aaup 2017: "finances for everyone"

Finances for EveryoneAAUP Annual Meeting, Austin, Texas

Tuesday, June 13, 2017

Mike Bieker, Director, University of Arkansas Press

Robbie Dircks, CFO, University of North Carolina Press

Dan Wackrow, CFO, Harvard University Press

AGENDAIntroduction

Accounting Basics and Definitions

The Income Statement

The Balance Sheet

Common Accounting Transactions

Questions and Answers

Definitions of Accounting

Accounting is the systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting, and communicating financial information. It reveals profit or loss for a given period, as well as identifies the value and nature of an organization’s assets, liabilities, and equity. www.businessdictionary.com

The American Accounting Association (AAA) defines accounting as: “the process of identifying, measuring and communicating economic information in order to permit informed judgment and decision-making by users of the information.”

Definitions of Accounting

Accounting is concerned with transactions and events having financial character. For example, hiring a new employee is qualitative information with no financial character. Thus, it is not recorded as an accounting transaction. However, the payment of salaries, payment for the printing of books, sale of books, etc. are recorded as accounting transactions because they involve financial value.

Basic Accounting Principles

Going Concern Principle – Financial Statements are prepared with the assumption that the business entity will continue to operate indefinitely.

Time Period Principle – The life of a business is subdivided into 12-month periods known as a Fiscal Year, which are the primary reporting period. However, the need for timely information leads to the preparation of more frequent reporting (monthly or quarterly).

Matching Principle – Income and related Expenses are recognized in the same period, which is the basis of Accrual accounting.

Accrual Basis of Accounting – The method of accounting used to ensure that the reporting of Income and Expenses are accurately reflected in the period in which they occur. Income is not the same as cash collections and Expense is not the same as a cash payment.

Revenue Recognition Principle – Income is recognized when earned (when service is performed or when sale occurs), regardless of when payment is received.

Expense Recognition Principle – Expenses are recognized when incurred (or used), regardless of when they are paid for.

Double-Entry Bookkeeping

Double-Entry Accounting – A system used to analyze and record business transactions.

• Debit – an entry on the left side of an account

• Credit – an entry on the right side of the account

Chart of Accounts – A list of accounts used by an organization into which all accounting transactions are recorded; sometimes referred to as the General Ledger.

T-Accounts

Provide a visual representation of a ledger account for purposes of analyzing transactions.

Asset T-Accounts

Rules for Asset Accounts

• Increased on the debit side (left side).

• Decreased on the credit side (right side).

• The normal (usual) balance is the increase or debit side.

Asset Account

Debit+

Increase SideNormal Balance

Credit-

Decrease Side

Liability & Equity T-Accounts

Rules for Liability & Equity Accounts

• Increased on the credit side (right side).

• Decreased on the debit side (left side).

• The normal (usual) balance is the increase or credit side.

Liability/Equity Account

Debit-

Decrease Side

Credit+


Income T-Accounts

Rules for Income Accounts

• Increased on the credit side (right side).

• Decreased on the debit side (left side).

• The normal (usual) balance is the increase or credit side.

Income Account

Debit-

Decrease Side

Credit+


Expense T-Accounts

Rules for Expense Accounts

• Increased on the debit side (leftside).

• Decreased on the credit side (right side).

• The normal (usual) balance is the increase or debit side.

Expense Account

Debit+


Credit-

Decrease Side

Primary Accounting Reports

Income Statement – measures the results of operations over a particular period of time by deducting all expenses from all income.

Balance Sheet – also known as the Statement of Financial Position, measures the amount of Assets (total resources), Liabilities (total owed to others), and Capital (amount left over after all obligations are paid out of existing resources) at a particular moment in time.

Statement of Cash Flows – reports the inflows and outflows of cash during a particular period of time.

AGENDAIntroduction



The Balance Sheet

The Cash Flow Statement



Accounting is the language of business. You have to be as comfortable with that as you are with your own native language to really evaluate a business.

- Warren Buffet

The income statement is one of three financial statements that you should become familiar with (the other two are the balance sheet and cash flow statement). Understanding an income statement is essential in order to analyze the performance of an organization.

The income statement summarizes a company’s revenues (sales) and expenses on a periodic (monthly, quarterly, annually) basis. Net sales and net income are typically of most interest.

Income statements come with various monikers, including “statement of income,” “statement of earnings” and “statement of operations.” Other terms include “P&L,” which stands for profit and loss statement. They all mean the same thing.

The income statement “recognizes” revenue when they are realized and expenses when incurred. With accrual accounting, the flow of accounting events through the income statement doesn’t necessarilycoincide with the actual receipt and disbursement of cash. The income statement measures profitability, not cash flow.

Income Statement Accounts• Net Sales – The value of sales to customers, netting gross sales

and returns • Cost of Sales – Expense incurred for materials (pp&b), labor (f/l

editing & design), and royalties, less project related subsidies• Gross Profit – The difference between net sales and cost of

sales, but more importantly, the amount of resources available to cover all other expenses

• Operational expenses – Departmental expenses not directly related to any one project

• Operating income – Earnings from normal operations, before non-operating income or expense (eg. institutional support, endowment earnings)

• Non-book publishing income – Institutional support, endowment income, journals income, distribution services income

• Net income – aka The Bottom Line. The sum of ALL revenues and expenses.

Gross Sales 2,816,238Returns (429,595)

Net Sales 2,386,643

Cost of Goods Sold 1,156,080 (Mfg cost, Freight, Inventory W/O, Royalties)Gross Margin 1,230,563

Other Publishing Income 159,905 (Income from permissions, licenses, etc)Gross Operating Income 1,390,468

Operating ExpensesEditorial 482,779 (Salaries, Honoraria, Travel, F/L editing)

Production & Design 582,022 (Salaries, F/L design, etc)Marketing 436,231 (Salaries, Commissions, Ads, Catalogs, Direct Mail)

Order Fulfillment 260,467 (Salaries, Warehouse costs) Gen’l, Acctg & Admin 429,498 (Salaries, Equipment, Supplies, Utilities, Tele, etc)

Other 12,084Total Operating Expenses 2,203,081

Net Operating Income (812,613)Non-Book Publ. Income 750,560 (Institutional Support, Endowment Earnings,

Distribution Services, Journals income) Net Income/(Loss) (62,530)

AGENDAIntroduction



The Balance Sheet




Balance Sheet

Balance Sheet Definition

• A balance sheet is a financial statement that summarizes a company's (1) assets, (2) liabilities and (3) shareholders' equity at a specific point in time. These three balance sheet segments give management an idea as to what the company owns and owes, as well as the amount invested by shareholders.

3 Parts of the Balance Sheet

Assets =

Liabilities +

Capital / Equity

The Accounting Equation

• ASSETS = LIABILITIES + OWNERS EQUITY

OR

• ASSETS – LIABILITIES = OWNERS EQUITY

• Equity may also be referred to as the book value of the company

Further Breaking down the Balance Sheet

Cash

Accounts Receivable

Inventory

Prepaid Expenses

Royalty Advances

Investments

Fixed Assets

Intangible Assets

Accounts Payable

Accrued Expenses

Wages Payable

Royalties Payable

Unearned Revenue

Long Term Debt

Retained Earnings

Treasury Stock

Additional Paid in Capital

ASSETS

(Provide future benefit)

LIABILITIES

(What I owe)

CAPITAL / EQUITY

(What am I worth)= +


Cash

Accounts Receivable

Inventory

Prepaid Expenses

Royalty Advances

Investments

Fixed Assets

Intangible Assets

Accounts Payable

Accrued Expenses

Wages Payable

Royalties Payable

Unearned Revenue

Long Term Debt

Retained Earnings

Treasury Stock


ASSETS LIABILITIES CAPITAL / EQUITY= +

• Exhibit Expenses• Maintenance• Editorial Stipend


Cash

Accounts Receivable

Inventory

Prepaid Expenses

Royalty Advances

Investments

Fixed Assets

Intangible Assets

Accounts Payable

Accrued Expenses

Wages Payable

Royalties Payable

Unearned Revenue

Long Term Debt

Retained Earnings

Treasury Stock


ASSETS LIABILITIES CAPITAL / EQUITY= +

Example University Press Balance SheetJune 30, 2016

Assets Liabilities & Equity

Current Assets Accounts Payable 25,000

Cash 10,000 Accrued Expenses 5,000

Accounts Receivable 35,000 Unearned Revenue 30,000

Prepaid Expenses 5,000 Royalties Payable 20,000

Royalty Advances 10,000 Total Liabilities 80,000

Inventory 40,000

Non-current Assets Retained Earnings 20,000

Fixed Assets 15,000 Stock 1,000

Investments 10,000 Addt’l Paid in Capital 24,000

Total Equity 45,000

Total Assets 125,000 Total Liabilities & Equity 125,000

Contra Accounts

• A contra account is an account found in an account ledger that is used to reduce the value of a related account. Items recorded in the contra account are specifically designed to offset other transactions, and are recorded as the opposite type of entry.

Examples of Contra Accounts

• Allowance for doubtful accounts

• Allowance for Sales Returns

Accounts Receivable

• Allowance for unearned / unrecoverable advances

Royalty Advances

• Allowance for obsolescence

Inventory

• Accumulated Depreciation

Fixed Assets

Why Set Up a Reserve?

• An asset contra account estimates a decline in an asset value before you have certain knowledge that it has occurred

• Provides a more accurate reflection of the value of the enterprise

• Protects the enterprise from the need to take large, unexpected “hits” to its profits• Returns reserve

• Bad debt reserve

• Inventory reserve


Current Assets Accounts Payable 25,000

Cash 10,000 Accrued Expenses 5,000

Accounts Receivable 35,000 Unearned Revenue 30,000

Prepaid Expenses 5,000 Royalties Payable 20,000

Royalty Advances 10,000 Total Liabilities 80,000

Allow. for unrecoverable Advances (2,000)

Inventory 40,000 Retained Earnings 18,000

Non-current Assets 15,000 Stock 1,000

Fixed Assets 15,000 Addt’l Paid in Capital 24,000

Investments 10,000 Total Equity 43,000

Total Assets 123,000 Total Liabilities & Equity 123,000

Example University Press Balance SheetJune 30, 2016

AGENDA

Introduction



The Balance Sheet



Common Accounting Transactions for Publishers

Sign author to write book and pay $2,500 royalty advance against royalties of 7.5% net.

Transaction 1

Debit+

$2,500

Author Royalty Advances

Credit-

$2,500

Cash

Asset Account Asset Account


Pay freelance editor $1,200 to copyedit manuscript.

Transaction 2

Debit+

$1,200

Copyedit Expense

Credit-

$1,200

Cash

Income Statement Expense Account Asset Account


Pay $119,000 in staff salaries for the month: Acquisitions - $24,500; Manuscript Editorial - $20,000; Des/Production - $22,000; Marketing -$30,000; G&A - $22,500.

Transaction 3

Debit+

$119,000

Staff Salary Expense

Credit-

$119,000

Cash



Pay compositor $2,500 for typesetting project.

Transaction 4

Debit+

$2,500

Work-In-Process

Credit-

$2,500

Cash



Pay printer $10,500 for printing/binding 3,000 copies ($3.50 per unit).

Transaction 5

Debit+

$10,500

Work-In-Process

Credit-

$10,500

Cash



Warehouse receives the 3,000 copies from the printer.

Transaction 6

Credit-

$13,000

Work-In-Process

Debit+

$13,000

Finished Goods Inventory



Warehouse ships 300 review copies for the marketing department at $3.50 unit cost = $1,050. Postage for the shipments total $525.

Transaction 7

Debit+

$1,050

Marketing Expense

Credit-

$1,050




Warehouse ships 300 review copies for the marketing department at $3.50 unit cost = $1,050. Postage for the shipments total $525.

Transaction 7a

Debit+

$525

Postage Expense

Credit-

$525

Cash



Marketing pays $2,500 for ad.

Transaction 8

Debit+

$2,500

Marketing Expense

Credit-

$2,500

Cash



2,500 copies are sold on account ($30 at 45% discount) for total sales revenue of $41,250. Invoice also includes $1,300 for shipping, for a total of $42,550. Inventory value of copies sold is $3.50/unit x 2500 = $8,750.

Transaction 9

Debit+

$42,550

Accounts Receivable

Credit+

$41,250

Book Sales Income

Asset AccountIncome Statement

Income Account



Transaction 9a

Debit+

Accounts Receivable

Credit-

$1,300

Postage Income


Income Account



Transaction 9b

Credit-

$8,750


Debit+

$8,750

Cost of Goods Sold

Asset AccountIncome Statement Expense Account


500 copies are returned for credit of $8,250. Inventory value of copies sold is $3.50/unit x 500 = $1,750.

Transaction 10

Credit-

$8,250

Accounts Receivable

Debit-

$8,250

Book Sales Revenue


Income Account


500 copies are returned for credit of $8,250. Inventory value of copies sold is $3.50/unit x 500 = $1,750.

Transaction 10a

Debit+

$1,750


Credit-

$1,750

Cost of Goods Sold



End of year inventory write-down – using 3-year write-down at $1.16/unit x 700 copies remaining in inventory = $812.

Transaction 11

Credit-

$812


Debit+

$812

Cost of Goods Sold



500 copies are remaindered at $2.00 each for total income of $1,000. Inventory value for copies sold is ($3.00-$1.16)= $2.34/copy x 500 = $1,170.

Transaction 12

Debit+

$1,000

Cash or Accts Receivable

Credit+

$1,000

Book Sales Income


Income Account


500 copies are remaindered at $2.00 each for total income of $1,000. Inventory value for copies sold is ($3.00-$1.16)= $2.34/copy x 500 = $1,170.

Transaction 12a

Credit-

$1,170


Debit+

$1,170

Cost of Goods Sold



200 copies are pulped. Inventory value for copies pulped is ($3.00-$1.16)= $2.34/copy x 200 = $468.

Transaction 13

Credit-

$468


Debit+

$468

Cost of Goods Sold



Pay author royalties - $33,000 net sales x 7.5% = $2,475.

Transaction 14

Credit-

$2,475


Debit+

$2,475

Royalty Expense



Pay author royalties - $33,000 net sales x 7.5% = $2,475.

Write-off balance of unearned advance.

Transaction 14a

Credit-

$25


Debit+

$25

Royalty Expense



Collect $34,000 from customers.

Transaction 15

Debit+

$34,000

Cash

Credit-

$34,000

Accounts Receivable



Pay fulfillment vendor $3,500 for services.

Transaction 16

Credit-

$3,500

Cash

Debit+

$3,500

Fulfillment Expense



Purchase copier machine at a cost of $15,000 and depreciate first year assuming a 4-year expected life - $15,000 / 4 = $3,750.

Transaction 17

Credit-

$15,000

Cash

Debit+

$15,000

Furniture & Equipment



Purchase copier machine at a cost of $15,000 and depreciate first year assuming a 4-year expected life - $15,000 / 4 = $3,750.

Transaction 17a

Debit+

$3,750

Depreciation Expense

Credit+

$3,750

Accumulated Depreciation

Income Statement Expense Account

Contra-Asset Account


Library purchases subscription to a quarterly journal for $100.

Transaction 18

Debit+

$100

Cash

Credit+

$100

Deferred Revenue

Asset Account Liability Account


Journal issue mails – recognize income for one issue.

Transaction 19

Debit+

$25

Deferred Revenue

Credit+

$25

Subscription Revenue


Income Account


Current Assets Accounts Payable $0

Cash ($122,125) Accrued Expenses $0

Accounts Receivable $300 Unearned Revenue $75

Inventory $2,500 Royalties Payable $0

Royalty Advances $0 Total Liabilities $75

Total Current Assets ($119,325) Equity

Non-current Assets Current Surplus (Deficit) ($108,150)

Fixed Assets $15,000 Retained Earnings $0

Accumulated Depreciation ($3,750)

Total Fixed Assets $11,250 Total Equity ($108,150)

Total Assets ($108,075) Total Liabilities & Equity ($108,075)

Common Accounting Transactions Balance Sheet - June 30, 2017

Common Accounting Transactions Income Statement for the Period Ending June 30, 2017

Gross Book Sales $42,250

Sales Returns ($8,250)

Net Book Sales $34,000

Postage Income $1,300

Journals Subscription Revenue $25

Total Sales Revenue $35,325

Cost of Books Sold $9,450

Royalty Expense $2,500

Total Cost of Goods Sold $11,950

Gross Margin $23,375

Operating Expenses:

Staff Salaries $119,000

Freelance Copyediting Expense $1,200

Marketing Space Advertising $2,500

Marketing Review Copies $1,050

Postage Expense $525

Fulfillment Expense $3,500

Depreciation Expense $3,750

Total Operating Expenses $131,525

Net Income (Deficit) ($108,150)

AGENDA

Introduction



The Balance Sheet




aaup 2017: "finances for everyone"

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