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AccountingAccounting
Leslie Lum
What’s Accounting?What’s 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
Management AccountingManagement 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
Everyone Should be a Everyone Should be a Management AccountantManagement 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
Income StatementIncome 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
How did Joe do this year?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?
How does it translate to a How does it translate to a company?company?
5,124.2 5,027.9 4,851.6 4,453.1 4,113.5
3,359.8 3,344.9 3,295.8 3,082.0 2,806.2
1,764.5 1,682.9 1,555.8 1,371.0 1,307.3
1,491.0 1,405.3 1,322.9 1,217.6 1,120.8
– – – – –
– – – – –
50.4 47.1 34.2 39.4 39.3
(109.0) (107.1) (108.6) (129.5) (125.1)
4,792.2 4,690.2 4,544.4 4,209.6 3,841.2
332.1 337.7 307.2 243.5 272.3
332.1 337.7 307.2 243.5 272.3
129.5 131.0 121.0 96.0 107.2
202.6 206.7 186.2 147.5 165.1
Income TaxIncome After Tax
Operating Income
Income Before Tax
Interest Expense (Income), Net Operating
Other Operating Expenses
Total Operating Expense
Selling/ General/ Administrative Expenses
Research & Development
Depreciation/ Amortization
Total Revenue
Cost of Revenue
Gross Profit
ANNUAL INCOME STATEMENT
In Millions of U.S. Dollars 12 Months Ending
01/31/00
12 Months Ending
01/31/99
12 Months Ending
01/31/98
12 Months Ending
01/31/97
12 Months Ending
01/31/96
Let’s Look at NordstromLet’s Look at Nordstrom
How did Nordstrom do?How did Nordstrom do?
What did Nordstrom take in? What did Nordstrom spend? What’s growth in revenues? What’s growth in expenses? What’s growth in profit?
Balance SheetBalance Sheet
Let’s you know about financial health Assets (Things the company owns) Liabilities (things the company owes) Equity or Net Worth (what’s owned free
and clear)
How’s Joe’s financial health?How’s Joe’s financial health?
What does he own? Are his assets earning money for him? What does Joe owe? What is his net worth?
How is Joe’s Net Worth How is Joe’s Net Worth compared to others?compared to others?
Age Average Net Worth Median Net WorthUnder 35 47,200 11,40035-44 144,500 48,50045-54 277,800 90,50055-64 356,200 110,800
How does it translate to a How does it translate to a company?company?
Assets - What the company Assets - What the company needs to do businessneeds 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
Liabilities - What the company Liabilities - What the company borrows to do businessborrows to do business
Current liabilities– Accounts payable - what the company owes its
vendors Long Term liabilities - Long term debt
EquityEquity
What the shareholders own in the company Any profits not given to the shareholders in
cash is included
Let’s analyze Let’s analyze some retail some retail
apparel apparel companiescompanies
Analyzing the infoAnalyzing 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 RatiosFinancial Ratios
Valuation ratios tell you whether or not you’re getting a good deal. Price equity.
Financial strength ratios let you know the state of the company’s 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 RatiosValuation 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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ProfitabilityProfitability
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 Financial Health - Debt to Equity RatioEquity 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 - Management Effectiveness - Return on EquityReturn 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.
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