CHAPTER 8: ACCOUNTINGDECISION MAKING BY THE NUMBERS

Market Information

How can you tell how well you are doing? Measure individual transactions Put them all together –

How much “stuff” (acquired wealth) do you have Where did it come from? (assets = liabilities +

owners equity) How much new wealth are you creating with it?

(revenue - expense = profit)

Goal of business: To create wealth Competing for transactions in the market

Financial statements: the main output of financial accounting

Financial accounting includes three basic financial statements: Balance Sheet

assets: value of the stuff the you or the organization controls

liabilities: debt claims against the stuff owners’ equity: owners’ claims against the stuff

Income Statement revenues (revenues ($$ coming in) coming in) expenses (expenses ($$ going out) going out)

Statement of Cash Flows

Let’s Look At It From a Personal Perspective

What are Your Personal Goals?

Do you use a personal budget?

How do you monitor your budget?

What software/tools do you use?

What type of costs do you categorize?

What short and long-term goals are you aiming for?

Is it evident in your budget?

How do you manage your finances for the future?

Personal Financial Planning

Financial planning starts with outlined goals for companies and individuals.

If you want to have a million dollars by age 65. If you save $286 per month at age 25, you will have a

million dollars by age 65.

But, you would need to save $488 or $1,689 at ages 35 and 45 to reach that amount.

With an 8% return, planning to be a millionaire is very possible!

Balance sheet: what we own and how we got it

Net Worth– difference between

your assets and liabilities

Balance Sheet – summarizes a firm’s or individual’s financial position at a specific point in time.

Assets – things of

value that you own

Liabilities – indicates what the you owe to

others

= +

Stuff & claims against stuff

Stuff• Checking $ 1,500• Savings $ 2,000

Claims against stuff• Credit Card $ 500

Stuff & claims against stuff

Stuff• Checking $ 1,500• Savings $ 2,000• Car $23,000Claims against stuff• Credit Card $ 500 • Dave (owner) $ 3,000• Credit Union (loan) $20,000

Stuff & claims against stuff

Stuff• House $150,000Claims against stuff• Bank (debt) $115,000 • Dave (owner) $ 35,000

Stuff & claims against stuff

Stuff• Checking $ 1,500• Savings $ 2,000• Car $23,000Claims against stuff• Credit Card $ 500• Dave (owner) $ 3,000• Credit Union (loan) $20,000

Stuff• House $150,000Claims against stuff• Bank (debt) $115,000 • Dave (owner) $ 35,000

Snap shot: Personal Balance Sheet

Assets

• Checking $ 1,500

• Savings 2,000

• Car 23,000

• House 150,000

Total Assets $ 176,500

Liabilities

• Credit Card $ 500

• Credit union – car loan 20,000

• Bank - mortgage 115,000

Total Liabilities $ 135,500

Net Worth $ 41,000

The income statement: how did we do?

Net Income – the profit or loss

earned

Income Statement – summarizes a firm’s or individual’s operations over a given period of time in terms of profit and loss.

Revenue– the amount of Income you

earn

Expenses – the cash you

spend or other assets you use to

generate revenue

- =

OK… You Have a Paycheck

NameAddressCity, State Zip

Employee ID:Department:Location:

Marital Status:Allowances:Addl %:Addl Amt:

Hours and Earnings ---Current-------------YTD---------Description Rate Hours Earnings Hours Earnings

Total

Taxes: Current YTDFed WithholdingFed MED/EEFed OASD/EE

Before Tax DeductionParking PermitRetirement / 401K

After Tax DeductionUnited Way Campaign

Employer Paid BenefitsLife BasicRetirement / 401K

Total Gross FED Taxable Gross Total Taxes Total DeductionCurrent:YTD:

YTD Hours VAC SICK FICA Taxable Gross Net Pay Distribution

Medicare Taxable GrossFed MED/EE is the employee (EE) Federal Medical Insurance Fed OASDI/EE is the employee Federal Old Age Survivors Disability tax

w4Fill Out Your W-4

OK… You Have a Paycheck – Taxes and Deductions

NameAddressCity, State Zip

Employee ID:Department:Location:

Marital Status:Allowances:Addl %:Addl Amt:

Hours and Earnings ---Current-------------YTD---------Description Rate Hours Earnings Hours Earnings

Total

Taxes: Current YTDFed Withholding 2013 Tax TablesFed MED/EE 1.45%Fed OASD/EE 6.20%

Before Tax DeductionParking PermitRetirement / 401K

After Tax DeductionUnited Way Campaign

Employer Paid BenefitsLife BasicRetirement / 401K

Total Gross FED Taxable Gross Total Taxes Total DeductionCurrent:YTD:

YTD Hours VAC SICK FICA Taxable Gross Net Pay Distribution

Medicare Taxable Gross

OK… You Have a Paycheck – Net Pay Calculation

Pay Begin Date: 6/01/2013Pay End Date: 6/30/2013

NameAddressCity, State Zip

Employee ID: 123456Department:Location:

Marital Status: SingleAllowances: 1Addl %: 0Addl Amt: 0

Hours and Earnings ---Current-------------YTD---------Description Rate Hours Earnings Hours EarningsRegular 3,750.00 40 22,500.00Holiday

Total

Taxes: Current YTDFed Withholding 471.15 2826.90Fed MED/EE 54.38 326.28Fed OASD/EE 232.50 1395.00

Before-Tax-DeductionParking PermitRetirement / 401K 187.50

After-Tax-DeductionUnited Way Campaign 10.00

Employer Paid BenefitsLife Basic 15.00Retirement / 401K 187.50

Total Gross FED Taxable Gross Total Taxes Total Deduction Net PayCurrent: 3,750.00 3,750.00 758.03 197.50 2,794.47YTD: 22,500.00 22,500.00 4,548.36 1,185.00 16,766.82

YTD Hours VAC SICK FICA Taxable Gross Net Pay Distribution 0 0 22,500.00 2,794.47

Medicare Taxable Gross 22,500.00

Assumptions:•Salary - $45,000•Paid Monthly - $3,750•Single•401K deduction - 5%•Employer match•United Way - $120/yr

http://www.adp.com/tools-and-resources/calculators-and-tools/payroll-calculators/salary-paycheck-calculator.aspx

Monthly Income StatementIncome

• Wages $ 2,794

Expenditures for Donations $

• Church 100

Expenditures for Living Expenses $

• Food 500

• Mortgage – principal, interest, taxes, insurance

778

• Utilities – gas, electric, water 150

• Credit Card 100

• Car loan 439

• Insurance – car 150

• Gas 200

• Medical 125

• Clothing 50

• Entertainment 200

Total Expenditures $ 2,792

Total Income Less Expenditures $ 2

Assumptions:•Salary - $45,000•30 Yr Mortgage 3.835%

• Principal & Interest - $562• Property Taxes - $150• Homeowners Insurance - $67

•Auto Loan• 4 years • 1.9% interest

Personal investing

What are your short-term and long-term goals?

Given your budget, how much are you able to invest?

How long can you leave your money invested?

How concerned are you about the tax implications of your investments?

How much tolerance do you have for risk?

DIVERSIFICATION

Direct stock purchase plans

Many Corporations offer Direct Stock Purchase Plans

Purchase stock direct from company

Dividend Reinvestment Plans (DRIPS) allow current stockholders to reinvest dividends to purchase additional stock

Strategies for investing in securities

Investing for Income Market Timing Value Investing Investing for Growth Buying and Holding