chapter 3 financial management continued bcn 4772 summer 2006

Chapter 3 Financial ManagementChapter 3 Financial ManagementContinuedContinued

BCN 4772 Summer 2006BCN 4772 Summer 2006

Financial ManagementFinancial Management

Income StatementIncome StatementRevenues, Expenses and IncomeRevenues, Expenses and IncomeCategorized by the type of goods or services Categorized by the type of goods or services

providedprovidedOperating ExpensesOperating ExpensesAdministrative ExpensesAdministrative ExpensesNot expenses to Not expenses to

Determine income on income statementDetermine income on income statementAdd to earnings section should make balance Add to earnings section should make balance

sheet balancesheet balance


Adjusting EntriesAdjusting EntriesNeeded to comply with Accrual methodNeeded to comply with Accrual methodHelps to match revenues and expensesHelps to match revenues and expensesShould try to match revenues and expenses Should try to match revenues and expenses

to the same accounting periodto the same accounting periodEx: End of year statements have not come in; Ex: End of year statements have not come in;

must close out booksmust close out books


Prepaid ExpensesPrepaid ExpensesAssetsAssetsBecome expenses over timeBecome expenses over time Insurance policyInsurance policyShould cost evenly across the whole yearShould cost evenly across the whole year

SuppliesSuppliesMatching?Matching?Ending Inventory – Beginning InventoryEnding Inventory – Beginning Inventory


Bad DebtBad DebtSet-up account for Allowance for Doubtful Set-up account for Allowance for Doubtful

Accounts Accounts Is subtracted from A/RIs subtracted from A/R

DepreciationDepreciationExpense allocated over the life of the assetExpense allocated over the life of the assetLike using up inventoryLike using up inventory


The MACRS Depreciation SystemThe MACRS Depreciation SystemModified Acceleration Cost Recovery SystemModified Acceleration Cost Recovery SystemAssigns specific number of years depending Assigns specific number of years depending

on the type of asseton the type of assetHas specific guidelines pertaining to each Has specific guidelines pertaining to each

type of assettype of assetACRS Asset Cost Recovery SystemACRS Asset Cost Recovery System

Old system Old system

Expensing EquipmentExpensing EquipmentAllowed 24,000 in year of purchaseAllowed 24,000 in year of purchaseThis is an alternative to depreciating itThis is an alternative to depreciating itDoes not benefit large purchasesDoes not benefit large purchasesDoes benefit smaller purchasesDoes benefit smaller purchases Improves cash flow by tax deductionImproves cash flow by tax deduction



AmortizationAmortization What is it?What is it? Refers to intangible assetsRefers to intangible assets Same as straight line depreciationSame as straight line depreciation Equal amounts over life of intangible assetEqual amounts over life of intangible asset Most are done over 15 yearsMost are done over 15 years Some exceptions – computer software 36 monthsSome exceptions – computer software 36 months Start-up costs and organization costs 60 monthsStart-up costs and organization costs 60 months


Accrued ExpensesAccrued ExpensesHave incurred, not received a bill or invoiceHave incurred, not received a bill or invoiceUse adjusting entries to record unpaidUse adjusting entries to record unpaidCan use reversing entry to account for thisCan use reversing entry to account for thisYou reverse the adjusting entry and enter the You reverse the adjusting entry and enter the

expense as if the adjusting entry was never expense as if the adjusting entry was never mademade

Accrued Revenues work same way Accrued Revenues work same way


Closing the booksClosing the books All revenue and expense accounts must = ZeroAll revenue and expense accounts must = Zero So new accounting period does not reflect any So new accounting period does not reflect any

revenues or expenses from last periodrevenues or expenses from last period This is done by a lengthy journal entryThis is done by a lengthy journal entry The balance is retained in Previous Year’s Earnings The balance is retained in Previous Year’s Earnings

account i.e. Retained earnings account i.e. Retained earnings

Opening the BooksOpening the Books Asset, liabilities, and OE are same as previous Asset, liabilities, and OE are same as previous

balance Not Revenue or Expensebalance Not Revenue or Expense


Differences in OrganizationsDifferences in OrganizationsPartnerships will have separate accounts for Partnerships will have separate accounts for

their initial depositstheir initial depositsOwners equity is Stockholders Equity for Owners equity is Stockholders Equity for

CorporationCorporationPreferred StockPreferred StockCommon StockCommon Stock


Subsidiary LedgerSubsidiary LedgerAccount for each customer, supplier, Account for each customer, supplier,

employee, etc.employee, etc.Keeps main ledger unclutteredKeeps main ledger unclutteredKeeps detailed info on accountsKeeps detailed info on accounts

When paidWhen paidHow PaidHow PaidHow much paidHow much paidStill outstandingStill outstanding


PayrollPayrollDetermine gross earnings for pay periodDetermine gross earnings for pay periodDetermine employee deductionsDetermine employee deductionsCalculate employer’s association expensesCalculate employer’s association expensesUpdate employee payroll recordsUpdate employee payroll recordsCreate Journal entriesCreate Journal entriesRemit funds to relevant government agenciesRemit funds to relevant government agencies


Determining Gross EarningsDetermining Gross EarningsRegular PayRegular PayOvertime PayOvertime PaySalarySalaryTipsTipsCommissionsCommissionsTaxable BenefitsTaxable BenefitsVacation PayVacation Pay


Employee DeductionsEmployee Deductions FITFIT SITSIT Social Security Tax (OASDI)Social Security Tax (OASDI) Medicare Tax (HI)Medicare Tax (HI) SUTASUTA SDISDI LocalLocal UnionUnion MedicalMedical DentalDental


SUTASUTA ““The Florida SUTA unemployment insurance The Florida SUTA unemployment insurance

tax applies to the first $8000 of wages. The tax applies to the first $8000 of wages. The 2005 rate for a new company is 2.7%. After 2005 rate for a new company is 2.7%. After that the rate can vary between .1% and 5.4% that the rate can vary between .1% and 5.4% depending on payroll totals and the number of depending on payroll totals and the number of UI claims.”UI claims.”


Remitting FundsRemitting Funds IRSIRS

Send check for total amount FIT an Medicare, Send check for total amount FIT an Medicare, accounted for in journal entryaccounted for in journal entry

Must be accompanied by an explanation of checkMust be accompanied by an explanation of checkSeparate check for FUTASeparate check for FUTALook at the Circular E, Employer’s Tax GuideLook at the Circular E, Employer’s Tax GuideCan go to Can go to IRS web siteIRS web site


Inventory ownershipInventory ownershipFOBFOBFASFASCIFCIF

Inventory ControlInventory ControlFIFOFIFOLIFOLIFOAVG costAVG cost Item by ItemItem by Item


Maximizing Cash Flow\Maximizing Cash Flow\ Bill customers PromptlyBill customers Promptly Deposit cash dailyDeposit cash daily Keep close watch on credit customersKeep close watch on credit customers Add late charges Add late charges Pay bills just before due datePay bills just before due date Keep inventory lowKeep inventory low Look at slow moving inventory ItemsLook at slow moving inventory Items Consider leasingConsider leasing Control TaxesControl Taxes Money market accountsMoney market accounts

chapter 3 financial management continued bcn 4772 summer 2006

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