Financing the BusinessFinancing the BusinessChapter 36Chapter 36

How are they different?How are they different?

• The easiest way to separate accounting and finance The easiest way to separate accounting and finance is to think of accounting as the past and finance as is to think of accounting as the past and finance as the future. the future.

• AccountingAccounting is a record of past and current business is a record of past and current business transactions.transactions.

• FinanceFinance may utilize accounting documents, but is may utilize accounting documents, but is focused on finding capital to operate the company, focused on finding capital to operate the company, assessing risks, and choosing between business assessing risks, and choosing between business opportunities.opportunities.

AccountingAccounting

• Accounting is a critical component of a business’ Accounting is a critical component of a business’ operation. Legally businesses are required to keep operation. Legally businesses are required to keep records of their financial transactions for tax records of their financial transactions for tax purposes. purposes.

• It includes payroll, expenses, sales, investment, and It includes payroll, expenses, sales, investment, and operations costs.operations costs.

• Information can be powerful when it’s used to assist Information can be powerful when it’s used to assist future decision making. future decision making. • Ex: A company can look back and determine if payroll is too Ex: A company can look back and determine if payroll is too

high, or they are spending too much on utilities.high, or they are spending too much on utilities.

Important Accounting DocumentsImportant Accounting Documents

• Income statementIncome statement – summary of your business’ – summary of your business’ income and expenses during a specific period, such income and expenses during a specific period, such as a month, a quarter, or a year.as a month, a quarter, or a year.

• As businesses operate they generate revenue As businesses operate they generate revenue (sales) and incur expenses (costs). (sales) and incur expenses (costs).

• Income Statements are also known as Income Statements are also known as Profit and Profit and Loss statements.Loss statements.

Income Statement Cont’dIncome Statement Cont’d

Total SalesTotal Sales- Returns and Allowances- Returns and Allowances= Net Sales= Net Sales- Cost of Goods Sold- Cost of Goods Sold= Gross Profit= Gross Profit- Expenses of Operating the Business- Expenses of Operating the Business= Net Income from Operations= Net Income from Operations- Income Taxes- Income Taxes= Net Profit = Net Profit

• Calculating Net SalesCalculating Net Sales• The total of all sales for any period of time is called The total of all sales for any period of time is called gross salesgross sales. .

• Net salesNet sales represents gross sales minus all sales returns and represents gross sales minus all sales returns and allowances (credit granted to customers for damaged or defective allowances (credit granted to customers for damaged or defective goods kept by the customer)goods kept by the customer). .

Important Important FinancialFinancial Documents Documents

• Balance SheetBalance Sheet – is a summary of a business’ assets – is a summary of a business’ assets (resources), liabilities (debts), and owner’s equity (resources), liabilities (debts), and owner’s equity (ownership/investment).(ownership/investment).

• AssetsAssets – are anything of monetary value that you own. – are anything of monetary value that you own.

• LiabilitiesLiabilities – current or long term debts. – current or long term debts.

• Owners EquityOwners Equity – Investment in a business. Also called Net – Investment in a business. Also called Net worth. worth.

• Assets-Liabilities = Assets-Liabilities = Net worthNet worth (Equity) (Equity)

What do they tell you?What do they tell you?

• Figures on a balance sheet shows you Figures on a balance sheet shows you information about a stockholder’s equity. information about a stockholder’s equity. This tells what an ownership’s interest and This tells what an ownership’s interest and the financial strength of a business are on a the financial strength of a business are on a given dategiven date..

SnapshotSnapshot

• Figures on the income statement can give Figures on the income statement can give you an idea of how well the business is you an idea of how well the business is operating operating over a period of time. over a period of time.

Video RecordingVideo Recording

Finance Cont’dFinance Cont’d

• The basic financial documents like Income The basic financial documents like Income Statements and Balance Sheets also play an Statements and Balance Sheets also play an important role in Finance. important role in Finance.

• Internal Uses –Internal Uses –• Performance evaluation. Performance evaluation. • Manager compensation and evaluations are often tied to Manager compensation and evaluations are often tied to

company performance. company performance. • Companies also use these documents for future Companies also use these documents for future

planning. planning.

Finance Cont’dFinance Cont’d

• External Uses – External Uses – • Short-term and Long-term creditors and investors.Short-term and Long-term creditors and investors.• Choosing suppliers. Choosing suppliers. • Credit ratings. Credit ratings. • Evaluating Competitors. Evaluating Competitors. • Acquiring other firms, identifying targets and deciding Acquiring other firms, identifying targets and deciding

what to offer. what to offer.

• Common theme is that financial statements Common theme is that financial statements are a prime source of information about a are a prime source of information about a firm’s financial health.firm’s financial health.

Re-emphasizing - How are they different?Re-emphasizing - How are they different?

• The easiest way to separate accounting and finance The easiest way to separate accounting and finance is to think of is to think of accounting as the pastaccounting as the past and and finance as finance as the future. the future.

• AccountingAccounting is a record of past and current business is a record of past and current business transactionstransactions

• FinanceFinance may utilize accounting documents, but is may utilize accounting documents, but is focused on finding capital to operate the company, focused on finding capital to operate the company, assessing risks, and choosing between business assessing risks, and choosing between business opportunities.opportunities.