Basic Accounting Ppt

Management Simulations, Inc.

The Nature of AccountingThe Nature of Accounting

““Accounting is the identification, measurement and Accounting is the identification, measurement and communication of financial information about communication of financial information about economic entities to interested persons”economic entities to interested persons”

Kieso and WeygandtKieso and Weygandt

• Arose from the need to communicate financial Arose from the need to communicate financial informationinformation

• Financial Accounting Standards Board (FASB) is Financial Accounting Standards Board (FASB) is authoritative rule making bodyauthoritative rule making body

Finance is the Language of Business. Accounting is the Medium of Finance.


Underlying AssumptionsUnderlying Assumptions

Key AssumptionsKey Assumptions

• Double entryDouble entry

• Timing-matching principalTiming-matching principal

• Accrual accountingAccrual accounting

• Historical costHistorical cost

• FASB Standards applied to FASB Standards applied to simulation reports.simulation reports.


Objectives of Financial ReportingObjectives of Financial Reporting

• Know how effectively resources are obtained Know how effectively resources are obtained and appropriatedand appropriated

• Use information to inform investment and Use information to inform investment and credit decisionscredit decisions

• Identify optimum time to take actions affected Identify optimum time to take actions affected by cash flowby cash flow

BalanceBalanceSheetSheet

P&L P&L or Income or Income StatementStatement

CashCashFlowFlow


Balance SheetBalance Sheet

• Identifies what the company owns and who Identifies what the company owns and who owns itowns it

• Snapshot of financial healthSnapshot of financial health

• Assets always equal liabilities and net worth Assets always equal liabilities and net worth combinedcombined

• Accurate for a specific dateAccurate for a specific date


Sample Capstone Sample Capstone ® Balance Sheet Balance Sheet from Annual Reportsfrom Annual Reports

•Provides two year’s data

•Leverage = Total Assets / Total Equity. Ideal Leverage 1.81 to 2.80 – from shareholder’s perspective

•Lenders prefer to examine Debt / Assets

•Managers favor Debt / Equity

The Analyst Report on the website provides coaching on Financial Structure


Capstone Capstone ® Balance Sheet Survey Balance Sheet Survey

The Capstone ® Courier provides each team’s Balance Sheet summary on Page 3

Strategic intentions may be inferred based on profile

Example – a team with a large Plant & Equipment line may be adopting a cost leadership, high volume position


Profit and Loss Statement or Profit and Loss Statement or Income StatementIncome Statement

• Compares revenues and expenses for a given periodCompares revenues and expenses for a given period

• Movie of financial healthMovie of financial health

• Shows activity over a period of timeShows activity over a period of time

• Indicates the profitability of an organizationIndicates the profitability of an organization


Income Statement Survey from Income Statement Survey from Capstone Capstone ® Courier Courier

• Compare your team Compare your team against competitorsagainst competitors

• Is your variable costs Is your variable costs to sales comparison to sales comparison above or below above or below average?average?

• Do your SG&A Do your SG&A expenses relative to expenses relative to sales reflect good sales reflect good rates of return? rates of return?


Simulation Sample Proforma Simulation Sample Proforma Income StatementIncome Statement

Your spreadsheet program creates a Proforma Income Statement using your sales forecasts reconciled to your tactical decisions

The projected loss for net profit in this example tells the management team there is additional work to be done in the Strategy section

Red number – bad, black number - good


Cash Flow StatementCash Flow Statement

• Shows movement of cash in and out of an Shows movement of cash in and out of an organization over a given periodorganization over a given period

• Shows how much cash is available for use Shows how much cash is available for use during a given periodduring a given period

• Reconciles net profit back to cashReconciles net profit back to cash


Sample Capstone Sample Capstone ® Cash Flow Cash Flow StatementStatement

• Provides two Provides two year’s datayear’s data

• Common causes Common causes for emergency for emergency loans:loans:

1)1) Excessive inventory Excessive inventory resulting from poor resulting from poor sales forecastssales forecasts

2)2) Making Plant & Making Plant & Equip upgrades w/o Equip upgrades w/o raising sufficient raising sufficient capitalcapital

3)3) Operating lossesOperating losses


• A financial ratio shows the relationship between A financial ratio shows the relationship between two financial measurestwo financial measures

• Developed by dividing one measure into anotherDeveloped by dividing one measure into another

• Provide insights into company’s operations and Provide insights into company’s operations and strategystrategy

• Four categories: liquidity, solvency, market value, Four categories: liquidity, solvency, market value, profitabilityprofitability

• Used internally to evaluate performance and set Used internally to evaluate performance and set goalsgoals

• Used externally to make investment decisionsUsed externally to make investment decisions

Introduction to RatiosIntroduction to Ratios


Ratios Report Sample from Ratios Report Sample from Spreadsheet ProformasSpreadsheet Proformas

Your spreadsheet program creates a Proforma Ratios Report based on your sales forecasts and tactical decisions.

Are your decisions maximizing the Success Measurements (ROE, ROS, ROA, Stock Price, Asset Turnover, Market Capitalization) you chose (or were assigned)?


Asset TurnoverAsset Turnover

““Reveals how effective assets are at generating Reveals how effective assets are at generating sales revenue.”sales revenue.”

Asset Turnover =Asset Turnover =salessales

assetsassets


““ROS indicates the percentage of each sales ROS indicates the percentage of each sales dollar that results in net income.”dollar that results in net income.”

Return on SalesReturn on Sales

Return on Sales =Return on Sales =net profitnet profit

net salesnet sales


Return on AssetsReturn on Assets

Return on Assets =Return on Assets =net profitnet profit

assetsassets

““ROA measures a company’s ability to use ROA measures a company’s ability to use all its assets to generate earnings.”all its assets to generate earnings.”


LeverageLeverage

Leverage =Leverage =assetsassets

equityequity

““Leverage shows the debt level of the Leverage shows the debt level of the organization.”organization.”


Return on EquityReturn on Equity

Return on Equity =Return on Equity =net profitnet profit

equityequity

““Return on Equity highlights for the Return on Equity highlights for the stockholders the return on their stockholders the return on their investment.”investment.”


Du Pont FormulaDu Pont Formula


equityequity

net profitnet profit

salessales

salessales

assetsassets

assetsassets

equityequityxxxx xxxx

Value Chain


Du Pont FormulaDu Pont Formula


equityequity

net profitnet profit

salessales

salessales

assetsassets

assetsassets

equityequityxxxx xxxx

Return on Return on SalesSales

Asset Asset TurnoverTurnover

LeverageLeverage

Value Chain


Du Pont Formula · TI vs. HPDu Pont Formula · TI vs. HP

Texas InstrumentsTexas Instruments Hewlett PackardHewlett Packard

Current AssetsCurrent Assets = 1.29= 1.29

Fixed Assets Fixed Assets = 1.11= 1.11

Sales Sales = 4.07= 4.07

Net Income Net Income = .37= .37

Shareholder Equity Shareholder Equity = 1.16= 1.16









Turnover xTurnover x 1.691.69

ROS ROS 9.3% 9.3%

= ROA= ROA 15.7%15.7%

x Leveragex Leverage 2.072.07

= ROE= ROE 32.5%32.5%










Fixed Assets Fixed Assets = .84= .84





ROS ROS 9.3% 9.3%

= ROA= ROA 15.7%15.7%


= ROE= ROE 32.5%32.5%










Fixed Assets Fixed Assets = .84= .84





ROS ROS 9.3% 9.3%

= ROA= ROA 15.7%15.7%


= ROE= ROE 32.5%32.5%


ROSROS 16.9%16.9%

= ROA= ROA 22.4%22.4%


= ROE= ROE 33.8%33.8%

Basic Accounting Ppt

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