Presentation1.ppt lesson 8

ص12:05ص12:05 ص12:05ص12:05 DR/Ysser Abd elmaksoudDR/Ysser Abd elmaksoud 11

LESSON 8 LESSON 8

BUSINESS BASICS PART I - BUSINESS BUSINESS BASICS PART I - BUSINESS TYPES, ETHICS AND LAW, TYPES, ETHICS AND LAW,

ECONOMICS, FINANCE AND ECONOMICS, FINANCE AND ACCOUNTINGACCOUNTING


Business TypesBusiness TypesA business in its most basic form sells A business in its most basic form sells a a productproduct or delivers a or delivers a serviceservice

Here are the most common forms to Here are the most common forms to set up a business organization, with set up a business organization, with a brief explanation of eacha brief explanation of each::

11--Sole Proprietorship (A business Sole Proprietorship (A business owned by one person )owned by one person )

22--Partnership – (A business owned by Partnership – (A business owned by two or more individuals )two or more individuals )


33--CorporationCorporation– –

A business in which legally the owners A business in which legally the owners are not personally liable for the are not personally liable for the financial obligations of the financial obligations of the business. can also own business. can also own stocks. Owners are not personally stocks. Owners are not personally liable and a corporation is often liable and a corporation is often referred to as a “legal person.” It referred to as a “legal person.” It can use the terms “Inc.” can use the terms “Inc.”

“Incorporated,” or “Company“Incorporated,” or “Company”.”.


44--Limited Liability Company (LLC)Limited Liability Company (LLC) - -

- -A business authorized by state A business authorized by state law. Although exact characteristics vary law. Although exact characteristics vary by state, the most common characteristics by state, the most common characteristics of the limited liability company are that it of the limited liability company are that it hashas::

11 . .Limited liability, that is, the owners of the Limited liability, that is, the owners of the company are not liable for more than the company are not liable for more than the capital they have invested in the businesscapital they have invested in the business..

22 . .Managed by members or managers, Managed by members or managers, owners can be members or managersowners can be members or managers..

33 . .Limitations on the transfer of ownershipLimitations on the transfer of ownership..


Business Ethics and LawBusiness Ethics and Law

Using the same moral guidelines you Using the same moral guidelines you already follow yourself, knowing the already follow yourself, knowing the difference between right and wrong, difference between right and wrong, also goes for businessalso goes for business


Some business ethics, however, are much Some business ethics, however, are much more easily recognizable as being more easily recognizable as being obviously ethically wrong. To name a fewobviously ethically wrong. To name a few::

--Money lost to FraudMoney lost to Fraud--Money lost to EmbezzlementMoney lost to Embezzlement

--Accuracy of books, records, and expense Accuracy of books, records, and expense reportsreports

--Proper use of organizational assetsProper use of organizational assets--Protecting proprietary informationProtecting proprietary information

--DiscriminationDiscrimination--LyingLying

--Over chargingOver charging


--Charging for work that was not necessaryCharging for work that was not necessary--Withholding needed informationWithholding needed information

--Abusive or intimidating behavior toward othersAbusive or intimidating behavior toward others--Misreporting actual time or hours workedMisreporting actual time or hours worked

--False insurance claimsFalse insurance claims--Kickbacks and briberyKickbacks and bribery

--Proper exercise of authorityProper exercise of authority--Theft of business equipment and suppliesTheft of business equipment and supplies

--Trading or accepting goods for unauthorized Trading or accepting goods for unauthorized favorsfavors

--Moonlighting, which causes poorer work Moonlighting, which causes poorer work performanceperformance

--Knowingly ignoring the health and safety of Knowingly ignoring the health and safety of employeesemployees

--Sexual harassmentSexual harassment--Evading someone’s privacyEvading someone’s privacy


Basically, business law governs the rules of Basically, business law governs the rules of conduct of people and organizations in business, conduct of people and organizations in business,

and is meant to enforce justice and obligationand is meant to enforce justice and obligation . .

The major areas of business law areThe major areas of business law are::

11--AntitrustAntitrust – –

22--BankruptcyBankruptcy – –

33--Business organizationBusiness organization – –

44--Consumer protection and product liabilityConsumer protection and product liability

55--ContractsContracts – –

66--EmploymentEmployment – –

77--Intellectual propertyIntellectual property – –

88--Securities regulationSecurities regulation – –


Basic Economics overviewBasic Economics overviewEconomics is basically “the study of what Economics is basically “the study of what constitutes rational human behavior in the constitutes rational human behavior in the

endeavor to fulfill needs and wantsendeavor to fulfill needs and wants ”. ”.

The foundation of economics is The foundation of economics is ScarcityScarcity, which , which refers to the tension between our limited refers to the tension between our limited resources and our unlimited wants and needsresources and our unlimited wants and needs . .

SupplySupply is the is the quantityquantity of a product produced and of a product produced and offered for saleoffered for sale . .

DemandDemand is based on is based on price.price. The law of demand is The law of demand is basically; the higher the price, the lower the basically; the higher the price, the lower the quantity demanded, and the lower the price, the quantity demanded, and the lower the price, the

higher the quantity demandedhigher the quantity demanded . .


The optimal is to have equilibrium The optimal is to have equilibrium where the price point for the where the price point for the quantity supplied is in balance with quantity supplied is in balance with the quantity demandedthe quantity demanded..

EquilibriumEquilibrium. This means that the . This means that the quantity demanded equals the quantity demanded equals the quantity suppliedquantity supplied..


Two branches of economicsTwo branches of economics

11--Microeconomics:- is the study of the decisions of Microeconomics:- is the study of the decisions of individuals, households, and businesses in individuals, households, and businesses in specific marketsspecific markets,,focuses on supply and demand and other forces focuses on supply and demand and other forces that determine the price levels seen in the that determine the price levels seen in the

economyeconomy . .

22--Macroeconomics:- is the study of the overall Macroeconomics:- is the study of the overall functioning of an economy such as basic functioning of an economy such as basic economic growth, unemployment, recession, economic growth, unemployment, recession, depression, or inflation. depression, or inflation. focuses on the national focuses on the national economy as a whole and provides a basic economy as a whole and provides a basic knowledge of how things work in the business knowledge of how things work in the business

worldworld , ,


The way we usually measure the size of an The way we usually measure the size of an economy is byeconomy is by-: -:

Gross Domestic ProductGross Domestic Product orGDP. GDP is the orGDP. GDP is the value of all the goods and services value of all the goods and services produced within our borders in one yearproduced within our borders in one year . .

· ·GDP = C + I + G + (Ex – IM). C is for GDP = C + I + G + (Ex – IM). C is for Consumption (household spending), I is Consumption (household spending), I is for Investments (business spending), G is for Investments (business spending), G is for government (federal, state and local for government (federal, state and local spending). "Ex" is for Export (goods spending). "Ex" is for Export (goods shipped out of the country that made shipped out of the country that made them) and "Im" is for Import (goods them) and "Im" is for Import (goods shipped into the country that outside shipped into the country that outside

countries made)countries made) . .


The Federal Reserve, also known as “the The Federal Reserve, also known as “the Fed,” controls the money supply. It is the Fed,” controls the money supply. It is the central banking systemcentral banking system..

--The Fed manages two kinds of economic The Fed manages two kinds of economic policypolicy::

11--Fiscal policyFiscal policy:- which is the spending and :- which is the spending and taxation to stimulate or “cool” the taxation to stimulate or “cool” the economy by adjusting taxes and spendingeconomy by adjusting taxes and spending..

22--Monetary policy:-Monetary policy:- which uses interest which uses interest rates, purchases, and sales of government rates, purchases, and sales of government

securities to heat or cool the economysecurities to heat or cool the economy . .


Here are some more economic terms, and Here are some more economic terms, and key economic indicators or trends, which key economic indicators or trends, which are commonly usedare commonly used::

11--BubbleBubble– – 22--Business cycleBusiness cycle - -

33--CapitalismCapitalism– – 44--Consumer ConfidenceConsumer Confidence– –

55--DepreciationDepreciation- - 66--DepressionDepression – –

77--Housing StartsHousing Starts– – 88--InflationInflation- -


99--Pareto principle (also known as the Pareto principle (also known as the 80-20 rule)80-20 rule)– –

1010--Prime RatePrime Rate – – 1111--RecessionRecession - -1212--SecuritiesSecurities– –

1313--Stock marketStock market – – 1414--Unemployment rateUnemployment rate- -

1515--Venture Capital (VC)Venture Capital (VC)– – 1616--YieldYield – –


Corporate Finance OverviewCorporate Finance OverviewFinance analyzes the health and growth of a Finance analyzes the health and growth of a company, manages the company’s cash, company, manages the company’s cash, and deals with banksand deals with banks . .

(-(-Chief Financial OfficerChief Financial Officer ) )CFO who oversees the CFO who oversees the finance department, which normally consists of finance department, which normally consists of a controller, managerial accountant and/or general a controller, managerial accountant and/or general

ledger accountantledger accountant . .


Some more detailed responsibilities of Some more detailed responsibilities of corporate finance arecorporate finance are::

11--Cash flow budgeting and working capital Cash flow budgeting and working capital management, which is management, which is managing the managing the relationship between a firm's short-term relationship between a firm's short-term assets and its short-term liabilities. assets and its short-term liabilities.

““current assets minus current liabilitiescurrent assets minus current liabilities ”. ”.

22--Comparing alternative proposalsComparing alternative proposals..

33--Forecasting and risk analysisForecasting and risk analysis..

44--Raise and manage its capitalRaise and manage its capital : :


55--Allocations of funds to long-term capital Allocations of funds to long-term capital investments vs. optimize short-term cash flowinvestments vs. optimize short-term cash flow..

66--Dividend policyDividend policy..77--The risk-return framework and the identification The risk-return framework and the identification

of the asset appropriate discount rateof the asset appropriate discount rate..88--Valuation of assets. Discounting of relevant cash Valuation of assets. Discounting of relevant cash

flows, relative valuation, and contingent claim flows, relative valuation, and contingent claim valuationvaluation..

99--The optimum allocation of funds. What to invest The optimum allocation of funds. What to invest in? How much to invest? When to investin? How much to invest? When to invest??

1010--How much money will be needed at various How much money will be needed at various points in the future? How will it be fundedpoints in the future? How will it be funded??

1111--Identification of required expenditure of a public Identification of required expenditure of a public sector entitysector entity..

1212--Source of that entity's revenueSource of that entity's revenue..


Financial Accounting and Managerial Financial Accounting and Managerial AccountingAccounting

Accounting provides the reliable and Accounting provides the reliable and relevant financial information useful in relevant financial information useful in making decisionsmaking decisions. .

Financial Accounting provides information Financial Accounting provides information for external parties who are interested in for external parties who are interested in the company’s accounting informationthe company’s accounting information..

Generally Accepted Accounting Principles Generally Accepted Accounting Principles (GAAP) is the common standards that (GAAP) is the common standards that

indicate how to report economic eventsindicate how to report economic events . .


Managerial Accounting provides accounting Managerial Accounting provides accounting information to internal parties for profit information to internal parties for profit planning and budgeting, costs of an planning and budgeting, costs of an organizations products and services, and organizations products and services, and performance reports such as budget vs. performance reports such as budget vs. actual resultsactual results. .

Managerial Accounting focuses on the Managerial Accounting focuses on the future, rather than reporting on the pastfuture, rather than reporting on the past . .

CostingCosting is also a major part of managerial is also a major part of managerial accountingaccounting..

----Direct materials or raw materialsDirect materials or raw materials ----Direct Labor costsDirect Labor costs

----Manufacturing overheadManufacturing overhead


Financial Statements: The Balance SheetFinancial Statements: The Balance Sheet

The balance sheet is often described as a The balance sheet is often described as a “Snapshot” of the current company’s “Snapshot” of the current company’s financial condition on a certain date. It financial condition on a certain date. It shows the “Assets” on the left, or top, of shows the “Assets” on the left, or top, of the balance sheet, and the “Liabilities and the balance sheet, and the “Liabilities and Owners Equity” on the right, or bottom. Owners Equity” on the right, or bottom.

The Assets must balance out with the The Assets must balance out with the Liabilities and Owners Equity. Assets are Liabilities and Owners Equity. Assets are what a company owns, such as equipment, what a company owns, such as equipment, buildings and inventory. buildings and inventory.

The formula is Assets = Liabilities + The formula is Assets = Liabilities + Owners’ Equity. Owners’ Equity.


ASSETS – which is everything the company ASSETS – which is everything the company ownsowns . .Here are the most common types of assetsHere are the most common types of assets : :

11--Cash, both in checking and savings along Cash, both in checking and savings along with petty cashwith petty cash . .

22--Marketable Securities, which are short-Marketable Securities, which are short-term investments, like U.S. Government term investments, like U.S. Government securities or the commercial paper of securities or the commercial paper of other firmsother firms . .

33--Accounts Receivable, which is money Accounts Receivable, which is money owed to the company by its customers, owed to the company by its customers,

usually within 10 to 60 daysusually within 10 to 60 days . .44--Notes Receivable, which is money due Notes Receivable, which is money due

from debtorsfrom debtors . .


55--Inventory:-which is the goods for sale to Inventory:-which is the goods for sale to customers, or goods in the manufacturing customers, or goods in the manufacturing

processprocess------

· ·The inventory for a The inventory for a ManufacturerManufacturer would would be the raw materials to make its productsbe the raw materials to make its products , ,

· ·The inventory for a The inventory for a RetailerRetailer would be would be just the finished goodsjust the finished goods . .

· ·The inventory for a The inventory for a ServiceService company company would have little to no inventory on their would have little to no inventory on their balance sheet due to the nature of the balance sheet due to the nature of the

businessbusiness . .

. .


66--LongLong--Term Assets or Tangibles also known Term Assets or Tangibles also known as “Fixed Assetsas “Fixed Assets.” .” The land, buildings, The land, buildings, factories, and warehouses, including the factories, and warehouses, including the machinery, furniture, computers, and machinery, furniture, computers, and fixtures that are owned by the companyfixtures that are owned by the company..

------Accumulated depreciation is a way to Accumulated depreciation is a way to allocate, which means assigning, the cost allocate, which means assigning, the cost of a fixed asset with a life of over one of a fixed asset with a life of over one yearyear. . The cost of the asset is charged The cost of the asset is charged against income over the life of the asset against income over the life of the asset rather than all in one yearrather than all in one year. . This is also This is also known as a “contra account,” which in known as a “contra account,” which in essence carries a minus signessence carries a minus sign . .


77--Intangible Assets-which are nonIntangible Assets-which are non--physical physical products likeproducts like patentspatents, , which are exclusive legal which are exclusive legal rights granted to an investor for a period of 17 rights granted to an investor for a period of 17 yearsyears,,trademarkstrademarks,, which are distinctive names or which are distinctive names or symbols granted for 28 years with option for symbols granted for 28 years with option for renewalrenewal, , goodwillgoodwill, , which is the amount of money which is the amount of money paid for the asset above the value it was paid for the asset above the value it was assigned by the previous owner, assigned by the previous owner, andand copyrightscopyrights, , which is a form of intellectual which is a form of intellectual property that gives the creator of an original property that gives the creator of an original work exclusive rights for a certain time periodwork exclusive rights for a certain time period

8-Investments, Prepayments and Deferred 8-Investments, Prepayments and Deferred Charges, which is monies already spent, that will Charges, which is monies already spent, that will yield benefits in upcoming years like insurance yield benefits in upcoming years like insurance coverage, rent, etccoverage, rent, etc..


LIABILITIESLIABILITIES – – which is everything the which is everything the company owes, mostly to suppliers and company owes, mostly to suppliers and creditorscreditors.. Current liabilities are those Current liabilities are those payable within a year of the date of the payable within a year of the date of the balance sheet. Types----------balance sheet. Types----------

1-Long-term debt which is the debt due 1-Long-term debt which is the debt due after one year of the date of the balance after one year of the date of the balance sheet. sheet.

2-Notes Payable which are short-term 2-Notes Payable which are short-term borrowings that are payable within the borrowings that are payable within the year. It is a promissory note, which is year. It is a promissory note, which is basically a written promise to pay. basically a written promise to pay.

3-Accounts Payable, which is the amount 3-Accounts Payable, which is the amount the company owes to suppliers. the company owes to suppliers.


4-Federal income taxes-and when applicable 4-Federal income taxes-and when applicable city and state taxescity and state taxes. ,. ,

5-Accrued Expenses Payable, which is all 5-Accrued Expenses Payable, which is all other monies, owed at the time of other monies, owed at the time of creating the balance sheet including creating the balance sheet including employees, contractors, utilities, etcemployees, contractors, utilities, etc..

6-I6-I..ee. . Current portion of longCurrent portion of long--term debt term debt which is the amount due within a year which is the amount due within a year from the date of the balance sheetfrom the date of the balance sheet.. This This would be considered a current liabilitywould be considered a current liability


77--Notes Payable-which are non current Notes Payable-which are non current ((due due after 12 monthsafter 12 months) ) borrowingsborrowings. . It is a It is a promissory note, which is basically a promissory note, which is basically a written promise to paywritten promise to pay8-Bonds payable-which is the obligation due 8-Bonds payable-which is the obligation due

on maturity of bonds.on maturity of bonds.9-Pension obligations, -which is the liability 9-Pension obligations, -which is the liability

for future pension benefits due to for future pension benefits due to employees. employees.

10-Deferred Taxes -which are the longer-10-Deferred Taxes -which are the longer-term tax obligations that have been term tax obligations that have been deferred to some future period. deferred to some future period.

11-Minority interest, -which is the 11-Minority interest, -which is the ownership of minority shareholders in the ownership of minority shareholders in the equity of consolidated subsidiaries. equity of consolidated subsidiaries. . .


OWNERS' EQUITY (also known as Stockholders’ OWNERS' EQUITY (also known as Stockholders’ Equity - when applicable) – Equity - when applicable) –

which is the amount left over for the company’s which is the amount left over for the company’s owners after the liabilities are subtracted from owners after the liabilities are subtracted from the assetsthe assets..

The formula is “Assets – Liabilities = Owners The formula is “Assets – Liabilities = Owners Equity.” This is also referred to as “Net Equity.” This is also referred to as “Net Worth.” If the company is incorporated, they can Worth.” If the company is incorporated, they can issue stock. Stocks represent ownership in a issue stock. Stocks represent ownership in a corporation. corporation.

1-Preferred Stock, which is a type of stock that 1-Preferred Stock, which is a type of stock that pays a dividend. It is a payment from profit pays a dividend. It is a payment from profit made to stockholders out of the company’s made to stockholders out of the company’s income at a specific rate, regardless on how the income at a specific rate, regardless on how the company performs. company performs.


22--Common StockCommon Stock which the owners have voting rights, but do not which the owners have voting rights, but do not receive dividends at a fixed pricereceive dividends at a fixed price. . The value of The value of the stock can rise or fallthe stock can rise or fall

33--Capital SurplusCapital Surplus also known as “additional paidalso known as “additional paid--in capital,” is the in capital,” is the amount paid to the company in excess of the par amount paid to the company in excess of the par valuevalue

44--Retained EarningsRetained Earnings , ,which is money reinvested into the company and which is money reinvested into the company and becomes part of the capital that finances the becomes part of the capital that finances the companycompany . .

55--Treasury stockTreasury stock , ,which is stock in the company that has been which is stock in the company that has been repurchased and not retiredrepurchased and not retired . .


As you can see, the “Total Assets” for each As you can see, the “Total Assets” for each year equaled the “Total Liabilities year equaled the “Total Liabilities EquityEquity.” .” It is called a “Balance Sheet” It is called a “Balance Sheet” because it has to balancebecause it has to balance. . Each dollar Each dollar value was a “Snapvalue was a “Snap--Shot” on the date of Shot” on the date of the financial statementthe financial statement. . Assets are in Assets are in order of their liquidity and how fast they order of their liquidity and how fast they can be converted into cashcan be converted into cash. . Current Current assets are expected to be liquidated assets are expected to be liquidated within one year of the date of the Balance within one year of the date of the Balance SheetSheet. . Liabilities and Equity are in order Liabilities and Equity are in order in which they are to be paidin which they are to be paid. . Current Current Liabilities are payable within one Liabilities are payable within one yearyear. . Also, as you can see, there are two Also, as you can see, there are two years of figures on the balance sheet for years of figures on the balance sheet for comparison and trending purposescomparison and trending purposes..


ProportionProportion:: Your company’s financial reports reveal Your company’s financial reports reveal interesting and important information on interesting and important information on the proportion of physical assets the proportion of physical assets ((plant plant and equipmentand equipment) ) versus cash flowversus cash flow

DirectionDirection::

A general sense of a company’s direction A general sense of a company’s direction can be assessed from its financial can be assessed from its financial statements. statements.


Financial Statements: The Financial Statements: The Income StatementIncome Statement

Income statements show the results of a Income statements show the results of a company’s operations, which are usually given company’s operations, which are usually given quarterly or by fiscal year The Income Statement quarterly or by fiscal year The Income Statement is also known as the “Profit & Loss” statement or is also known as the “Profit & Loss” statement or “P&L.” Simply put, the formula is: “Revenue – “P&L.” Simply put, the formula is: “Revenue – Expenses = Income.” The easiest and best Expenses = Income.” The easiest and best scenario is, scenario is,

The income statement gives you the “Net Income,” The income statement gives you the “Net Income,” also known as “The Bottom Line,” after all costs also known as “The Bottom Line,” after all costs and expenses have been subtracted from all and expenses have been subtracted from all possible income including total sales, interest possible income including total sales, interest earned on investments, and sale of a non-earned on investments, and sale of a non-tangible item like a patent. tangible item like a patent.


Here is a brief explanation of the type of Here is a brief explanation of the type of accounts associated with a common accounts associated with a common Income StatementIncome Statement : :

11--Revenues – also called “Sales, “Sales Revenues – also called “Sales, “Sales Revenue,” or “Sales of Goods or Revenue,” or “Sales of Goods or Services.” It is also known as the “Top Services.” It is also known as the “Top Line.” It is the amount of money the Line.” It is the amount of money the company made, before any expenses, on company made, before any expenses, on

its operationsits operations . .22--Cost of Goods Sold – also known as, and Cost of Goods Sold – also known as, and

pronounced, “COGS” or “Cost of Sales” –pronounced, “COGS” or “Cost of Sales” –These are direct costs or direct expenses These are direct costs or direct expenses because they are directly associated with because they are directly associated with making what the company sells (i.e. making what the company sells (i.e. manufacturer)manufacturer) , ,


33--Gross Income – also called “Gross Gross Income – also called “Gross Profit.” It is the money the company Profit.” It is the money the company earns on its sales before SG&Aearns on its sales before SG&A . .

44--Selling, General, and Administrative Selling, General, and Administrative Expense also known as “SG&A” – – It is Expense also known as “SG&A” – – It is the salary of the sales peoplethe salary of the sales people

55--Operating Income Before Depreciation - Operating Income Before Depreciation - This is gross income or gross profit minus This is gross income or gross profit minus SG&A. This is also the EBITDA SG&A. This is also the EBITDA number. For more information on EBITDAnumber. For more information on EBITDA

66--Depreciation Expense – This is the amount Depreciation Expense – This is the amount of depreciation charged against sales of depreciation charged against sales

during the periodduring the period . .


77--Operating Income – Gross income minus Operating Income – Gross income minus SG&A gives you the operating SG&A gives you the operating income. This is also considered EBIT or income. This is also considered EBIT or operating profitoperating profit..

88--Interest Expense – This item reflects the Interest Expense – This item reflects the costs of a company's borrowingscosts of a company's borrowings . .

99--Non-operating Income – An example of this Non-operating Income – An example of this would be money won from a lawsuitwould be money won from a lawsuit . .

1010--Non-operating Expenses – This could be Non-operating Expenses – This could be the cost of litigation or settlements paid the cost of litigation or settlements paid in lawsuits, closing down a division, etcin lawsuits, closing down a division, etc..

1111--Pre-Tax Accounting Income – Also known Pre-Tax Accounting Income – Also known as “Income Before Taxes.” This is the as “Income Before Taxes.” This is the

income before taxesincome before taxes . .


1212--Provision for Income Taxes – Taxes that Provision for Income Taxes – Taxes that will be charged against the income in this will be charged against the income in this period, even if they have not been paid in period, even if they have not been paid in this period. This will be the income tax this period. This will be the income tax charged to income for the periodcharged to income for the period . .

1313--Income before Extraordinary Items – This Income before Extraordinary Items – This is the pre-tax minus income taxis the pre-tax minus income tax . .

1414--Preferred Stock Dividends - Each share of Preferred Stock Dividends - Each share of preferred stock is normally paid a preferred stock is normally paid a guaranteed, relatively high dividend and guaranteed, relatively high dividend and has first dibs over common stock at the has first dibs over common stock at the company's assets in the event of company's assets in the event of

bankruptcybankruptcy . .


1515--Net Income Available to Common Net Income Available to Common Stockholders - The net income applicable Stockholders - The net income applicable to common shares figure is the bottom-to common shares figure is the bottom-line profit the company reportedline profit the company reported . .

1616--Extraordinary items - Are events that Extraordinary items - Are events that occur infrequently and are unusualoccur infrequently and are unusual . .

1717--Discontinued operations - Occur when a Discontinued operations - Occur when a significant segment of a business has significant segment of a business has been identified for disposalbeen identified for disposal

1818--Net Income or (Loss) – This is also known Net Income or (Loss) – This is also known as, “The Bottom Line.” Net income is as, “The Bottom Line.” Net income is what’s left after subtracting the COGS, what’s left after subtracting the COGS, SG&A, and all the rest of the expenses SG&A, and all the rest of the expenses

and taxes on the income statementand taxes on the income statement . .


1919--Earnings Per Share (EPS) - This is Net Earnings Per Share (EPS) - This is Net income remaining for stockholders ÷ income remaining for stockholders ÷ Common shares outstanding, also Common shares outstanding, also

considered part of the bottom lineconsidered part of the bottom line . .

Income statements are like a management Income statements are like a management report card. It lets you investigate where report card. It lets you investigate where sales are rising or falling, whether costs sales are rising or falling, whether costs are rising or falling faster or slower than are rising or falling faster or slower than sales, if interests expense is rising or sales, if interests expense is rising or falling year to year, of if there were any falling year to year, of if there were any extraordinary changes, etcextraordinary changes, etc . .


Financial Analysis Tools - RatiosFinancial Analysis Tools - Ratios

Financial ratios are used to show the Financial ratios are used to show the relationship of two financial relationship of two financial statement accounts to measure a statement accounts to measure a company’s performance, and company’s performance, and

whether it is creditworthywhether it is creditworthy . .


LIQUIDITY RATIOSLIQUIDITY RATIOS11--Liquidity ratios demonstrate a company's ability Liquidity ratios demonstrate a company's ability

to pay its current obligationsto pay its current obligations..Current ratio = Current Assets ÷ Current LiabilitiesCurrent ratio = Current Assets ÷ Current Liabilities

22--Quick ratio (acid test)Quick ratio (acid test) = = Quick Assets Quick Assets (cash + (cash + marketable securities + receivables)marketable securities + receivables) ÷ Current ÷ Current LiabilitiesLiabilities : :

33--Accounts Receivables Turnover = NetAccounts Receivables Turnover = Net Sales ÷ Accounts ReceivableSales ÷ Accounts Receivable

44--Annual Inventory Turnover Annual Inventory Turnover == COGS for the Year ÷ COGS for the Year ÷ Average Inventory BalanceAverage Inventory Balance : :


LEVERAGE RATIOSLEVERAGE RATIOSLeverage Ratios are used to understand a Leverage Ratios are used to understand a company's ability to meet it long term company's ability to meet it long term

financial obligationsfinancial obligations . .11--Debt-to-Equity ratio = Total LiabilitiesDebt-to-Equity ratio = Total Liabilities ÷ ÷

Total OwnersTotal Owners ' 'Equity:Equity: This This indicates what proportion of indicates what proportion of debt (trade credit, liabilities, and debt (trade credit, liabilities, and borrowings) and equity (shareholders borrowings) and equity (shareholders purchased stock and earnings reinvested purchased stock and earnings reinvested into the company rather than taken as into the company rather than taken as dividends) that the company is using to dividends) that the company is using to

finance its assetsfinance its assets . . 22--Debt ratio = Long Term Debt ÷ Total Debt ratio = Long Term Debt ÷ Total

AssetsAssets : :33--Earnings Before Interest and Taxes (or Earnings Before Interest and Taxes (or

EBIT, pronounced e-bitEBIT, pronounced e-bit)) = Revenue - = Revenue - Operating Expenses or OPEXOperating Expenses or OPEX : :


44--Times Interest Earned (TIE) Times Interest Earned (TIE) RatioRatio = = Earnings Before Interest and Earnings Before Interest and Taxes (EBIT or Operating Income) ÷ Taxes (EBIT or Operating Income) ÷

Interest ExpenseInterest Expense : :


PROFITABILITY RATIOSPROFITABILITY RATIOS

Profitability Ratios are used to assess a business's Profitability Ratios are used to assess a business's ability to generate earnings as compared to its ability to generate earnings as compared to its expenses and other relevant costs incurred expenses and other relevant costs incurred during a specific period of timeduring a specific period of time . .

11--Gross MarginGross Margin = = Gross Income ÷ Net Sales Gross Income ÷ Net Sales (Revenue): Also known as Gross profit(Revenue): Also known as Gross profit..

22--Operating Margin = Operating Income (aka EBIT) Operating Margin = Operating Income (aka EBIT) ÷ Net Sales (Revenue)÷ Net Sales (Revenue) : :

33--Net Margin = Net Income ÷ Net Sales Net Margin = Net Income ÷ Net Sales (Revenue): Also known as Net profitability(Revenue): Also known as Net profitability . .

44--Asset TurnoverAsset Turnover = = Net Sales (Revenue) ÷ Total Net Sales (Revenue) ÷ Total AssetsAssets


55--Return on assets (ROA)Return on assets (ROA) = = Net Income ÷ Net Income ÷ Total AssetsTotal Assets

66--Return on investment (ROI)Return on investment (ROI) = = Net Income Net Income ÷ Owners' Equity÷ Owners' Equity : :

By calculating ratios, you can find patterns By calculating ratios, you can find patterns like is the company generating cash? Is like is the company generating cash? Is the liquidity strong? Does the company the liquidity strong? Does the company have too much debt or too many have too much debt or too many assets? Is it growing the assets faster assets? Is it growing the assets faster than sales? Are the margins weak or than sales? Are the margins weak or strong? How do the ratios compare to the strong? How do the ratios compare to the

last couple of years, etclast couple of years, etc ? ?


Some other ratios that investors look at areSome other ratios that investors look at are::11--Earnings Per Share (EPS) = Net income Earnings Per Share (EPS) = Net income

remaining for stockholders ÷ Common remaining for stockholders ÷ Common shares outstanding (also considered part shares outstanding (also considered part

of the bottom line)of the bottom line) . .

22--Price Earning Ratio (PE) = Market price ÷ Price Earning Ratio (PE) = Market price ÷ Earnings per shareEarnings per share

33--Dividend Payout Ratio = Dividends per Dividend Payout Ratio = Dividends per share ÷ Earnings per shareshare ÷ Earnings per share

44--Dividend Yield Ratio = Dividends per share Dividend Yield Ratio = Dividends per share ÷ Current market price÷ Current market price


What is the Cash Flow Statement?What is the Cash Flow Statement?

The cash flow statement is a measure of The cash flow statement is a measure of a company's financial healtha company's financial health . .

11--Cash flows from operating activitiesCash flows from operating activities . .22--Cash flows from investing activitiesCash flows from investing activities . .33--Cash flows from financing activitiesCash flows from financing activities . .

Cash for purposes of the cash flow Cash for purposes of the cash flow statement normally includes cash and statement normally includes cash and

cash equivalentscash equivalents . .


Accounting and the AccountantAccounting and the Accountant

Accounting keeps track of the flow of money by Accounting keeps track of the flow of money by keeping financial records of sales, expenses, keeping financial records of sales, expenses, receipts, and disbursements of cash, including receipts, and disbursements of cash, including calculating the taxes the company owes. calculating the taxes the company owes.

the controller of the accountant are: the controller of the accountant are:

· ·Accounts Receivable, which tracks the money Accounts Receivable, which tracks the money the company is owed and paidthe company is owed and paid..

· ·Accounts Payable, which tracks expenditures Accounts Payable, which tracks expenditures and authorizes checks to be cut to pay bills to and authorizes checks to be cut to pay bills to supplierssuppliers..

· ·Payroll, which ensures employees get paidPayroll, which ensures employees get paid..

· ·Credit, decides just how much credit will be Credit, decides just how much credit will be extended to a customerextended to a customer . .


These two entries offset each other and These two entries offset each other and keep the books in balancekeep the books in balance:: The debit representsThe debit represents::An increase in an asset accountAn increase in an asset account..A decrease in a liability accountA decrease in a liability account..A decrease in a revenue accountA decrease in a revenue account..An increase in an expense accountAn increase in an expense account..

The credit representsThe credit represents::A decrease in an asset accountA decrease in an asset account..An increase in a liability or owners equity An increase in a liability or owners equity accountaccount..An increase in a revenue accountAn increase in a revenue account..A decrease in an expense accountA decrease in an expense account..


Accounting for Inventory and DepreciationAccounting for Inventory and Depreciation

Inventory is defined as assets that are Inventory is defined as assets that are intended for sale, are in process of being intended for sale, are in process of being produced for sale, or are to be used in produced for sale, or are to be used in

producing goodsproducing goods . .

Counting inventory is done in two waysCounting inventory is done in two ways : :

11--The The Periodic methodPeriodic method, which is a physical , which is a physical count daily, weekly, monthly or yearlycount daily, weekly, monthly or yearly , ,

22--Perpetual inventoryPerpetual inventory methodmethod, which , which adjusts inventory with each transaction adjusts inventory with each transaction through computerized software, such as through computerized software, such as Fishbowl inventoryFishbowl inventory..


The following equation expresses how a company's The following equation expresses how a company's inventory is determinedinventory is determined::

Beginning Inventory + Net Purchases - Cost of Beginning Inventory + Net Purchases - Cost of Goods Sold (COGS) = Ending InventoryGoods Sold (COGS) = Ending Inventory

Beginning Inventory + Net Purchases - Ending Beginning Inventory + Net Purchases - Ending Inventory = Cost of Goods SoldInventory = Cost of Goods Sold


FIFO, LIFO and Average Costing FIFO, LIFO and Average Costing MethodMethod

These are three of the most common methods of These are three of the most common methods of accounting for inventoriesaccounting for inventories . .

11--FIFO (First in, First out. Pronounced fife-oh) - The FIFO (First in, First out. Pronounced fife-oh) - The company assumes that the first item making its company assumes that the first item making its

way into inventory is the first soldway into inventory is the first sold . .

22--LIFO (Last in, First out. Pronounced life-oh) - The LIFO (Last in, First out. Pronounced life-oh) - The company assumes that the last item making its company assumes that the last item making its way into inventory, or most recent, is assumed to way into inventory, or most recent, is assumed to be sold firstbe sold first..

33--Average Costing Method – This is used when Average Costing Method – This is used when COGS fluctuate frequently throughout the yearCOGS fluctuate frequently throughout the year . .


Accounting for depreciation deals with adjustments Accounting for depreciation deals with adjustments that are made to company profits once a month, or that are made to company profits once a month, or once a year, to account for expenses such as once a year, to account for expenses such as depreciation and amortizationdepreciation and amortization . .

11--Straight-line depreciation = Cost of asset ÷ asset’s Straight-line depreciation = Cost of asset ÷ asset’s years of lifeyears of life..

22--Double declining balance = Book value of the asset Double declining balance = Book value of the asset times twice the straight-line ratetimes twice the straight-line rate..

33--Sum of the year’s digits is a method of calculating Sum of the year’s digits is a method of calculating depreciation of an asset that assumes higher depreciation of an asset that assumes higher depreciation charges and greater tax benefits in the depreciation charges and greater tax benefits in the early years of an asset's lifeearly years of an asset's life..

44--MACRS (Modified Asset Cost Recovery System) is the MACRS (Modified Asset Cost Recovery System) is the new accelerated cost recovery system, created after new accelerated cost recovery system, created after the release of the Tax Reform Act of 1986, which the release of the Tax Reform Act of 1986, which allows for greater accelerated depreciation over allows for greater accelerated depreciation over

longer time periodslonger time periods . .


Setting up a budget for your departmentSetting up a budget for your department

Every manager needs to know what costs are Every manager needs to know what costs are associated with their department, and how in associated with their department, and how in relation are they doing to that budget. relation are they doing to that budget.

Budgets need to be realistic. Budgets need to be realistic.

There are basically two types of budgets, a capital There are basically two types of budgets, a capital expenditure budget and operating budget:expenditure budget and operating budget:

1-Capital expenditure (also known as “Capex”) 1-Capital expenditure (also known as “Capex”) relates to costs associated with plant and relates to costs associated with plant and equipment. equipment.

2-Operating budget, which is related to the normal 2-Operating budget, which is related to the normal day-to-day operations and expenditures such as day-to-day operations and expenditures such as payroll, supplies, and miscellaneous. payroll, supplies, and miscellaneous.

· · Sales budgetSales budget --------- ---------Expense budgetExpense budget


. .Finance acts as a middleman between Finance acts as a middleman between department heads and upper-department heads and upper-management when it comes to budgetsmanagement when it comes to budgets..

The two issues that stand out the most are The two issues that stand out the most are overtime and flight costs. overtime and flight costs.

The two issues that stand out the most are The two issues that stand out the most are overtime and flight costs. overtime and flight costs.

The way you set up your department should The way you set up your department should help greatly in justifying certain requests, help greatly in justifying certain requests, such as raises based on skill levels, such as raises based on skill levels, materials to streamline process, and materials to streamline process, and trending data that shows the need for trending data that shows the need for more staff throughout the year. more staff throughout the year.


Quick Lesson SummaryQuick Lesson Summary

1-Four of the most common business 1-Four of the most common business types are: Sole Proprietorship, types are: Sole Proprietorship, Partnership, Corporation, and LLC’s.Partnership, Corporation, and LLC’s.

2-2-Always practice good business Always practice good business ethics and you should never get into ethics and you should never get into any trouble. any trouble.

3-3-Knowing some of the most common Knowing some of the most common economics terms, and economy economics terms, and economy basics, can help you understand the basics, can help you understand the effect it can have on your company. effect it can have on your company.


44--There will be times when you are in an There will be times when you are in an upper management meeting, or listening upper management meeting, or listening to a company wide CEO conference call, to a company wide CEO conference call, where many financial terms are used. You where many financial terms are used. You should know and understand the most should know and understand the most commonly used terms and theory like commonly used terms and theory like EBIT, EBITDA, Margins, ROI and Bottom EBIT, EBITDA, Margins, ROI and Bottom

lineline . .

55--Know how finance and accounting Know how finance and accounting practices are associated with your yearly practices are associated with your yearly budgetbudget


THE ENDTHE END

LESSON 8LESSON 8

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Business

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