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The recording, classifying,
Transcript of The recording, classifying,
summarizing, and interpreting
of financial events and
transactions to provide
management and other
interested parties the
information they need to make
Purpose of Accounting?
-help managers make well informed decisions
-report financial information about the firm to
The Accounting System
accounting is only for profit-seeking firms
Accounting used to provide information and analyses managers inside the organization to assist them in decision making.
Accounting information and analyses prepared for people
outside the organization.
The job of reviewing and evaluating the information used to prepare a company’s financial statements.
The management of accounting practices that incorporate tax laws.
-government and not-forprofit accounting
Accounting system for organizations whose purpose
is not generating a profit but serving ratepayers, taxpayers,
and others according to a duly approved budget.
1. The balance sheet, which reports the firm’s financial condition on a specific date.
2. The income statement, which summarizes revenues, cost of goods, and expenses (including taxes), for a specific period and highlights the total profit or loss the firm experienced during that period.
3. The statement of cash flows, which provides a summary of money coming into and going out of the firm. It tracks a company’s cash receipts and cash payments.
A summary of all the financial
transactions that have occurred
over a particular period.
The function in a business that acquires funds for the firm and manages those funds within the firm.
The job of managing a firm’s resources so it can meet its goals and objectives.
Managers who examine financial data prepared by accountants and recommend strategies for improving the
financial performance of the firm.
Finance & Financial Managers
What Financial Managers do
Two friends, Elizabeth Bertani andPat Sherwood, started a company called Parsley Patch on what can best be described as a shoestring budget. It began when Bertani prepared salt-free seasonings for her husband, who was on a no-salt diet. Her friend Sherwood thought the seasonings were good enough to sell.
Bertani agreed, and Parsley Patch Inc. was born. The business began with an investment of $5,000 that was rapidly depleted on a logo and label design. Bertani and Sherwood quickly learned about the need for capital in getting a business going. Eventually, they invested more than $100,000 of their own money to keep the business from being undercapitalized. Everything started well, and hundreds of gourmet shops adopted the product line. But whensales failed to meet expectations, the women decided the health-food market offered more potential because salt-free seasonings were a natural for people with restricted diets. The choice was a good one. Sales soared, approaching $30,000 a month. Still, the company earned no profits. Bertani and Sherwood weren’t trained in monitoring cash flow or in controlling expenses. In fact, they were told not to worry about costs, and they hadn’t. They eventually hired a certified public accountant (CPA) and an experienced financial manager, who taught them how to compute the costs of their products, and how to control expenses as well as cash moving in and out of the company (cash flow). Soon Parsley Patch was earning a comfortable margin on operations that ran close to $1 million a year. Luckily, the owners were able to turn things around before it was too late. Eventually, they sold the firm to spice and seasonings giant McCormick.
Three of the most common reasons a
firm fails financially are:
1. Undercapitalization (insufficient
funds to start the business).
2. Poor control over cash flow.
3. Inadequate expense control.
A financial plan that sets forth management’s expectations and, on the basis of those expectations, allocates the use of specific resourcesthroughout the firm
• Name three finance functions important to the firm’s overall operations and performance.
• What three primary financial problems cause firms to fail?
• How do short-term and long-term financial forecasts differ?
• What is the purpose of preparing budgets in an organization? Can you identify three different types of budgets?
Virtually all organizations have operational needs for which they need funds. Key areas include:
• Managing day-by-day needs of the business.
• Controlling credit operations.
• Acquiring needed inventory.
• Making capital expenditures.
Financial managers must ensure that funds are available to meet daily cash needs without compromising the firm’s opportunities to invest money for its future.
Funds raised through various
forms of borrowing that must
Money raised from within the
firm, from operations or through
the sale of ownership in the
firm (stock or venture capital).
Funds needed for a year or
Funds needed for more than a
year (usually 2 to 10 years).
The practice of buying goods
and services now and paying
for them later.
A written contract with a
promise to pay a supplier a
specific sum of money at a
Friends and Family
(1)agree to specific loan terms,
(2) put the agreement in writing, and
(3) arrange for repayment in the same way they would for a bank loan
The assessment of a firm’s
financial condition using
calculations and interpretations
of financial ratios developed
from the firm’s financial
A loan backed by collateral,
something valuable such as
A loan that doesn’t require any
line of credit
A given amount of unsecured
short-term funds a bank will
lend to a business, provided
the funds are readily available
The process of selling accounts
receivable for cash.
1. What are our organization’s long-term goals and objectives?
2. What funds do we need to achieve the firm’s long-term goals and objectives?
3. What sources of long-term funding (capital) are available,
and which will best fit our needs?
OBTAINING LONG TERM LOANS
The principle that the greater
the risk a lender takes in
making a loan, the higher the
interest rate required.
Money that is invested in new
or emerging companies that
are perceived as having great
Comparing Debt and Equity Financing
Can we divide these into 6 steps?