Accounting

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Accounting

• Leslie Lum

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Whats Accounting?

• Accounting is the language of business
• Allows us to look at a business and understand
  how it has done
• Makes everyone report by the same rules so that
  we know what we are looking at
• Follow generally accepted accounting principles
• Rules set by Financial Accounting Standards Board

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Management Accounting

• Within a company accounting allows a business to
  manage
• Plan - Typically forecast profit and loss for the
  next five years
• Budget - profit and loss for the next year
• Track what was actually spent against the budget
• Allows management to try several alternatives
  using numbers to see what will happen

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Everyone Should be a Management Accountant

• Food 4,152 (Away 1762)
• Alcoholic Beverages 284
• Housing 8,434
• Apparel 1,546
• Transportation 5,187
• Health Care 1,407
• Tobacco 261
• Insurance 346
• Pensions and SS 2,125
• Other 4,000

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Income Statement

• Tells you what happened during the year
• Sales or Revenues are what came in
• Expenses are what went out
• Profit or Net Income is what was left
• The more sales, the better
• The less expenses, the better
• The more profit, the better

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How did Joe do this year?

• What did he take in?
• What did he spend?
• What is his growth in revenues?
• What is his growth in expenses?
• What is his growth in profit?

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How does it translate to a company?
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Lets Look at Nordstrom
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How did Nordstrom do?

• What did Nordstrom take in?
• What did Nordstrom spend?
• Whats growth in revenues?
• Whats growth in expenses?
• Whats growth in profit?

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Balance Sheet

• Lets you know about financial health
• Assets (Things the company owns)
• Liabilities (things the company owes)
• Equity or Net Worth (whats owned free and clear)

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Hows Joes financial health?

• What does he own?
• Are his assets earning money for him?
• What does Joe owe?
• What is his net worth?

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How is Joes Net Worth compared to others?
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How does it translate to a company?
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Assets - What the company needs to do business

• Cash - Money the company has
• Accounts receivables - What customers owe
• Inventories - Product waiting to be sold
• Fixed Assets - Buildings, equipment, etc. the
  company owns

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Liabilities - What the company borrows to do
business

• Current liabilities
• Accounts payable - what the company owes its
  vendors
• Long Term liabilities - Long term debt

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Equity

• What the shareholders own in the company
• Any profits not given to the shareholders in cash
  is included

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Lets analyze some retail apparel companies
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Analyzing the info

• Calculating ratios helps you compare to other
  companies
• Growth rates in revenues and net income
• Return on sales Profit you make on every 1 of
  sales
• Debt to equity Is the company in too much debt?

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Financial Ratios

• Valuation ratios tell you whether or not youre
  getting a good deal. Price equity.
• Financial strength ratios let you know the state
  of the companys financial health. Total debt to
  equity.
• Profitability ratios let you know how the company
  does on the bottom line. Return on sales.
• Management effectiveness and efficiency ratios
  tell you how well management is doing. Return on
  equity.

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Valuation Ratios

• Price equity is what you pay for every 1 of
  earnings.
• All other factors being equal, lower valuation
  ratios tend to perform better.

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Profitability

• Profitability ratios come in many levels.
• Return on sales or net profit margin is the
  bottom line profitability picture. It tells you
  what you make for every dollar of sales.
• The higher the better.

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Financial Health - Debt to Equity Ratio

• Variety of ratios show whether the company is
  able to handle yearly obligations
• Total Debt to Equity ratio gives overall
  financial health
• The lower the debt to equity, the better

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Management Effectiveness - Return on Equity

• Return on Equity let you know how much the
  company earns on its net worth or book value.
• The higher the ratio the better.