Dealership Accounting: Financial Statement Analysis

• Dealership accounting involves specific bookkeeping practices tailored to the automotive industry's unique challenges

Financial Statements

• Financial statements provide insight into a dealership's financial performance and standing
• The key statements include the income statement, balance sheet, and cash flow statement
• The income statement, or profit and loss (P&L) statement, summarizes revenues, costs, and expenses over a period
  • It reveals the dealership's net income or loss
• The balance sheet presents a dealership's assets, liabilities, and equity at a specific point in time, adhering to the accounting equation (Assets = Liabilities + Equity)
• The cash flow statement tracks the movement of cash both into and out of the dealership over a period
  • It is categorized into operating, investing, and financing activities

Inventory Management

• Inventory typically forms a substantial portion of a car dealership's assets and requires careful management
• Dealerships must account for new vehicles, used vehicles, parts, and accessories
• Common methods for inventory costing include:
  • First-In, First-Out (FIFO)
  • Last-In, First-Out (LIFO), where permitted
  • Weighted-Average cost
  • Specific Identification
• Routine physical inventory counts are essential to match recorded inventory with actual stock, helping to detect discrepancies from theft, damage, or clerical errors
• Depreciation is not typically applied to vehicle inventory held for sale
  • However, demonstration vehicles may be depreciated
• Floorplan financing is a common method used by dealerships to finance their inventory
  • It involves a loan that is secured by the vehicle inventory
  • Dealerships pay interest on the loan until the vehicles are sold, at which point the loan is repaid

Cash Flow Analysis

• Monitoring cash flow is important for dealerships to ensure they can meet short-term obligations and invest in growth opportunities
• A cash flow analysis involves tracking all cash inflows (receipts) and outflows (payments)
• Managing working capital is especially important for dealerships
  • This is because of the significant investments in inventory and accounts receivable
• Common strategies to improve cash flow include:
  • Negotiating favorable payment terms with suppliers
  • Offering incentives for early payments from customers
  • Efficiently managing inventory turnover

Journal Entries

• Journal entries are the foundation of the accounting cycle
• Each transaction is recorded in the general journal
• A standard journal entry includes:
  • The date of the transaction
  • The accounts affected
  • The debit and credit amounts
  • A brief description
• Examples specific to dealerships:
  • Sale of a vehicle (Debit: Cash or Accounts Receivable, Credit: Sales Revenue, Credit: Sales Tax Payable)
  • Purchase of inventory (Debit: Inventory, Credit: Accounts Payable or Cash)
  • Payment of floorplan interest (Debit: Interest Expense, Credit: Cash)
  • Recording depreciation on fixed assets (Debit: Depreciation Expense, Credit: Accumulated Depreciation)

General Ledger

• The general ledger is the central repository of all a dealership's financial transactions
• It contains all the accounts used to create financial statements
• Each account in the general ledger provides a detailed record of all debits and credits
• Maintaining an accurate general ledger is critical for preparing reliable financial reports and ensuring compliance with accounting standards

Debits and Credits

• Debits and credits are the fundamental elements of double-entry bookkeeping
• Debits increase asset, expense, and dividend accounts, while decreasing liability, owner's equity, and revenue accounts
• Credits increase liability, owner's equity, and revenue accounts, while decreasing asset, expense, and dividend accounts
• The basic accounting equation (Assets = Liabilities = Equity) must always balance, meaning the total debits must equal the total credits for every transaction

Automotive Industry Bookkeeping

• Automotive dealerships often have complex revenue streams including:
  • New vehicle sales
  • Used vehicle sales
  • Finance and insurance (F&I) products
  • Service and parts
• Each stream requires specific accounting treatment
• Accounting for warranty claims, both for vehicles under manufacturer warranty and extended warranties sold by the dealership, adds complexity
• Bookkeeping must correctly allocate revenue and costs to the appropriate departments
  • This ensures accurate departmental performance analysis
• Compliance with manufacturer reporting requirements is also essential, ensuring eligibility for incentive programs and rebates
• Sales tax regulations for vehicle sales can vary significantly by jurisdiction, requiring careful attention to ensure compliance
• Bookkeeping also needs to manage customer rebates and incentives
  • These can be offered by the manufacturer, the dealership, or both
• Dealerships must also adhere to specific accounting standards and regulations set forth by organizations like the Financial Accounting Standards Board (FASB) and the Internal Revenue Service (IRS)
• Internal controls are put in place to protect assets, prevent fraud, and ensure the accuracy of financial information