a business’s income and expenses through a process of recording financial transactions. The transactions are summarized into key financial reports that show the business’s financial status. Accounting is necessary to calculate the past, present, and future financial status for businesses. Because there is some degree of interpretation in the process of accounting, it is both an art and a science. © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9

10. Corporate Accounting Managerial accounting oTracks sales and the costs of producing the sales oDetermines profitability of business activities oProvides analyses for management decision- making oProduces budgets oMonitors actual performance vs. budgets Financial accounting oProduces financial statements for stakeholders outside the company © 2010 Pearson Education, Inc. Publishing as Prentice Hall 10

11. Additional Types of Accounting Auditing oInternal auditors oIndependent auditors Government and not-for-profit accounting Tax accounting © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11

12. Accounting Standards and Processes Generally acceptable accounting principles (GAAP) oDefined by the Financial Accounting Standards Board Sarbanes-Oxley Act oPassed in 2002 to protect investors from corporate accounting fraud oEstablished the Public Company Accounting Oversight Board International Financial Reporting Standards (IFRSs) © 2010 Pearson Education, Inc. Publishing as Prentice Hall 12

13. The Accounting Process Bookkeeping Double-entry bookkeeping The fundamental accounting equation © 2010 Pearson Education, Inc. Publishing as Prentice Hall 13

14. Examples of the Accounting Equation © 2010 Pearson Education, Inc. Publishing as Prentice Hall 14

15. Financial Statements Balance sheet Income statement Statement of cash flows © 2010 Pearson Education, Inc.15

16. Balance Sheet A snapshot of a business’s financial condition at a specific moment in time Based on the accounting equation © 2010 Pearson Education, Inc. Publishing as Prentice Hall 16 Assets Current assets Fixed assets Intangible assets Liabilities Short-term liabilities Long-term liabilities Owners’ Equity

17. Balance Sheet Example © 2010 Pearson Education, Inc. Publishing as Prentice Hall 17

18. Analyzing a Balance Sheet Inventory turnover Ratio analysis: Working capital = current assets – current liabilities Current ratio = current assets ÷ current liabilities Debt-to-equity ratio = total liabilities ÷ shareholders’ equity © 2010 Pearson Education, Inc. Publishing as Prentice Hall 18

19. Income Statements Income statements also work around an equation: R evenues – Expenses = Profit (or loss) Revenue – Cost of Goods Sold Gross profit – Operating expenses Operating income – Interest expense – Taxes Net income after taxes © 2010 Pearson Education, Inc. Publishing as Prentice Hall 19 The “bottom line”

20. Income Statement Example © 2010 Pearson Education, Inc. Publishing as Prentice Hall 20

21. Analyzing Income Statements Ratio analysis: © 2010 Pearson Education, Inc. Publishing as Prentice Hall 21 Gross profit margin = (total revenue – COGS) / total revenue Operating profit margin = [(total revenue – COGS) – operating expenses] / total revenue Earnings per share = net income / outstanding shares

22. Statement of Cash Flows Operating activities oCash used or provided by the core business Investing activities oCash involved in the purchase or sale of investments or income-producing assets Financing activities oCash exchanged between the firm and its owners (or shareholders) and creditors © 2010 Pearson Education, Inc. Publishing as Prentice Hall 22

23. Statement of Cash Flows Example © 2010 Pearson Education, Inc. Publishing as Prentice Hall 23

24. Chapter Summary 1.What are the implications of financial management, and how do financial managers fulfill their responsibilities? 2.How do companies finance their short-term business needs through trade credit, commercial banks, commercial finance companies, and commercial paper? 3.What is the purpose of each type of long-term financing for companies? 4.What are the functions of corporate accounting, tax accounting, auditing, financial accounting, managerial accounting, and government and not-for-profit accounting? 5.How is double-entry bookkeeping used to maintain the balance of the fundamental accounting equation? 6.What is the function of balance sheets, income statements, and statements of cash flow? © 2010 Pearson Education, Inc. Publishing as Prentice Hall 24

25. Beyond the Book © 2010 Pearson Education, Inc. Publishing as Prentice Hall 25

26. The Roles of Accountants and Auditors © 2010 Pearson Education, Inc. Publishing as Prentice Hall 26 Accountants compile and report financial information. Auditors verify the reported information is correct. oAuditors use documentary evidence and third parties to verify the financial information. oAuditors also visit company locations to confirm that physical assets exist.

27. Who Uses Financial Statements? Company managers Investors Creditors/lenders Tax authorities Who else? © 2010 Pearson Education, Inc. Publishing as Prentice Hall 27

28. Largest CPA Firms Firm 2007 revenue (in millions) Deloitte & Touche$9,856 Price Waterhouse Coopers $6,922 Ernest & Young$6,890 KPMG$4,438 RSM McGladrey$1,389 Grant Thorton$940 BDO Seidman$589 © 2010 Pearson Education, Inc. Publishing as Prentice Hall 28

29. Financial Statement Restatements of Public Companies Auditors originally stated the financial statements were in accordance with GAAP Companies later issued revised financial statements, usually reducing their net worth © 2010 Pearson Education, Inc. Publishing as Prentice Hall 29 Year # of U.S. Public Companies # of Financial Restatements% 20027,1442653.7% 20036,7802373.5% 20046,7292944.4% 20056,4734396.8%

30. Sarbanes-Oxley Act of 2002 Internal control standards to prevent incorrect reporting Auditors can only engage in audit and tax services—not more lucrative services such as consulting Oversight board established over CPA firms of public companies CEOs and CFOs are subject to criminal penalties for improper financial statements Deadline for complete compliance was 2005 © 2010 Pearson Education, Inc. Publishing as Prentice Hall 30