AGEC EXAM TWO

What management aspects will be covered on this exam?

• Financial Management

• Supply Chain Management

• Human Resources Management

What is the technical definition of profit?

• The amount remaining from a sale after costs (product, operating, interest) have been paid

• Total Revenue (PxQ) - Total Costs (Fixed+ Variable) = Profit

• Profit is a historical benchmark that represents the skill and ability of decision-makers of the firm

• Provides important information for managers

Describe the difference between managerial and financial accounting, and discuss which is more important to managers

• Managerial: the collection and use of financial information to make management decisions, often does not follow GAAP

• Financial: the collection and use of financial information in order to meet outside reporting requirements, must follow GAAP, more use to external reporting

• Managerial is more important, as it provides financial information that allows managers to make the best decision

A Record system should be…

• Simple and easy to understand

• Reliable, accurate, consistent, and timely

• Based on the uniqueness of the particular business

• Cost effective to implement and maintain

Good Financial records are used for…

• Determining the success of the business in terms of profitability during specific time periods

• Determining the general financial condition of a firm at a point in time

• Analyzing trends in performance

• Predicting the future ability of the firm to meet demands of creditors, change, and expansion

• Choosing among alternatives for future use of resources

Describe the important financial statements used and their purpose

• Income statement: shows the revenue and expenses, as well as showing if the firm is profitable or not

• Balance Sheet: shows the assets, liabilities, and equity that a firm has, does not show income (!!)

• A=L+OE

Explain the differences between the subclassifications of accounts

• Assets: what the firm owns

  • Current Assets (Cash, AR, Inventory, Prepaid Expenses): assets that can be paid out within a year

  • Fixed Assets (Equipment minus depreciation, Land- does not depreciate): Assets that cannot be easily liquidated

  • Other Assets: intangible assets (patents, property rights)

• Liabilities: What the firm owes to others

  • Current Liabilities (AP,NP,Accrued Expenses, advances): anything that is due within the year

  • Long-term liabilities (Mortgages, Long-term loans): anything that will be paid over the long-term

• Owners Equity (Net Worth): the money that owners have invested within the business

  • Common Stock: money that was apart of the original investment

  • Retained Earnings: profits that the business has previously had, that is retained into the business instead of being paid out to the owner (common stock)

What is the income statement?

• Summarizes revenue and expenses during a specific period of time (usually a fiscal year)

• Allows for firms to see their financial performance

• Can also be known as:

  • Operating statement, profit and loss statement, or statement of earnings

What are the two types of accounting and what is the differences?

• Cash Basis approach: revenue and expenses occur when cash is received or paid (only count when cash is affected)

• Accrual basis: revenue and expenses exist whenever they are earned or incurred regardless of when the cash transaction occurs (counts when transactions occurs)

• Example: Brookstone sells $10,000 of feed to a farmer in December, but the farmer pays in January

  • Cash-basis: recorded in jan

  • Accrual basis: recorded in dec

How can cash-basis income not represent the true value of the income statement

• Can understate net income if:

  • Revenue earned but not converted to cash (AR, inventory)

  • Expenses incurred during the prior or later years, but cash is paid this year (decrease in AP or accrued expenses, increase in prepaid expenses and purchased supplies)

• Can overstate true net income if:

  • Revenue is generated in prior years and converted to cash this year

  • Expenses were incurred this year, but cash paid during prior or later years

Provide the definition of sales and the formula

• Dollar value of all products and services that have been sold during the specified period (cash or on credit)

• Gross Sales

• - Returns

• - Discounts and allowances

• = Net Sales

Provide the formula for cost of goods sold

• Beginning Inventory

• - Ending Inventory

• = Net Inventory Change

• + Purchases

• + Freight

• =Cost of Goods Sold

Provide the definition and the formula for gross margin

• The difference between net sales and total cost of goods sold, the money available to cover operating expenses, interest expense, and generate a profit

• Net Sales

• - Cost of goods sold

• = Gross Margin

What is operating expenses

• Costs associated with the sales transacted during the specific time period

• Includes:

  • Marketing expenses: Advertising, commissions

  • Administrative Expenses: Sales, office supplies

  • General Expenses: Utilities, taxes, bad debt

What are some other key aspects of the income statement

• Net operating income/margin: gross margin (or gross profit) minus total operating expenses

• Net income before taxes:

  • add non-operating revenue (interests from investments)

  • subtract non-operating expenses (interest paid on debts)

• Net income after taxes: subtract federal business profits tax

What is the statement of owners equity?

• Shows how the owners share of the business changes during the year through net income or loss, additional investments, and withdrawals

• Explains the change in owners equity accounts over the period

• The main change usually comes from net income or net loss, which affects retained earnings

• May also include changes in stock or owner’s capital contributions

What are the two classes of stock

• Retained earnings: Portion of company’s net income that is kept in the business

• Common stock: represents the owner’s investment in a corporation, the money they put into the business in exchange for ownership share

Explain the statement of cash flows

• Shows the cash inflows and outflows of the firm for a specific time period

• Cash in = Cash out

• Cash flows: Operations, investments, disinvestments, financing

What is a proforma statement

• Financial statements prepared for a future period, which typically includes a balance sheet and statement of cash flows

What are some important accounting principles?

• Only monetary facts reported on the balance sheet and the income statement

• Records for business entities must be separated from personal business transactions

• Assumes business will continue to operate indefinitely

• Cost basis of valuation (owned resources recorded at their cost or market value, whichever is lower)

• Every accounting changes assets and liabilities/owner’s equity, all assets are claimed by someone

• Profits more accurately reflected by accounting on the accrual basis

• The format of the income statement should reflect the needs of the business

• Consistency of format but can be change as needed

• Informed decision-making is the major purpose for keeping records and preparing financial information

How can financial statements be used for evaluation?

• Allows on-going evaluation of the firm on the achievement of goals

• Allows implementation of contingency plans when necessary

What are the areas requiring analysis?

• Profitability

  • Trends in revenue and expenses

  • Actual profitability and trends

  • Ability to generate profits from revenues and assets

• Liquidity

  • Firm’s cash position

  • Firm’s ability to respond to uncertainty or short-term shocks

  • Ability to meet short term obligations

• Solvency

  • Firm’s capital structure

  • Ability to deal with risk and absorb future losses or financial shocks

  • Long-term financial stability

• Efficiency

  • How effectively the firm uses its assets

  • Productivity ad asset utilization

  • Operational efficiency over time

What is used for common size analysis

• Total Sales

• Total Assets

• Budgets

• Forecasts

Why do financial analysts use ratio analysis

• Easy to calculate

• Easy to make comparisons with previous years or other firms

• Easily understood

• Able to communicate a firm’s financial position and performance to outside parties

List the commonly used ratios

• Profitability Ratios

• Liquidity Ratios

• Solvency Ratios

• Operating or efficiency ratios

List the profitability ratios

Return on Assets

• (Net income after taxes + interest Expense)/Average Total Assets

• Measures how efficiently the firm uses all assets to generate profit

• A higher ROA means the firm is using its assets more effectively to earn income Return on equity

Return on Equity

• (Net Income after taxes)/ Average Owners Equity

• Measures the return earned on the owner’s investment and investment performance

Gross Margin Ratio

• Gross Margin/ Net Sales

• Measures how much a profit a business makes after covering cost of goods sold

• Shows how efficently the firm produces or sells its products

• A higher gross margin means better control of production and purchasing costs

Operating Margin

• Operating income/ Net Sales

• Measures how much of each sales dollar remains after covering all operating expenses, but before interest and taxes

• Shows how efficiently the firm runs its core business operations

• A higher margin means the firm is better at managing costs and generating operating profit