Finance and Accounting for Administrative Professionals

Transcription

1 Finance and Accounting for Administrative Professionals

2 TABLE OF CONTENTS Course Overview...3 How to Understand and Use the Language of Business...4 GAAP How to Set Up Financial Statements and Reports...8 Appendix A...19 Appendix B...21 Produced by SkillPath Seminars The Smart Choice 6900 Squibb Road P.O. Box 2768 Mission, KS Finanace and Accounting for Administrative Professionals Copyright SkillPath All rights reserved.

3 COURSE OVERVIEW In today s business world, your effectiveness may well depend on your ability to handle the numbers. Every successful administrative professional wants to possess basic finance and accounting skills, because they are great assets to have in this highly competitive marketplace. In this session you will learn basic financial and accounting terms and how to read budgets and work on balance sheets, which will help increase your efficiency so you can better daily assist your manager. Understand 15 common financial terms and find out what those tricky financial statements and reports are showing you Present ideas in sound financial terms for greater impact and acceptance at all levels of the organization Interpret and understand the most common financial reports: income statements, balance sheets and cash flow statements Learn how cash and profit differ as exhibited in the cash flow statement Understand the basic T accounting system and how to account for assets, liabilities, equity, revenue and expenses Learn how to sort and post business transactions into debit or credit columns and how to check for accuracy Understand the basics of the accounting cycle 3

4 HOW TO UNDERSTAND AND USE THE LANGUAGE OF BUSINESS What Every Administrative Professional Needs to Know About Accounting and Finance Grasping what financial data is telling you is important for both making and executing business decisions. If costs of goods are rising, then other costs will have to be lowered or prices will have to be raised. While business decisions usually involve more than just numbers, the numbers will always matter. By understanding basic financial accounting and developing an awareness of Generally Accepted Accounting Principles (GAAP), you will be better able to: Communicate more effectively at all levels of the organization. Decipher and analyze industry trends that have implications for your organization. Understand how your department contributes to the bottom line. Make or contribute to better-informed proposals and decisions. Types of financial statements: Income statement Balance sheet Statement of cash flow Statement of retained earnings 4

5 How to Cut Through the Jargon to Translate Financial Data Into Meaningful Concepts and Understandable Terms The best way to begin learning about financial concepts is to learn the language of finance and accounting. Learn the basics. Ask questions. Read the financial reports. Ask more questions. Relating basic terms to your personal finances Assets: If you want to borrow money, one of the areas your local banker will be most concerned with is what things of value you own, or what your assets are. Asset describes something of value measured in monetary terms. Liabilities: The banker will also be concerned with how much you owe, and to whom. Liabilities represent a legal commitment. Equity: Your personal equity is what you are worth in dollars. It is the value of your assets minus your liabilities. In sole proprietorships, it is called Owner s Equity. In Corporations, it is called Stockholders Equity. Example of buying a house Before purchase: Assets Cash Checking account Savings 850 7,450 Liabilities Personal bank loan Credit card debt 2, Securities 40,000 Total Assets $48,300 Equity 45,800 Total Liabilities & Equity $48,300 After purchase: Assets Cash Checking account Savings 850 7,450 Liabilities Personal bank loan Credit card debt 2, Securities 27,500 House 125,000 Total Assets $160,800 Mortgage loan 112,500 Equity 45,800 Total Liabilities & Equity $160,800 Even though you now own a home, your personal equity has decreased. Why? Although your assets increased, your creditors claims on those assets also increased. 5

6 The 15 Financial Terms Your Business Vocabulary Must Include Accounting is the universal language of business. The accounting process is a system designed to record, classify, report, and interpret financial data. Common accounting terms: 1. Accrual method: Recognizes revenue at the point of sale and recognizes expenses when incurred 2. Asset: An item of value owned by a business or individual, whether or not there is a claim on the item 3. Balance sheet: Summary statement of the firm s financial position at a given point in time 4. Capital expenditure: An outlay of funds by a company, expected to produce benefits over a period greater than one year 5. Current assets: The value of all assets expected to be converted into cash within one year 6. Current liabilities: Short-term liabilities, due within one year 7. Depreciation: The systematic charging of a portion of the cost of a fixed asset against the annual revenues generated by the asset 8. Equity: The value of the owners interest in property remaining after all claims and liens against it 9. Income statement: Provides a financial summary of the company s operating results during a specified period 10. Leverage: The amount of borrowed funds that a company uses to finance company growth and development, usually through the purchase of assets 11. Liability: A legal commitment to pay some amount or transfer some benefit, at some point in the future 12. Retained earnings: Those earnings of a company that are not distributed as dividends 13. Sales forecast: The prediction of a company s sales over a given period, used as the key input to the short-run financial planning process 14. Statement of cash flows: A cash flow statement is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents. The cash flow statement is concerned with the flow of cash in and out of the business. 15. Statement of retained earnings: Reconciles the net income earned in a year and any cash dividends paid with the change in retained earnings between the start and the end of that year See the Glossary in the Appendix for a more complete list of common accounting terms. 6

7 How to Present Your Ideas and Plans in the Appropriate Financial Terms Generally Accepted Accounting Principles (GAAP) provide guidelines for the preparation of financial statements. However, there is no single definition or all-inclusive listing of principles that are universally acceptable to all theorists and practitioners. Financial data is often part of a project proposal and many types of business reports. You will be more effective if you are able to present financial information: Fairly and accurately In an organized manner Using terms everyone understands With consistency Using standard definitions Understanding the Basics of the Accounting Cycle The accounting cycle is a logical series of steps that accountants follow to keep records and prepare financial statements. Accounting cycle: 1. Analyze transactions. 2. Record them in the journal as debits and credits. 3. Post the journal entries to the general ledger. 4. Run a trial balance. 5. Make adjusting entries. 6. Close the books. 7. Prepare financial statements. 7

8 GAAP HOW TO SET UP FINANCIAL STATEMENTS AND REPORTS How to Understand and Interpret the Most Common Financial Reports Management, bankers, and outside investors all look at a company s financial statements to determine if strategies are working and risks are paying off. People spend years studying accounting and finance. However, in today s business world, everyone needs to know at least the basics in order to make sound decisions. What are financial statements? Documents that summarize a firm s financial condition and transactions for a given period Why do we use them? To enable managers to make informed decisions and allow stockholders, creditors, and the government to have an accurate picture of the firm s financial dealings and profitability The three main statements: 1. Balance sheet: Shows the overall financial condition of the firm on a specific date a snapshot in time 2. Income statement: Shows whether the firm has achieved a profit or loss over a period of time transactional 3. Cash flow: Shows a summary of cash inflows and outflows of the firm 8

9 The Income Statement The income statement or the profit and loss (P&L) or the statement of operations and retained earnings tracks the profit (or losses) of a company. It shows transactions over a period of time, deducting allowable expenses from revenue (or sales). While it shows a company s profits, it does not show the cash position or how much money is owed to creditors or due from debtors. Revenue and cost of goods sold Revenue (sales) Calculated by taking total sales, less any product returns or sales discounts Cost of goods sold (cost of sales) The costs directly associated with making or acquiring your products Gross profit Derived by subtracting the cost of goods sold from net sales Does not include any operating expenses or income taxes SG&A and operating income SG&A (sales, general, and administration costs) Watched closely to detect signs of managerial inefficiency Strive to keep operating expense as low as possible while not damaging the underlying business Operating income Earnings from normal operations before any non-operating costs, such as interest expense and taxes Used by financial analysts (rather than net income) as a measure of profitability What the income statement tells you Is the organization profitable, and how much so? Is it increasing or decreasing? How effective are marketing and sales efforts? Have outside factors (e.g., economy, competition, etc.) affected revenue, and how much so? Have costs increased (which ones?), and how have they affected profitability? Do you see any trends over the course of several years? What are they? 9

10 XYZ Manufacturing, Inc. Income Statement (in thousands) Year 2 Year 1 Sales 23, % 19, % Cost of Goods Sold 14, % 11, % Gross Margin 9, % 7, % Operating Expenses SG&A 7, % 5, % Depreciation & Amortization % % Total Operating Expenses 7, % 6, % Operating Income 1, % 1, % Interest Expense % % Income Before Taxes % 1, % Income Taxes (if C Corp) % % Net Income % % Please note that these examples use common-size financial statements, also known as vertical analysis. 10

11 The Balance Sheet The balance sheet is a snapshot of the financial condition of the firm at a given time. Definitions Asset: Assets are anything of value that a company owns including cash Current assets: Cash, marketable securities, receivables, inventories, and prepayments Often characterized as those assets that may be converted into cash in one year or less Long-term (non-current) assets: Assets that will last more than one year: property, building, equipment, etc. Liability: Liabilities are anything a company owes to people or businesses Current liabilities: Those that must be paid within a year from the date of the balance sheet Long-term (non-current) liabilities: Debts that will not be repaid within the next 12 months Equity: Owners equity (capital) is money invested in the business plus the retained earnings. These funds are at risk but may increase in value. Key concept: Assets = Liabilities + Owners Equities Other terminology The balance sheet may also be called the statement of financial condition, the statement of financial position, or the position statement. Depreciation is the amount that the value of an asset is reduced by (on the balance sheet) in a period due to age and use. This portion is added to the expenses (on the income statement) of the business in this period. Retained earnings are earnings (net profit from the income statement) not paid out in dividends to shareholders. What the balance sheet tells you Measures net worth (Total Assets Total Liabilities) Debt/equity ratio More risk the higher it is; can t obtain loans Net working capital (Current Assets Current Liabilities) Current ratio Risk of inability to pay obligations as they come due increases as the current ratio decreases. For example: A company with a current ratio of 2.0 to 1.0 is less likely to default on its obligations than a company with a current ratio of.75 to 1.0. Measures cash Liquidity (short term) Solvency (long term) Answers the basic questions: How much are you worth? How much cash can you generate? Is cash increasing or decreasing? Is working capital (current assets minus current liabilities) increasing or decreasing? Is shareholder equity positive? Is it increasing or decreasing? If shareholder equity is increasing, is it because of increased profitability or infusion of capital? How important is goodwill to the value of assets? Shows your financial position Your ability to handle risk 11

12 XYZ Manufacturing, Inc. Balance Sheet (in thousands) Year 2 Year 1 Assets Current Assets Cash & Equivalents 2, % 2, % Accounts Receivable 2, % 2, % Inventory 2, % 2, % Total Current Assets 7, % 6, % Non-current Assets Property, Plant & Equipment 14, % 13, % Less: Accumulated Depreciation (5,000) 28.2% (4,195) 25.6% Net Fixed Assets 9, % 8, % Goodwill 1, % 1, % Total Non-current Assets 10, % 9, % Total Assets 17, % 16, % Liabilities Current Liabilities Accounts Payable 1, % 1, % Other Current Liabilities 2, % 2, % Total Current Liabilities 3, % 3, % Non-current Liabilities Loans 3, % 2, % Total Non-current Liabilities 3, % 2, % Total Liabilities 6, % 6, % Equity Equity Investments 6, % 6, % Retained Earnings 4, % 4, % Total Equity 10, % 10, % Total Liabilities and Equity 17, % 16, % 12

13 The Cash Flow Statement The cash flow statement provides a summary of the cash inflows and outflows for the firm. Cash flow analysis uses computations of accounts receivable collection, short-term assets, and account balances to determine the current cash position. Look at this report to identify the firm s leverage and long term risks. The phrase Cash is king illustrates one key principle of financial intelligence: No matter how profitable an organization s financial statements show it to be, if it doesn t have enough cash to pay its obligations, it s in peril. The reason is simple. Profit isn t real money. Cash is. Why profit doesn t equal cash The biggest reason profit and cash are different is their timing in the business cycle. Expenses for daily operations and products and services are paid out in cash by non-retail businesses long before revenue is recognized and profit is recorded. And it s later still when cash payments are received for products and services sold. Another factor that differentiates profit from cash is non-cash expenses such as depreciation. This is the annual expense charged on financial statements over a number of years for the cost of capital items. It directly affects profit but has no effect on cash. There are three basic sources of cash flows: 1. Operations 2. Investing 3. Financing Cash flows of profit-making operations ( + ) Received from sales ( ) Purchases of products ( ) Operating expenses ( ) Interest expense ( ) Income tax expense ( = ) Net increase (decrease) of cash Cash flows of investing capital ( + ) Profits from investments ( ) Losses from investments ( ) Spent for long-term assets ( = ) Net increase (decrease) of cash Cash flows of financing/borrowing ( + ) Short-term borrowing ( + ) Long-term borrowing ( ) Dividends paid to stockholders ( ) Payments to debt holders ( = ) Net increase (decrease) of cash 13

14 Questions the cash flow statement answers: Where is cash coming from operations, investors, loans? What is cash being used for operations, investments, debt service? Are customers paying their bills on time? Is our organization timing the payment of its bills effectively? (in thousands) XYZ Manufacturing, Inc. CASH FLOW December 31, Year 2 Cash Flows From Operating Activities Net Profit $ 678 Change in Accounts Receivable (AR) 20 Change in Inventory (740) Depreciation Expense 805 Change in Current Liabilities 302 Total Cash Flows From Operating Activities $1,065 Cash Flows From Investing Activities Change in Property, Plant & Equipment ($1,300) Cash Flows From Financing Activities Change in Long-Term Liabilities $ 365 Net Change in Cash During Year $ 130 Beginning Cash Balance $2,000 Ending Cash Balance $2,130 How cash and profit differ as exhibited in the cash flow statement Revenue booked on income statement not all collected yet (AR) Cash outlay for inventory not all sold yet, so not expensed on income statement Expenses accounted for on income statement but bills not yet paid (AP) Cash purchase of machinery and equipment will be depreciated over time Depreciation on income statement not a cash outlay Cash received from long-term loan not revenue not on income statement 14

15 How to Account for Assets, Liabilities, Equity, Revenue, and Expenses Assets = Liabilities + Equities or Total Business Resources = Creditors Claims + Owners Claims Revenue increases equity and expenses decrease equity; therefore: Resorting to algebra (sorry, it s unavoidable): Assets = Liabilities + Equities + Revenues Expenses Assets + Expenses = Liabilities + Equities + Revenues This last form is where double-entry bookkeeping comes into play. The equation must always be kept in balance. The left-hand side (assets plus expenses) must always be equal to the right-hand side (liabilities + equities + revenues). Understanding the basic T accounting system Accounting often uses a component called an T Account. It s often shown as a T. We set up an account for each specific asset, liability, equity, revenue, and expense. 1,000 Cash Capital 1,000 15

16 Sorting business transactions into the appropriate debits and credits posting accounts Double-entry (accrual) bookkeeping has been designed to keep track of data while reducing errors. It uses two entries to record each individual transaction. In the double-entry system, each transaction records related pairs of financial data for asset, liability, income, expense, or capital accounts. We use an accounting equation (Assets = Liabilities + Equity) to accomplish this. When entries are posted, the amount posted on the left must equal the amount posted on the right, which is to say that at least two entries must be made one on the left-hand side and one on the right-hand side of the equation. This keeps track of data while reducing the probability of an arithmetic error. The left and right refer to the appropriate sides of the accounting equation. This equation must always be in balance. Remember: Debit is left (Dr.). Credit is right (Cr.). Example: To keep your debits and credit straight, look at the accounting equation again. Assets = Liabilities + Equity Since assets are on the left side of the equation, asset account balances are on the left side as well. So, to increase an asset account, you debit it. To decrease an asset account, you credit it. Conversely, to increase a liabilities or equity account, you credit it; and to decrease a liabilities or equity account, you debit it. Revenue and expenses are also accounted for and balanced with debits and credits. Expenses are on the left (debit) side. Revenue is on the right (credit) side. Debit side (Dr.) Assets + Expenses Debit (Dr.) to increase Credit (Cr.) to decrease Normal balance = Debit Credit side (Cr.) Liabilities + Equities + Revenues Credit (Cr.) to increase Debit (Dr.) to decrease Normal balance = Credit 16

17 Examples: Suppose an owner invests an additional $10,000 in the business (buys more stock). Account Debit Credit Cash $10,000 Owners Equity $10,000 Now suppose inventory is purchased for $7,000. Account Debit Credit Cash $ 7,000 Inventory $ 7,000 Note that in the first example, the accounts involved are on opposite sides of the balance sheet. In the second example, the accounts are both on the same side of the balance sheet (the asset side). Next, examine the entries when a $1,000 cash sale is made. Account Debit Credit Revenue $ 1,000 Cash $ 1,000 The company then decides to buy new equipment. The cost is $20,000. $5,000 will be paid in cash, and a loan will be taken out to pay for the balance. Account Debit Credit Equipment $ 20,000 Long-Term Liability $15,000 Cash $ 5,000 A sale of $3,000 is made on credit. The buyer has 60 days to pay. Cost of goods sold (COGS) is 50%. Account Debit Credit Revenue $ 3,000 Accounts Receivable $ 3,000 COGS $ 1,500 Inventory $ 1,500 17

18 Checking for Accuracy: The Value of Taking a Trial Balance To keep our equation in balance, the sum of the debit entries must always equal the sum of the credit entries. Checking these totals is called taking a trial balance. From the transaction illustrated on the previous page, determine the account balances listed below. Do the debits equal the credits? Trial Balance Account Debit Credit Cash Owners Equity Inventory Revenue Equipment Long-term Liability Accounts Receivable COGS Totals See Appendix B for answer. Recording Business Transactions: A Summary of the Information Account: Device used to keep track of transactions General ledger: All accounts grouped together General ledger accounts include: Assets Revenues Liabilities Expenses Equity Double-entry accounting: Records the dual effect of a business transaction Debit = Credit: Second most important accounting equation; These terms are used only to denote left side (debit) and right side (credit). T Account: A visual aid used by accountants to illustrate a journal entry s effect on the general ledger accounts; Debit amounts are entered on the left side of the T and credit amounts are entered on the right side. Source: Journal: A chronological record of the entity s transactions Trial balance: Summary of all account balances; A total of all debits and credits must be found and must be equal. 18

19 Glossary Accelerated Cost Recovery System Used to determine the depreciation of assets for tax purposes Aging A technique for providing information concerning the proportion of an accounts receivable balance that has been outstanding for a specified period of time Aggressive financing strategy Plan by which the firm finances its seasonal needs with short-term funds and its permanent needs with long-term funds Annuity A stream of equal annual cash flows Bond Long-term debt instrument used by businesses and government to raise large sums of money, generally from a diverse group of lenders Book value The strict accounting value of an asset, calculated by subtracting its accumulated depreciation from installed cost Capital The long-term funds of the firm Capital budgeting The process of evaluating and selecting long-term investments Capital gain The amount by which the price at which an asset was sold exceeds the asset s purchase price Cash The ready currency to which all liquid assets can be reduced Cash budget (cash forecast) Financial projections of the firm s short-term cash surpluses or shortages Cash method Recognizes revenues and expenses only with respect to actual inflows and outflows of cash Cash turnover The number of times per year the firm s cash is turned into a marketable product and then back into cash Common stock Collectively, units of ownership interest, or equity, in a corporation Contribution margin The percent of each sales dollar remaining after variable costs are satisfied Cost of capital The rate of return a firm must earn on its investments in projects in order to maintain the market value of its stock Current assets Short-term assets, expected to be converted into cash within one year or less Current liabilities Short-term liabilities, expected to be converted into cash within one year Current ratio A measure of liquidity calculated by dividing the firm s current assets by its current liabilities Dividends Periodic distribution of earnings to the owners of stock in a firm Earnings per share (EPS) The firm s total earnings available to common stock holders divided by the number of common shares of stock outstanding Appendix A Fixed assets Those assets of a permanent nature that cannot be disposed of without disruption to the business Fixed charges (fixed expenses) Expenses that do not vary with business volume Inventory turnover Measures the activity or liquidity of a firm s inventory Liquidity A firm s ability to satisfy its short-term obligations as they come due Long term A period greater than one year Long-term funds The sum of the firm s long-term debt and stockholders equity 19

20 Net cash flow The mathematical difference between the firm s cash receipts and its cash disbursements in each period Net present value Found by subtracting the initial investment from the present value of the cash inflows discounted at a rate equal to the firm s cost of capital Net profit margin Measures the percentage of each sales dollar left after all expenses, including taxes, have been deducted Net working capital The difference between the firm s current assets and current liabilities Noncash charges Expenses deducted on the income statement that do not involve an actual outlay of cash during the period Opportunity cost The cost to the firm of forgone returns due to the failure to make short-term investments Par value Per-share value arbitrarily assigned to an issue of common stock primarily for accounting purposes Percent-of-sales method A method for developing the pro forma income statement that expresses the cost of goods sold, operating expenses, and interest expense as a percentage of projected sales Preferred stock A special form of stock having a fixed periodic dividend that must be paid prior to payment of any common stock dividends Present value The current value of a future sum Semivariable costs Costs that are partly fixed and partly variable Short term A period of less than one year Stockholders The true owners of a firm by virtue of their equity in the form of common and/or preferred stock Variable costs Costs that vary directly with sales 20

21 Appendix B Answers to Trial Balance, Page 18 Trial Balance Account Debit Credit Cash ($1,000) Owners Equity $10,000 Inventory $5,500 Revenue $4,000 Equipment $20,000 Long-Term Liability $15,000 Accounts Receivable $3,000 COGS $1,500 Totals $29,000 $29,000 21

22 Please join us again soon! For dates, locations, complete course outlines and information on our other seminars, products and services, visit us at or a division of the Graceland College Center for Professional Development and Lifelong Learning, Inc. Finance and Accounting for Administrative Professionals 4/16 V736 Webinar