eBook Chp 5 Money Matters: Accounting & Finance (PDF)

CHAPTER 5 MONEY MATTERS: ACCOUNTING & FINANCE LEARNING OBJECTIVES At the conclusion of this chapter, you will be able to:  Define revenue, costs, and profitability  Explain the three forms of accounting  Interpret the entries on the three financial statements  Use formulae to calcu...

CHAPTER 5 MONEY MATTERS: ACCOUNTING & FINANCE LEARNING OBJECTIVES At the conclusion of this chapter, you will be able to:  Define revenue, costs, and profitability  Explain the three forms of accounting  Interpret the entries on the three financial statements  Use formulae to calculate financial ratios  Differentiate types of expenses and liabilities ACCOUNTING AREAS Accounting as a practice falls into three areas: 1. FINANCIAL 2. MANAGERIAL 3. GOVERNMENTAL reports data in the form prepares internally ensures fees and of standard financial circulated reports taxes are paid at the statements to external and creates local, state, or federal sources forecasts level FINANCIAL STATEMENTS Managers need to focus on three financial statements: 1. CASH FLOW 2. INCOME STATEMENT STATEMENT 3. BALANCE SHEET 1. CASH FLOW STATEMENT Starbucks Statement of Cash Flows ($Millions) Oct 1, 2023 The cash flow statement tracks cash or revenue coming into Net Earnings $4,124.7 the business and going out of the business. These inflows and outflows are separated by activity: Adjustments 1,884.0 Net Cash from Operating 6,008.7 Activities OPERATING INVESTING FINANCIAL Net Cash from Investing (2,270.8) Activities Net Cash from Financing (3,004.8) Activities revenue and transactions of transactions Net Increase (Decrease) in 733.1 Cash and Cash Equivalents expenses capital related to associated with investments and stocks, bonds, running the other and loans business investments 2. INCOME STATEMENT Provides more details about the firm’s profitability and starts with sales revenue. Cost of goods sold accounts for how much we directly spend to generate the sales revenue. Starbucks Income Statement ($Millions)* Oct 1, 2023 Sales Revenues $35,975.6 We subtract the cost of goods sold from the sales revenue to determine the gross margin. Cost of Goods Sold (9,409.1) Gross Margin 26,566.6 From gross margin, we subtract expenses Advertising and Promotion (1,441.3) associated with promoting and advertising the business to derive net marketing contribution. Net Marketing Contribution 25,125.2 Operating Expenses (17,810.6) We then subtract operating expenses from net marketing contribution to determine our Operating Income 7,314.6 operating income. Depreciation, Interest, and Taxes (3,189.9) Finally, we account for depreciation, pay interest Net Income 4,124.7 on any loans, and settle our taxes. We subtract those expenditures from our operating income to determine our net income. 3. BALANCE SHEET Starbucks Balance Sheet Liabilities and Shareholder’s Oct 1, Oct 1, 2023 ($Millions) Assets Equity ($Millions) 2023 Represents the final statement and contains three items: Current Assets $7,303.4 Short-Term Liabilities $9,345.3  assets Non-Current Assets 1,884.0 Long-Term Liabilities $28.098.  liabilities Goodwill and other Non- 6,008.7 Total Liabilities 37,443.3 Tangible Assets  owners’ equity - - Retained Earnings (8,037.0) When we sum the dollar value of the - - Stockholders’ Equity 39.2 liabilities and the dollar value of the owners’ equity, the total must equal Total Liabilities and Total Assets 29,445.5 29,445.5 the dollar value of the assets. Shareholders’ Equity  ASSETS Assets represent the dollar value of entities or items that the business owns. Current assets reflect entities or items that the business can convert into or sell for cash in less than a year. Examples: cash on hand, cash that the business holds in savings accounts, money market accounts, or stocks and bonds Non-current assets involve entities or items that the business can convert into or sell for cash in more than a year. Examples: plant, property, and equipment Goodwill represents intangible assets. Examples: brandmark, trademarks, copyrights, patents LIABILITIES Liabilities represent the dollar value of entities or items that the business owes. Short-term liabilities, also known as current liabilities, represent debts owed by the business that are due within a year. Examples: Credit card debt, lines of credit, and other forms of short-term borrowing or debt Long-term liabilities involve debts owed by the business that are due in more than a year or require more than a year to pay off. Examples: Mortgages and leases OWNERS’ EQUITY Owners’ equity represents the final entry in this important formula (balance sheet) and comes in two forms:  stockholders’ equity  retained earnings Stockholders’ equity reflects how much the owners of the business have invested in the business. Retained earnings reflect how much net profit remains in the business that is not distributed as dividends to shareholders. A firm buys its assets with liability or debt, with equity, or with a mixture of both.  3. APPLYING THE FINANCIAL STATEMENTS PROFIT AND LOSS 1. 2. (P&L) STATEMENTS a basic form of control that PRO FORMA STATEMENTS compares the help to ensure monetary actual amount MONETARY control. Entries are CONTROL organized by revenue and to the budgeted expense. Each entry has a ensures we only projected column and an amount, with spend money that we have. actual column so we can stay as close to the budget each amount as possible. expressed in relation to sales revenue. XYZ CORPORATION PROFIT & LOSS STATEMENT Period ending January 31, 2023 Item Amount % of Sales Net Sales $175,234 100.00% COGS $34,193 19.51% Gross Margin $141,041 80.49% Operating Expenses $76,318 43.55% Net Income $64,723 36.94% IMPORTANT RATIOS & CALCULATIONS Efficient use of financial resources can be determined by a set of ratios and calculations:  Return on Sales – determined by dividing net profit by net sales revenue to understand how much profit is generated from revenue  Return on Investment – calculated by dividing the net profit, which is known as the return, by the investment, or the amount needed to start the project  Breakeven – the point that the business has sold enough product to pay off the investment amount. Measured by dividing total fixed costs by gross margin per unit  Payback period – determines when on the calendar a product will reach the break-even point  Rate of change – calculated by subtracting the old figure from the new figure and then dividing by the old figure