Presentation1.ppt lesson 8

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LESSON 8LESSON 8
BUSINESS BASICS PART I - BUSINESSBUSINESS BASICS PART I - BUSINESS
TYPES, ETHICS AND LAW,TYPES, ETHICS AND LAW,
ECONOMICS, FINANCE ANDECONOMICS, FINANCE AND
ACCOUNTINGACCOUNTING

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Business TypesBusiness Types
A business in its most basic form sellsA business in its most basic form sells
aa productproduct or delivers aor delivers a serviceservice
Here are the most common forms toHere are the most common forms to
set up a business organization, withset up a business organization, with
a brief explanation of eacha brief explanation of each::
11--Sole Proprietorship (A businessSole Proprietorship (A business
owned by one personowned by one person((
22--Partnership – (A business owned byPartnership – (A business owned by
two or more individualstwo or more individuals((

33--CorporationCorporation––
A business in which legally the ownersA business in which legally the owners
are not personally liable for theare not personally liable for the
financial obligations of thefinancial obligations of the
business. can also ownbusiness. can also own
stocks. Owners are not personallystocks. Owners are not personally
liable and a corporation is oftenliable and a corporation is often
referred to as a “legal person.” Itreferred 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 (LLCLimited Liability Company (LLC( -( -
--A business authorized by stateA business authorized by state
law. Although exact characteristics varylaw. Although exact characteristics vary
by state, the most common characteristicsby state, the most common characteristics
of the limited liability company are that itof the limited liability company are that it
hashas::
11..Limited liability, that is, the owners of theLimited liability, that is, the owners of the
company are not liable for more than thecompany 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 youUsing the same moral guidelines you
already follow yourself, knowing thealready 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 muchSome business ethics, however, are much
more easily recognizable as beingmore 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 expenseAccuracy 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 favorsTrading or accepting goods for unauthorized favors
--Moonlighting, which causes poorer workMoonlighting, which causes poorer work
performanceperformance
--Knowingly ignoring the health and safety ofKnowingly ignoring the health and safety of
employeesemployees
--Sexual harassmentSexual harassment
--Evading someone’s privacyEvading someone’s privacy

Basically, business law governs the rules of conductBasically, business law governs the rules of conduct
of people and organizations in business, and isof people and organizations in business, and is
meant to enforce justice and obligationmeant 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––

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Basic Economics overviewBasic Economics overview
Economics is basically “the study of whatEconomics is basically “the study of what
constitutes rational human behavior in theconstitutes rational human behavior in the
endeavor to fulfill needs and wantsendeavor to fulfill needs and wants.”.”
The foundation of economics isThe foundation of economics is ScarcityScarcity, which, which
refers to the tension between our limitedrefers to the tension between our limited
resources and our unlimited wants and needsresources and our unlimited wants and needs..
SupplySupply is theis the quantityquantity of a product produced andof a product produced and
offered for saleoffered for sale..
DemandDemand is based onis based on price.price. The law of demand isThe law of demand is
basically; the higher the price, the lower thebasically; the higher the price, the lower the
quantity demanded, and the lower the price, thequantity demanded, and the lower the price, the
higher the quantity demandedhigher the quantity demanded..

The optimal is to have equilibriumThe optimal is to have equilibrium
where the price point for thewhere the price point for the
quantity supplied is in balance withquantity supplied is in balance with
the quantity demandedthe quantity demanded..
EquilibriumEquilibrium. This means that the. This means that the
quantity demanded equals thequantity demanded equals the
quantity suppliedquantity supplied..

Two branches of economicsTwo branches of economics
11--Microeconomics:- is the study of the decisions ofMicroeconomics:- is the study of the decisions of
individuals, households, and businesses inindividuals, households, and businesses in
specific marketsspecific markets,,
focuses on supply and demand and other forcesfocuses on supply and demand and other forces
that determine the price levels seen in thethat determine the price levels seen in the
economyeconomy..
22--Macroeconomics:- is the study of the overallMacroeconomics:- is the study of the overall
functioning of an economy such as basicfunctioning of an economy such as basic
economic growth, unemployment, recession,economic growth, unemployment, recession,
depression, or inflation.depression, or inflation. focuses on the nationalfocuses on the national
economy as a whole and provides a basiceconomy as a whole and provides a basic
knowledge of how things work in the businessknowledge of how things work in the business
worldworld,,

The way we usually measure the size of anThe way we usually measure the size of an
economy is byeconomy is by:-:-
Gross Domestic ProductGross Domestic Product orGDP. GDP is theorGDP. GDP is the
value of all the goods and servicesvalue 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 forGDP = C + I + G + (Ex – IM). C is for
Consumption (household spending), I isConsumption (household spending), I is
for Investments (business spending), G isfor Investments (business spending), G is
for government (federal, state and localfor government (federal, state and local
spending). Ex is for Export (goodsspending). Ex is for Export (goods
shipped out of the country that madeshipped out of the country that made
them) and Im is for Import (goodsthem) and Im is for Import (goods
shipped into the country that outsideshipped into the country that outside
countries madecountries made(.(.

The Federal Reserve, also known as “theThe Federal Reserve, also known as “the
Fed,” controls the money supply. It is theFed,” controls the money supply. It is the
central banking systemcentral banking system..
--The Fed manages two kinds of economicThe 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” thetaxation to stimulate or “cool” the
economy by adjusting taxes and spendingeconomy by adjusting taxes and spending..
22--Monetary policy:-Monetary policy:- which uses interestwhich uses interest
rates, purchases, and sales of governmentrates, purchases, and sales of government
securities to heat or cool the economysecurities to heat or cool the economy..

Here are some more economic terms, andHere are some more economic terms, and
key economic indicators or trends, whichkey 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 thePareto principle (also known as the
80-20 rule80-20 rule( –( –
1010--Prime RatePrime Rate––
1111--RecessionRecession--
1212--SecuritiesSecurities––
1313--Stock marketStock market––
1414--Unemployment rateUnemployment rate--
1515--Venture Capital (VCVenture Capital (VC( –( –
1616--YieldYield––

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Corporate Finance OverviewCorporate Finance Overview
Finance analyzes the health and growth of aFinance 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 Officer) CFO who overseesChief Financial Officer) CFO who oversees
the finance department, which normallythe finance department, which normally
consists of a controller, managerialconsists of a controller, managerial
accountant and/or general ledgeraccountant and/or general ledger
accountantaccountant..

Some more detailed responsibilities ofSome more detailed responsibilities of
corporate finance arecorporate finance are::
11--Cash flow budgeting and working capitalCash flow budgeting and working capital
management, which ismanagement, which is managing themanaging the
relationship between a firm's short-termrelationship 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 capitalAllocations 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 identificationThe risk-return framework and the identification
of the asset appropriate discount rateof the asset appropriate discount rate..
88--Valuation of assets. Discounting of relevant cashValuation of assets. Discounting of relevant cash
flows, relative valuation, and contingent claimflows, relative valuation, and contingent claim
valuationvaluation..
99--The optimum allocation of funds. What to investThe 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 variousHow 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 publicIdentification of required expenditure of a public
sector entitysector entity..
1212--Source of that entity's revenueSource of that entity's revenue..

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Financial Accounting and ManagerialFinancial Accounting and Managerial
AccountingAccounting
Accounting provides the reliable andAccounting provides the reliable and
relevant financial information useful inrelevant financial information useful in
making decisionsmaking decisions..
Financial Accounting provides informationFinancial Accounting provides information
for external parties who are interested infor external parties who are interested in
the company’s accounting informationthe company’s accounting information..
Generally Accepted Accounting PrinciplesGenerally 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 accountingManagerial Accounting provides accounting
information to internal parties for profitinformation to internal parties for profit
planning and budgeting, costs of anplanning and budgeting, costs of an
organizations products and services, andorganizations products and services, and
performance reports such as budget vs.performance reports such as budget vs.
actual resultsactual results..
Managerial Accounting focuses on theManagerial Accounting focuses on the
future, rather than reporting on the pastfuture, rather than reporting on the past..
CostingCosting is also a major part of managerialis 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 aThe 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. Itfinancial condition on a certain date. It
shows the “Assets” on the left, or top, ofshows the “Assets” on the left, or top, of
the balance sheet, and the “Liabilities andthe 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 theThe Assets must balance out with the
Liabilities and Owners Equity. Assets areLiabilities 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 companyASSETS – 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 alongCash, 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. Governmentterm investments, like U.S. Government
securities or the commercial paper ofsecurities or the commercial paper of
other firmsother firms..
33--Accounts Receivable, which is money owedAccounts Receivable, which is money owed
to the company by its customers, usuallyto the company by its customers, usually
within 10 to 60 dayswithin 10 to 60 days..
44--Notes Receivable, which is money dueNotes Receivable, which is money due
from debtorsfrom debtors..

55--Inventory:-which is the goods for sale toInventory:-which is the goods for sale to
customers, or goods in the manufacturingcustomers, or goods in the manufacturing
processprocess------
··The inventory for aThe inventory for a ManufacturerManufacturer wouldwould
be the raw materials to make its productsbe the raw materials to make its products,,
··The inventory for aThe inventory for a RetailerRetailer would bewould be
just the finished goodsjust the finished goods..
··The inventory for aThe inventory for a ServiceService companycompany
would have little to no inventory on theirwould have little to no inventory on their
balance sheet due to the nature of thebalance sheet due to the nature of the
businessbusiness..
..

66--LongLong--Term Assets or Tangibles also knownTerm Assets or Tangibles also known
as “Fixed Assetsas “Fixed Assets.”.” The land, buildings,The land, buildings,
factories, and warehouses, including thefactories, and warehouses, including the
machinery, furniture, computers, andmachinery, furniture, computers, and
fixtures that are owned by the companyfixtures that are owned by the company..
------Accumulated depreciation is a way toAccumulated depreciation is a way to
allocate, which means assigning, the costallocate, which means assigning, the cost
of a fixed asset with a life of over oneof a fixed asset with a life of over one
yearyear.. The cost of the asset is chargedThe cost of the asset is charged
against income over the life of the assetagainst income over the life of the asset
rather than all in one yearrather than all in one year.. This is alsoThis is also
known as a “contra account,” which inknown 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--physicalphysical
products likeproducts like patentspatents,, which are exclusive legalwhich are exclusive legal
rights granted to an investor for a period of 17rights granted to an investor for a period of 17
yearsyears,,trademarkstrademarks,, which are distinctive names orwhich are distinctive names or
symbols granted for 28 years with option forsymbols granted for 28 years with option for
renewalrenewal,, goodwillgoodwill,, which is the amount of moneywhich is the amount of money
paid for the asset above the value it was assignedpaid for the asset above the value it was assigned
by the previous owner, andby the previous owner, and copyrightscopyrights,, which is awhich is a
form of intellectual property that gives theform of intellectual property that gives the
creator of an original work exclusive rights for acreator of an original work exclusive rights for a
certain time periodcertain time period
8-Investments, Prepayments and Deferred Charges,8-Investments, Prepayments and Deferred Charges,
which is monies already spent, that will yieldwhich is monies already spent, that will yield
benefits in upcoming years like insurancebenefits in upcoming years like insurance
coverage, rent, etccoverage, rent, etc..

LIABILITIESLIABILITIES –– which is everything thewhich is everything the
company owes, mostly to suppliers andcompany owes, mostly to suppliers and
creditorscreditors.. Current liabilities are thoseCurrent liabilities are those
payable within a year of the date of thepayable within a year of the date of the
balance sheet. Types----------balance sheet. Types----------
1-Long-term debt which is the debt due1-Long-term debt which is the debt due
after one year of the date of the balanceafter one year of the date of the balance
sheet.sheet.
2-Notes Payable which are short-term2-Notes Payable which are short-term
borrowings that are payable within theborrowings that are payable within the
year. It is a promissory note, which isyear. 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 amount3-Accounts Payable, which is the amount
the company owes to suppliers.the company owes to suppliers.

4-Federal income taxes-and when applicable4-Federal income taxes-and when applicable
city and state taxescity and state taxes. ,. ,
5-Accrued Expenses Payable, which is all5-Accrued Expenses Payable, which is all
other monies, owed at the time of creatingother monies, owed at the time of creating
the balance sheet including employees,the balance sheet including employees,
contractors, utilities, etccontractors, utilities, etc..
6-I6-I..ee.. Current portion of longCurrent portion of long--term debtterm debt
which is the amount due within a yearwhich is the amount due within a year
from the date of the balance sheetfrom the date of the balance sheet.. ThisThis
would be considered a current liabilitywould be considered a current liability

77--Notes Payable-which are non currentNotes Payable-which are non current ((duedue
after 12 monthsafter 12 months)) borrowingsborrowings.. It is aIt is a
promissory note, which is basically apromissory note, which is basically a
written promise to paywritten promise to pay
8-Bonds payable-which is the obligation due8-Bonds payable-which is the obligation due
on maturity of bonds.on maturity of bonds.
9-Pension obligations, -which is the liability9-Pension obligations, -which is the liability
for future pension benefits due tofor 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 beenterm tax obligations that have been
deferred to some future period.deferred to some future period.
11-Minority interest, -which is the11-Minority interest, -which is the
ownership of minority shareholders in theownership 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’swhich is the amount left over for the company’s
owners after the liabilities are subtracted fromowners after the liabilities are subtracted from
the assetsthe assets..
The formula is “Assets – Liabilities = OwnersThe formula is “Assets – Liabilities = Owners
Equity.” This is also referred to as “NetEquity.” This is also referred to as “Net
Worth.” If the company is incorporated, they canWorth.” If the company is incorporated, they can
issue stock. Stocks represent ownership in aissue stock. Stocks represent ownership in a
corporation.corporation.
1-Preferred Stock, which is a type of stock that1-Preferred Stock, which is a type of stock that
pays a dividend. It is a payment from profit madepays a dividend. It is a payment from profit made
to stockholders out of the company’s income at ato stockholders out of the company’s income at a
specific rate, regardless on how the companyspecific rate, regardless on how the company
performs.performs.

22--Common StockCommon Stock
which the owners have voting rights, but do notwhich the owners have voting rights, but do not
receive dividends at a fixed pricereceive dividends at a fixed price.. The value ofThe 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 thein capital,” is the
amount paid to the company in excess of the paramount paid to the company in excess of the par
valuevalue
44--Retained EarningsRetained Earnings,,
which is money reinvested into the company andwhich is money reinvested into the company and
becomes part of the capital that finances thebecomes part of the capital that finances the
companycompany..
55--Treasury stockTreasury stock,,
which is stock in the company that has beenwhich is stock in the company that has been
repurchased and not retiredrepurchased and not retired..

As you can see, the “Total Assets” for eachAs you can see, the “Total Assets” for each
year equaled the “Total Liabilitiesyear 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 dollarEach dollar
value was a “Snapvalue was a “Snap--Shot” on the date ofShot” on the date of
the financial statementthe financial statement.. Assets are inAssets are in
order of their liquidity and how fast theyorder of their liquidity and how fast they
can be converted into cashcan be converted into cash.. CurrentCurrent
assets are expected to be liquidated withinassets are expected to be liquidated within
one year of the date of the Balanceone year of the date of the Balance
SheetSheet.. Liabilities and Equity are in orderLiabilities and Equity are in order
in which they are to be paidin which they are to be paid.. CurrentCurrent
Liabilities are payable within oneLiabilities are payable within one
yearyear.. Also, as you can see, there are twoAlso, as you can see, there are two
years of figures on the balance sheet foryears of figures on the balance sheet for
comparison and trending purposescomparison and trending purposes..

ProportionProportion::
Your company’s financial reports revealYour company’s financial reports reveal
interesting and important information oninteresting and important information on
the proportion of physical assetsthe proportion of physical assets ((plantplant
and equipmentand equipment)) versus cash flowversus cash flow
DirectionDirection::
A general sense of a company’s directionA general sense of a company’s direction
can be assessed from its financialcan be assessed from its financial
statements.statements.

Financial Statements: TheFinancial Statements: The
Income StatementIncome Statement
Income statements show the results of a company’sIncome statements show the results of a company’s
operations, which are usually given quarterly oroperations, which are usually given quarterly or
by fiscal year The Income Statement is alsoby fiscal year The Income Statement is also
known as the “Profit Loss” statement orknown as the “Profit Loss” statement or
“PL.” Simply put, the formula is: “Revenue –“PL.” Simply put, the formula is: “Revenue –
Expenses = Income.” The easiest and bestExpenses = 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 costsalso known as “The Bottom Line,” after all costs
and expenses have been subtracted from alland expenses have been subtracted from all
possible income including total sales, interestpossible income including total sales, interest
earned on investments, and sale of a non-tangibleearned on investments, and sale of a non-tangible
item like a patent.item like a patent.

Here is a brief explanation of the type ofHere is a brief explanation of the type of
accounts associated with a commonaccounts associated with a common
Income StatementIncome Statement::
11--Revenues – also called “Sales, “SalesRevenues – also called “Sales, “Sales
Revenue,” or “Sales of Goods orRevenue,” or “Sales of Goods or
Services.” It is also known as the “TopServices.” It is also known as the “Top
Line.” It is the amount of money theLine.” It is the amount of money the
company made, before any expenses, oncompany made, before any expenses, on
its operationsits operations..
22--Cost of Goods Sold – also known as, andCost 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 expensesThese are direct costs or direct expenses
because they are directly associated withbecause they are directly associated with
making what the company sells (i.e.making what the company sells (i.e.
manufacturermanufacturer(,(,

33--Gross Income – also called “GrossGross Income – also called “Gross
Profit.” It is the money the companyProfit.” It is the money the company
earns on its sales before SGAearns on its sales before SGA..
44--Selling, General, and AdministrativeSelling, General, and Administrative
Expense also known as “SGA” – – It isExpense also known as “SGA” – – 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 minusThis is gross income or gross profit minus
SGA. This is also the EBITDASGA. This is also the EBITDA
number. For more information on EBITDAnumber. For more information on EBITDA
66--Depreciation Expense – This is the amountDepreciation Expense – This is the amount
of depreciation charged against salesof depreciation charged against sales
during the periodduring the period..

77--Operating Income – Gross income minusOperating Income – Gross income minus
SGA gives you the operating income. ThisSGA gives you the operating income. This
is also considered EBIT or operating profitis also considered EBIT or operating profit..
88--Interest Expense – This item reflects theInterest Expense – This item reflects the
costs of a company's borrowingscosts of a company's borrowings..
99--Non-operating Income – An example ofNon-operating Income – An example of
this would be money won from a lawsuitthis would be money won from a lawsuit..
1010--Non-operating Expenses – This could beNon-operating Expenses – This could be
the cost of litigation or settlements paid inthe cost of litigation or settlements paid in
lawsuits, closing down a division, etclawsuits, closing down a division, etc..
1111--Pre-Tax Accounting Income – Also knownPre-Tax Accounting Income – Also known
as “Income Before Taxes.” This is theas “Income Before Taxes.” This is the
income before taxesincome before taxes..

1212--Provision for Income Taxes – Taxes thatProvision for Income Taxes – Taxes that
will be charged against the income in thiswill be charged against the income in this
period, even if they have not been paid inperiod, even if they have not been paid in
this period. This will be the income taxthis period. This will be the income tax
charged to income for the periodcharged to income for the period..
1313--Income before Extraordinary Items – ThisIncome before Extraordinary Items – This
is the pre-tax minus income taxis the pre-tax minus income tax..
1414--Preferred Stock Dividends - Each share ofPreferred Stock Dividends - Each share of
preferred stock is normally paid apreferred stock is normally paid a
guaranteed, relatively high dividend andguaranteed, relatively high dividend and
has first dibs over common stock at thehas first dibs over common stock at the
company's assets in the event ofcompany's assets in the event of
bankruptcybankruptcy..

1515--Net Income Available to CommonNet Income Available to Common
Stockholders - The net income applicableStockholders - 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 thatExtraordinary items - Are events that
occur infrequently and are unusualoccur infrequently and are unusual..
1717--Discontinued operations - Occur when aDiscontinued operations - Occur when a
significant segment of a business has beensignificant segment of a business has been
identified for disposalidentified for disposal
1818--Net Income or (Loss) – This is also knownNet Income or (Loss) – This is also known
as, “The Bottom Line.” Net income isas, “The Bottom Line.” Net income is
what’s left after subtracting the COGS,what’s left after subtracting the COGS,
SGA, and all the rest of the expenses andSGA, and all the rest of the expenses and
taxes on the income statementtaxes on the income statement..

1919--Earnings Per Share (EPS) - This is NetEarnings Per Share (EPS) - This is Net
income remaining for stockholders ÷income remaining for stockholders ÷
Common shares outstanding, alsoCommon shares outstanding, also
considered part of the bottom lineconsidered part of the bottom line..
Income statements are like a managementIncome statements are like a management
report card. It lets you investigate wherereport card. It lets you investigate where
sales are rising or falling, whether costssales are rising or falling, whether costs
are rising or falling faster or slower thanare rising or falling faster or slower than
sales, if interests expense is rising orsales, if interests expense is rising or
falling year to year, of if there were anyfalling 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 theFinancial ratios are used to show the
relationship of two financialrelationship of two financial
statement accounts to measure astatement accounts to measure a
company’s performance, andcompany’s performance, and
whether it is creditworthywhether it is creditworthy..

LIQUIDITY RATIOSLIQUIDITY RATIOS
11--Liquidity ratios demonstrate a company's abilityLiquidity 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 AssetsQuick 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 TurnoverAnnual Inventory Turnover == COGS for the Year ÷COGS for the Year ÷
Average Inventory BalanceAverage Inventory Balance::

LEVERAGE RATIOSLEVERAGE RATIOS
Leverage Ratios are used to understand aLeverage Ratios are used to understand a
company's ability to meet it long termcompany'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: ThisThis indicates what proportion ofindicates what proportion of
debt (trade credit, liabilities, anddebt (trade credit, liabilities, and
borrowings) and equity (shareholdersborrowings) and equity (shareholders
purchased stock and earnings reinvestedpurchased stock and earnings reinvested
into the company rather than taken asinto the company rather than taken as
dividends) that the company is using todividends) that the company is using to
finance its assetsfinance its assets..
22--Debt ratio = Long Term Debt ÷ TotalDebt ratio = Long Term Debt ÷ Total
AssetsAssets::
33--Earnings Before Interest and Taxes (orEarnings 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 andEarnings 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'sProfitability Ratios are used to assess a business's
ability to generate earnings as compared to itsability to generate earnings as compared to its
expenses and other relevant costs incurredexpenses and other relevant costs incurred
during a specific period of timeduring a specific period of time..
11--Gross MarginGross Margin == Gross Income ÷ Net SalesGross 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 SalesNet Margin = Net Income ÷ Net Sales
(Revenue): Also known as Net profitability(Revenue): Also known as Net profitability..
44--Asset TurnoverAsset Turnover == Net Sales (Revenue) ÷ TotalNet 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 IncomeNet Income
÷ Owners' Equity÷ Owners' Equity::
By calculating ratios, you can find patternsBy calculating ratios, you can find patterns
like is the company generating cash? Islike is the company generating cash? Is
the liquidity strong? Does the companythe liquidity strong? Does the company
have too much debt or too manyhave too much debt or too many
assets? Is it growing the assets fasterassets? Is it growing the assets faster
than sales? Are the margins weak orthan sales? Are the margins weak or
strong? How do the ratios compare to thestrong? How do the ratios compare to the
last couple of years, etclast couple of years, etc??

12:09u‫م‬12:09u‫م‬ DR/Ysser Abd elmaksoud 46
Some other ratios that investors look at areSome other ratios that investors look at are::
11--Earnings Per Share (EPS) = Net incomeEarnings Per Share (EPS) = Net income
remaining for stockholders ÷ Commonremaining for stockholders ÷ Common
shares outstanding (also considered partshares outstanding (also considered part
of the bottom lineof 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 perDividend Payout Ratio = Dividends per
share ÷ Earnings per shareshare ÷ Earnings per share
44--Dividend Yield Ratio = Dividends per shareDividend 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 ofThe 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 flowCash for purposes of the cash flow
statement normally includes cash and cashstatement normally includes cash and cash
equivalentsequivalents.  .

Accounting and the AccountantAccounting and the Accountant
Accounting keeps track of the flow of money byAccounting 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, includingreceipts, 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 moneyAccounts Receivable, which tracks the money
the company is owed and paidthe company is owed and paid..
·         ·         Accounts Payable, which tracks expendituresAccounts Payable, which tracks expenditures
and authorizes checks to be cut to pay bills toand 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 beCredit, decides just how much credit will be
extended to a customerextended to a customer.   .

12:09u‫م‬12:09u‫م‬ DR/Ysser Abd elmaksoud 49u
These two entries offset each other andThese 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 equityAn 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 areInventory is defined as assets that are
intended for sale, are in process of beingintended for sale, are in process of being
produced for sale, or are to be used inproduced 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--TheThe 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 adjusts, which adjusts
inventory with each transaction throughinventory with each transaction through
computerized software, such as Fishbowlcomputerized software, such as Fishbowl
inventoryinventory..

The following equation expresses how a company'sThe following equation expresses how a company's
inventory is determinedinventory is determined::
Beginning Inventory + Net Purchases - Cost ofBeginning Inventory + Net Purchases - Cost of
Goods Sold (COGS) = Ending InventoryGoods Sold (COGS) = Ending Inventory
Beginning Inventory + Net Purchases - EndingBeginning Inventory + Net Purchases - Ending
Inventory = Cost of Goods SoldInventory = Cost of Goods Sold

FIFO, LIFO and Average CostingFIFO, LIFO and Average Costing
MethodMethod
These are three of the most common methods ofThese are three of the most common methods of
accounting for inventoriesaccounting for inventories.  .
11--FIFO (First in, First out. Pronounced fife-oh) - TheFIFO (First in, First out. Pronounced fife-oh) - The
company assumes that the first item making itscompany 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) -LIFO (Last in, First out. Pronounced life-oh) -
The company assumes that the last item makingThe company assumes that the last item making
its way into inventory, or most recent, is assumedits way into inventory, or most recent, is assumed
to be sold firstto be sold first..
33--Average Costing Method – This is used when COGSAverage Costing Method – This is used when COGS
fluctuate frequently throughout the yearfluctuate frequently throughout the year.    .

Accounting for depreciation deals with adjustmentsAccounting for depreciation deals with adjustments
that are made to company profits once a month,that are made to company profits once a month,
or once a year, to account for expenses such asor once a year, to account for expenses such as
depreciation and amortizationdepreciation and amortization. .
11--Straight-line depreciation = Cost of asset ÷Straight-line depreciation = Cost of asset ÷
asset’s years of lifeasset’s years of life..
22--Double declining balance = Book value of theDouble declining balance = Book value of the
asset times twice the straight-line rateasset times twice the straight-line rate..
33--Sum of the year’s digits is a method of calculatingSum of the year’s digits is a method of calculating
depreciation of an asset that assumes higherdepreciation of an asset that assumes higher
depreciation charges and greater tax benefits indepreciation charges and greater tax benefits in
the early years of an asset's lifethe early years of an asset's life..
44--MACRS (Modified Asset Cost Recovery System) isMACRS (Modified Asset Cost Recovery System) is
the new accelerated cost recovery system,the new accelerated cost recovery system,
created after the release of the Tax Reform Act ofcreated after the release of the Tax Reform Act of
1986, which allows for greater accelerated1986, which allows for greater accelerated
depreciation over longer time periodsdepreciation over longer time periods. .

Setting up a budget for your departmentSetting up a budget for your department
Every manager needs to know what costs areEvery manager needs to know what costs are
associated with their department, and how inassociated 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 capitalThere 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 andrelates to costs associated with plant and
equipment.equipment.
2-Operating budget, which is related to the normal2-Operating budget, which is related to the normal
day-to-day operations and expenditures such asday-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 betweenFinance acts as a middleman between
department heads and upper-managementdepartment heads and upper-management
when it comes to budgetswhen it comes to budgets..
The two issues that stand out the most areThe two issues that stand out the most are
overtime and flight costs.overtime and flight costs.
The two issues that stand out the most areThe two issues that stand out the most are
overtime and flight costs.overtime and flight costs.
The way you set up your department shouldThe 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, andmaterials to streamline process, and
trending data that shows the need fortrending 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 business1-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 businessAlways practice good business
ethics and you should never get intoethics and you should never get into
any trouble.any trouble.
3-3-Knowing some of the mostKnowing some of the most
common economics terms, andcommon economics terms, and
economy basics, can help youeconomy basics, can help you
understand the effect it can have onunderstand the effect it can have on
your company.your company.

44--There will be times when you are in anThere will be times when you are in an
upper management meeting, or listeningupper management meeting, or listening
to a company wide CEO conference call,to a company wide CEO conference call,
where many financial terms are used. Youwhere many financial terms are used. You
should know and understand the mostshould know and understand the most
commonly used terms and theory likecommonly used terms and theory like
EBIT, EBITDA, Margins, ROI and BottomEBIT, EBITDA, Margins, ROI and Bottom
lineline. .
55--Know how finance and accountingKnow how finance and accounting
practices are associated with your yearlypractices are associated with your yearly
budgetbudget

THE ENDTHE END
LESSON 8LESSON 8

Presentation1.ppt lesson 8

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