3920u9 - New Venture and Small Business Management UNIT 9...

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Unformatted text preview: New Venture and Small Business Management UNIT 9 MODULE 1 The Accounting Function AS MANY AS 45% OF ENTREPRENEURS LACK A BASIC UNDERSTANDING OF ACCOUNTING Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved THE ACCOUNTING CYCLE RECORDING TRANSACTIONS THE SALE OF A HOT DOG... JOURNAL ENTRIES l l l l debit cash $2.00 credit sales $2.00 debit cost of sales $1.00 credit inventory $1.00 JOURNAL (double-entry system) CLASSIFYING TRANSACTION TOTALS SUMMARIZING DATA Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved THE ACCOUNTING CYCLE RECORDING TRANSACTIONS THE ACCOUNTING CYCLE RECORDING TRANSACTIONS JOURNAL CLASSIFYING TRANSACTION TOTALS LEDGER CLASSIFYING TRANSACTION TOTALS LEDGER SUMMARIZING DATA SUMMARIZING DATA l balance sheet l income statement l statement of changes in financial position FINANCIAL STATEMENTS Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved 1 New Venture and Small Business Management THE BALANCE SHEET A snapshot at a specific point in time of what a business owns and owes THE BALANCE SHEET ASSETS CURRENT ASSETS Cash Accounts Receivable expected to be Inventory converted to cash Prepaid Expenses within one year TOTAL CURRENT ASSETS FIXED ASSETS OTHER ASSETS LIABILITIES ASSETS & OWNER'S EQUITY Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved THE BALANCE SHEET ASSETS CURRENT ASSETS FIXED ASSETS x Accumulated Depreciation - y z OTHER ASSETS FIXED ASSETS INCLUDE... THE BALANCE SHEET LIABILITIES & OWNER'S EQUITY CURRENT LIABILITIES Operating Bank Loan Accounts Payable Accrued Payables Current Portion of Long-Term Debt TOTAL CURRENT LIABILITIES amounts owed to third parties and due within one year l land & buildings l equipment l vehicles l computers & furniture l leasehold improvements Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved THE BALANCE SHEET LIABILITIES & OWNER'S EQUITY CURRENT LIABILITIES Operating Bank Loan Accounts Payable Accrued Payables Current Portion of Long-Term Debt TOTAL CURRENT LIABILITIES LONG-TERM DEBT OWNER'S EQUITY Paid-In Capital Retained Earnings Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved THE INCOME STATEMENT REVENUES COST OF GOODS SOLD GROSS PROFIT GENERAL & ADMIN EXPENSES SALES & MARKETING EXPENSES EARNINGS BEFORE INTEREST AND TAXES $ $ OPERATING ACTIVITIES $ INTEREST EXPENSE EARNINGS BEFORE TAXES $ TAXES EARNINGS AFTER TAX (NET INCOME) $ } FINANCING ACTIVITIES } TAXES PAID Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved 2 New Venture and Small Business Management THE BALANCE SHEET TRANSACTIONS ARE RECORDED USING A `DOUBLE-ENTRY' SYSTEM... DEBIT ASSETS ASSETS CURRENT ASSETS Cash Accounts Receivable Inventory Pre-Paids LIABILITIES & EQUITY CURRENT LIABILITIES + $2.00 - $1.00 + $1.00 Bank Loan Accounts Payable Accrued Payable Current L-T Debt $ LONG-TERM DEBT $ CREDIT decrease FIXED ASSETS Accumulated Depreciation $ OTHER ASSETS $ increase LIABILITIES decrease increase + $1.00 OWNER'S EQUITY Paid-In Retained Earnings $ Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved OUT OF BALANCE ! THE BALANCE SHEET ASSETS CURRENT ASSETS Cash Accounts Receivable Inventory Pre-Paids LIABILITIES & EQUITY + INCOME CURRENT LIABILITIES $2.00 Bank Loan STATEMENT Accounts Payable SALES AccruedCOST OF SALES Payable Current L-T Debt PROFIT GROSS - $1.00 + $1.00 $2.00 $1.00 $1.00 $ TOTAL EXPENSES 0 NET INCOME $1.00 $ THE STATEMENT OF CHANGES IN FINANCIAL POSITION CASH FROM (USED) OPERATING ACTIVITIES FIXED ASSETS Accumulated Depreciation $ OTHER ASSETS $ LONG-TERM DEBT + + CASH FROM (USED) INVESTING ACTIVITIES CASH FROM (USED) FINANCING ACTIVITIES NET CHANGE IN CASH POSITION OWNER'S EQUITY Paid-In Retained Earnings + $1.00 + $1.00 Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved + $1.00 Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved ACCRUAL ACCOUNTING l income is recorded vs. CASH ACCOUNTING HOW DO YOU EXPENSE THE CART ? ACCRUAL ACCOUNTING $15 000 / 5 years of useful life = $3 000 / year Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved when earned (i.e. the sale made and the goods shipped) as incurred l income is recorded when payment received vs. CASH ACCOUNTING $15 000 at time of purchase l expenses are recorded l expenses are recorded when payment is made Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved 3 New Venture and Small Business Management THE STATEMENT OF CHANGES IN FINANCIAL POSITION OPERATING ACTIVITIES Net Income + Non-Cash Expenses + Changes in Non-Cash Working Capital Items INVESTING ACTIVITIES Investment in Fixed or Other Assets Proceeds from Sale of Assets FINANCING ACTIVITIES Issuance (Repayment) of Long-Term Debt Issuance (Repurchase) of Shares Dividends Paid NET CHANGE IN CASH POSITION $ $ Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved $ $ ENTREPRENEURS NEED TO UNDERSTAND ACCOUNTING ! Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved FACTS... l entrepreneur invests $7 000 into business l buys cart for $15 000 - $5 000 down, $10 000 financed at 12% per annum with $200 monthly principal installments payment due in 10 days IN FOUR WEEKS, 980 HOT DOGS WERE SOLD AT $2.00 EACH... DID SHE EARN A PROFIT ? COULD SHE PAY HER DEBTS ? l buys $1 500 worth of inventory on credit with l pays $250 for one-year municipal permit l hires a student for 20 hours/week @ $7.50/hour (pay-day is Wednesday) Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved OPENING JOURNAL ENTRIES Dr Cash Paid-In Capital Investment by Entrepreneur Fixed Assets Long-Term Debt Cash Purchase of the Cart Inventory Accounts Payable To Buy Initial Supplies $15 000 $10 000 $5 000 $7 000 $7 000 LEDGER ENTRIES CASH ACCOUNT Cr for each debit there must be corresponding credit(s) and vice-versa Dr Investment by Entrepreneur Down-Payment on Cart To Buy Municipal Permit NET CASH $1 750 $7 000 Cr $5 000 $250 $1 500 $1 500 Pre-Paid Expenses $250 Cash $250 Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved To Buy Municipal Permit Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved 4 New Venture and Small Business Management THE BALANCE SHEET ASSETS CURRENT ASSETS Cash Accounts Receivable Inventory Pre-Paids $1 750 $1 500 $250 $3 500 ON-GOING JOURNAL ENTRIES Dr Cr $1 960 $980 $980 $600 $450 $150 $250 $250 LIABILITIES & EQUITY CURRENT LIABILITIES Bank Loan Accounts Payable $1 500 Accrued Payable Current L-T Debt $2 400 $3 900 LONG-TERM DEBT $7 600 Cash Sales One Month's Sales Cost of Sales Inventory Reflect Cost/Source of Sales Wages Cash Accrued Payables Student's Help Depreciation Expense Accumulated Depreciation User of the Cart $1 960 FIXED ASSETS $15 000 Accumulated Depreciation $15 000 OTHER ASSETS $18 500 OWNER'S EQUITY Paid-In Retained Earnings $7 000 $18 500 Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved $100 Interest Expense Cash Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Interest Paid $100 FIRST MONTH INCOME STATEMENT SALES COST OF SALES GROSS PROFIT WAGES DEPRECIATION INTEREST NET INCOME* $1 960 $980 $980 Cash $600 $250 $100 $30 Inventory Accumulated Depreciation BALANCE SHEET (at end of first month) ASSETS Dr $1960 LIABILITIES & OWNER'S EQUITY Cr $450 $100 $200 $1500 $980 $250 Accounts Payable Accrued Payables Long-Term Debt Retained Earnings $200 $30 Dr $1500 Cr $150 (* assumes no taxes) Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved BALANCE SHEET (at end of first month) ASSETS CURRENT ASSETS Cash Accounts Receivable Inventory Pre-Paids $1 460 $520 $250 $2 230 LIABILITIES & EQUITY CURRENT LIABILITIES Bank Loan Accounts Payable Accrued Payable $150 Current L-T Debt $2 400 $2 550 LONG-TERM DEBT $7 400 PROFIT MADE = $30.00 PRINCIPAL PAYMENT MADE ! FIXED ASSETS $15 000 Accumulated Depreciation ($250) $14 750 OTHER ASSETS $16 980 OWNER'S EQUITY Paid-In Retained Earnings $7 000 $30 $16 980 Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved 5 New Venture and Small Business Management THE STATEMENT OF CHANGES IN FINANCIAL POSITION OPERATING ACTIVITIES Net Income + Non-Cash Expenses + Changes in Non-Cash Working Capital Items $30 $250 ($370) ($90) CASH GENERATED FROM OPERATIONS INVESTING ACTIVITIES Investment in Fixed or Other Assets Proceeds from Sale of Assets FINANCING ACTIVITIES Issuance (Repayment) of Long-Term Debt Issuance (Repurchase) of Shares Dividends Paid There was a net cash outflow of ($200) $290 ! ($200) NET CHANGE IN CASH POSITION ($290) Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved 6 New Venture and Small Business Management UNIT 9 MODULE 2 Evaluating Financial Performance FINANCIAL STATEMENTS PROVIDE VALUABLE INFORMATION AND CAN ACT AS EFFECTIVE MANAGEMENT TOOLS Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved FINANCIAL STATEMENTS reflect results SMALL BUSINESS FINANCIAL STATEMENT PREPARATION MONTHLY QUARTERLY ANNUALLY changes are captured in subsequent financial statements MANAGEMENT DECISIONS CHANGES IN POLICIES AND PROCEDURES IDEAL REALITY CHANGES IN PERFORMANCE Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved FINANCIAL STATEMENTS TELL US... l a venture's ability to respond to opportunities and meet obligations l operating efficiencies / effectiveness l appropriateness of financing l adequacy of return on investment Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved FINANCIAL STATEMENTS ARE RESTATED IN RELATIVE TERMS, OR FINANCIAL RATIOS, TO FACILITATE ANALYSIS Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved 1 New Venture and Small Business Management FINANCIAL ANALYSIS l TREND ANALYSIS w compares information year-over-year Year 1 Year 2 Year 3 N.B. RATIOS ARE WIDELY USED BY A VENTURE'S EXTERNAL CONSTITUENCIES. THEREFORE, ENTREPRENEURS MUST UNDERSTAND THESE VALUABLE TOOLS ! Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved BENCHMARKING w compares one firm's results to those of similar firms Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved 4 CATEGORIES OF RATIOS l LIQUIDITY RATIOS l ACTIVITY RATIOS l LEVERAGE RATIOS l PROFITABILITY RATIOS Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved LIQUIDITY: `a venture's ability to meet short-term obligations' l CURRENT RATIO (or WORKING CAPITAL RATIO) l ACID-TEST RATIO (or QUICK RATIO) Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved CURRENT RATIO = CURRENT ASSETS CURRENT LIABILITIES CURRENT RATIO BENCHMARKS IF... ratio is higher than average THEN... `RULE OF THUMB' 1:1 WEAK creditors feel themselves to be protected as the venture is more likely to meet its obligations 2:1 STRONG IF... ratio is below average THEN... company enjoys less financing flexibility Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved 2 New Venture and Small Business Management ACTIVITY RATIOS: `reflect how well a venture is managing its assets' ACID-TEST RATIO = CURRENT ASSETS - INVENTORY CURRENT LIABILITIES INVENTORY TURNOVER = = COST OF GOODS SOLD AVERAGE INVENTORY LEVEL COLLECTION PERIOD Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved ACCOUNTS RECEIVABLE AVERAGE DAILY CREDIT SALES Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved INVENTORY TURNOVER l Does it correspond to expected figure ? l Is it trending up or down ? l How does it compare to the industry average ? Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved INVENTORY TURNOVER HIGH RATIOS l good quality, in proper balance OR l insufficient capital more frequent ordering LOW RATIOS l obsolete or outdated ? l have sales dropped ? l ineffective purchasing ? i.e. ratios can indicate management problems ! Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved COLLECTION PERIOD TOO LONG l l l l poor quality receivables overly-generous credit lack of aggressive collections skewed results ? LEVERAGE: `how a firm is financing its assets; debt or equity ? DEBT-TO-EQUITY RATIO LOW RATIO = TOTAL DEBT OWNER'S EQUITY HIGH RATIO LEVERAGE TOO SHORT l credit policy too tight ? Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved RISK Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved 3 New Venture and Small Business Management FINANCIAL RATIOS (small business; industry averages) PROFITABILITY RATIOS SECTOR EXAMPLE CURRENT RATIO MANUFACTURING WHOLESALE RETAIL SERVICE children's blow-molded general fast-food clothing plastics merchandise 2.1 1.5 1.5 0.5 0.3 hair stylist 1.3 0.6 N/A N/A 2.1 6.3 NET PROFIT MARGIN = NET PROFIT NET SALES ACID-TEST RATIO x 100 0.7 0.8 0.8 WHY ARE THESE SO LOW ? INVENTORY TURNOVER 3.7 8.9 7.8 39.8 (times) WHY IS THIS `NOT APPLICABLE' ? COLLECTION PERIOD (days) DEBT-TO-EQUITY NET PROFIT MARGIN 43 1.0 2.5 51 1.8 5.0 32 1.7 3.1 N/A 5.0 4.4 Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved Copyright 1999 Jon Kerr and Captus Press Inc. All right reserved WHY IS THIS THE LOWEST ? 4 ...
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This note was uploaded on 06/02/2011 for the course AK 3920 taught by Professor Jonkerr during the Winter '10 term at York University.

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