Finance and

Accounting
For Non-Financial
Managers

Accounting/Finance

Recording, classifying,
and summarizing financial
transactions in terms of
dollars and their
interpretation

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 Key Accounting Terms

Accounting equation

Revenue and expenses

Capital and withdrawals

Fixed cost and variable cost

Accounting Equation

Assets=Liabilities +
Owners Equity

A = L + OE

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 Transactions

Any business event

or activity that
involves monetary
value

Accounts

Used to record and

summarize
business
transactions

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 Revenue and Expenses
Becomes a portion of
owners equity

Revenue
Money earned from selling
goods or services
Increases owners equity

Revenue and Expenses

Expense

Cost of goods or services that a

business buys and uses to earn
revenue

Decreases owners equity

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 Revenue and Expenses

Result in net profit or net loss

Revenue Expenses

Incorporated as
Assets = Liabilities + Owners
Equity + Revenue Expenses
A = L + OE + R - E

Capital and Withdrawals

Determines the owners equity

Capital
Owners investment
Increases owners equity

Withdrawals
When an owner withdraws assets

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 Fixed and Variable Costs
Fixed costs do not vary with the
amount of activity in a business
Property taxes, administration salaries,
etc.

Variable costs vary with the activity

Cost of direct material, direct labor and
variable overhead, etc.

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 Types of Expenses
Cost of goods sold
Cost of products sold in an accounting period

Cost of goods sold = Beginning inventory

+ Purchases Ending inventory

Manufacturing cost of goods sold = Direct

Material + Direct Labor + Variable
Overhead + Allocated Factory Overhead

Types of Expenses
Operating expenses
Expenditures that are necessary for the
daily operations of a business
Marketing expenses
Administrative expenses
Other general expenses
Depreciation
Depletion

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 Types of Expenses (cont.)
Interest expenses
Result of the financial structure of a
business
Incurred if a company has taken a loan
to support its asset investment

Income tax (Federal, state & local)

Profit and Loss

Gross profit on sales
Gross profit on sales = Total revenue
Cost of goods sold

Operating profit
Operating profit = Gross profit on
sales Operating expenses

EBIT (Earnings Before Interest

and Taxes)
EBIT = Operating profit + Other
revenue
Other revenue: Dividends, Interest, etc.

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 Profit and Loss (cont.)
Income before taxes
Income before taxes = EBIT Interest
expenses

Net profit or Net loss

Net profit or Net loss = Income before
taxes Income taxes

Interpret Income Statements

Ratios used to interpret
Income
Net operating margin
Profit margin on sales

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 Net Operating Margin
Net Operating Margin = Operating
profit/sales

Expressed in percentage

Compared to previous years

percentage to determine financial
health

Profit Margin on Sales

Profit Margin on Sales = Net
Profit/Sales

Expressed in percentage

Financial health determined by

comparing this percentage with the
percentages of:
Previous years
Other companies

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 Inadequate Level of Gross
Profit on Sales
The reasons could be:
Product volume

Price structure

Product costs

Balance Sheet
Assets
Current
Fixed

Liabilities
Current
Long-term

Owners equity
Capital Stock
Preferred
Common
Retained earnings

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 Interpret Balance Sheets
Liquidity

Debt-to-total assets ratio

Liquidity
Ability to generate adequate
amounts of cash to meet current
obligations

Compared by calculating:
Working capital
Current ratio

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 Working Capital
Working Capital = Current Assets
Current Liabilities

Value should be neither too small

nor too large

Current Ratio
Reflects whether a company has
sufficient current resources to meet
obligations

Current Ratio = Current Assets /

Current Liabilities

Expressed as a decimal

Value should not be below 1

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 Debt-to-Total-Assets Ratio
Debt-to-Total Assets Ratio = Total
Liabilities / Total Assets

Indicates:
Liabilities per $1 of assets
Measure ability to absorb a reduction in
assets without hindering its ability to pay
creditors

Value should be low

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 Operating Activities
Cash inflows and outflows that relate to
daily operations

Generally result from purchase and sale

of product or service

Example:
Collecting from customers
Collecting interest and dividends
Paying suppliers
Paying employees
Paying interest and tax

Investing Activities
Involve the acquisition and sale of
long-term assets

Example:
Purchasing stocks
Selling fixed assets
Selling debt or stocks
Loaning money
Purchasing fixed assets

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 Financing Activities
Result from issuance and repayment
of long-term liabilities and capital
stock

Example:
Issuing stock certificates
Buying back your own stock
Issuing loans
Making loan payments

Fundamentals of Budgeting
Budgeting is the process of planning
and controlling the financial activities
for an upcoming accounting period
by:

Analyzing present performance

Setting objectives for improving its

future financial health

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 Importance of Budgeting
Outlines a plan for managers and
employees

Fortifies effective pricing and spending

efforts

Benefits
Requires planning
Enhances communication
Reinforces accountability
Identifies problems
Motivates employees

Analyze Financial Statements

Methods of analysis

Horizontal analysis

Trend analysis

Vertical analysis

Ratio analysis

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 Horizontal Analysis
Analyzes month-to-month or year-to-
year changes for each line item on a
financial statement

Determines the method, the reason,

and the outcome of change

Trend Analysis
Analyzes changes for three or more
years

Shown in dollar amount and

percentage

With first year as base year and

subsequent years as percentage of
base year amount

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 Vertical Analysis
Concentrates on the relationships
between various items in the same
period

Top-down budgeting

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Information Provided by Ratio
Analysis
Liquidity ratios
Determine a companys ability to generate
cash

Activity ratios
Evaluate how well a company uses its assets

Leverage ratios
Determine a businesss ability to meet its
long-term obligations

Profitability ratios
Determine returns for investors

Information used in
Budgeting
Working Capital
Current ratio
Acid test
Inventory turnover ratio
Days sales outstanding
Total assets turnover ratio
Debt-to-total-assets ratio
Times-interest-earned ratio
Net operating margin
Profit margin on sales

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 Current Ratio
Liquidity ratio

Current Ratio = Current Assets /

Current Liabilities

Expressed as a decimal

Value should not be below 1

Generally 2:1 satisfactory

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 Inventory Turnover Rate
Activity ratio

Calculates the frequency of inventory to

be sold out and restocked, per year

Inventory Turnover Ratio = Cost of Goods

Sold / Average Inventory
Average Inventory = (Beginning Inventory +
Ending Inventory) / 2

Value should be high

Days Sales Outstanding

Activity ratio

Indicates the length of time a business

must wait after making a sale before
receiving cash

Days Sales Outstanding = Accounts

Receivable / Average Sales Per Day
Average Sales Per Day = Annual Sales / 360

Value should be low

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 Total Assets Turnover Ratio
Activity ratio

Indicates a businesss ability to

generate sales in relation to its total
assets

Total Assets Turnover Ratio = Sales

/ Total Assets

Value should be high

Total Debt-to-Total Assets

Ratio
Leverage ratio

Indicates a companys
Liabilities per $1 of assets
Ability to absorb a reduction in assets without
hindering its ability to pay creditors

Total Debt-to-Total-Assets Ratio = Total

Liabilities / Total Assets

Value should be low

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 Times-Interest-Earned Ratio
Leverage ratio

Measures ability to meet its annual

interest payments

Times-Interest-Earned Ratio =
Operating Profit / Interest Charges

Value should be high

The Profit Margin on Sales

Profitability ratio

Indicates how satisfactory business

activities have been

Profit Margin on Sales = Net Profit /

Sales

Value should be high

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 The Break-Even Point
Occurs when
Total sales = Total expenses, with
nothing left over for profit
Operating income = zero

Break-Even Point = Total Fixed

Operating Expenses / Contribution
Profit Margin per unit

The Break-Even Example

Fixed Cost = $2,000,000
R = $100 VC = $60/unit
Profit Contribution
PC = $100-$60 = $40/unit

BE = $2,000,000 = 50,000 units

$40
at 50,000 units
R = 50,000 ($100) = $5,000,000
VC = 50,000 ($60) = $3,000,000
FC = = $2,000,000
Total Cost $5,000,000

Profit 0

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 Budget Objectives
Relevant
To your businesss vision

Measurable
In quantitative terms

Realistic
Challenging but not impossible

Monitor Performance
Record the actual performance of
the business on pro forma
statements

To compare actual performance with

the budgeted amount

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 Accounting Equation

Total Assets =
Total Liabilities + Total Equity

$18,610,000 = $8,789,000 +
$9,821,000
$18,610,000 = $18,610,000

Working Capital

Current Assets Current Liabilities

$6,610,000 $2,900,000 =
$3,710,000

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 Current Ratio
Total Current Assets
Total Current Liabilities

$6,610,000
$2,900,000 = 2.28

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 Inventory Terms
COGS/Inventory

$7,000,000
$2,300,000 = 3.04

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 Times Interest Earned
Operating Profit/Interest Expense

$3,800,000 = 7.6
$500,000

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 Profit Margin on Sales
Net Profit/Sales

$ 2,120,000 = 0.178
$12,000,000

Net Operation Profit

Operating Profit/Total Fixed Assets

$ 3,800,000 = 0.32
$12,000,000

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 Return on Equity
Net Profit After Taxes/Total Equity

$2,120,000 = 0.216
$9,821,000

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