Overview of Accounting Part 2 Click here for Streaming Audio To Accompany Presentation (optional)EGR 403 - The Big PictureFinancial StatementsThe Balance SheetAssetsLiabilitiesEquityBalance Sheet (Left Side Total = Right Side Total)Balance Sheet UsesInventoriesBondsBonds (Cont’d)Slide 13Common StockSlide 15Preferred StockInvesting in Stocks and BondsInvestment ConsiderationsOverview of AccountingPart 2 Click here for Streaming Audio To Accompany Presentation (optional)EGR 403 Capital Allocation TheoryDr. Phillip R. RosenkrantzIndustrial & Manufacturing Engineering DepartmentCal Poly PomonaEGR 403 - Cal Poly Pomona - SV2 2EGR 403 - The Big Picture•Framework: Accounting & Breakeven Analysis•“Time-value of money” concepts - Ch. 3, 4•Analysis methods–Ch. 5 - Present Worth–Ch. 6 - Annual Worth–Ch. 7, 8 - Rate of Return (incremental analysis)–Ch. 9 - Benefit Cost Ratio & other techniques•Refining the analysis–Ch. 10, 11 - Depreciation & Taxes–Ch. 12 - Replacement AnalysisEGR 403 - Cal Poly Pomona - SV2 3Financial Statements•Balance Sheet (General Accounting)–Snap shot of what the company owns and how much they owe. Discloses information to investors.•Income Statement (Cost Accounting)–Shows profit for the period based on Generally Accepted Accounting Practices (GAAP)•Cash Flow Statement (Sources & Uses of Funds)–Shows the actual need for cash over time so that the company can manage their cash properly•The first two statements will be discussedEGR 403 - Cal Poly Pomona - SV2 4The Balance Sheet•The balance sheet is a picture of the financial health of a corporation at a point in time•It is based on the accounting equation:Assets = Liabilities + EquityorCorporate Value = Value owed + Value ownedEGR 403 - Cal Poly Pomona - SV2 5Assets•Assets are traditionally shown on the left side of the balance sheet•Asset are “what the company owns”:–Current Assets: Cash, Short-Term Investments, Accounts Receivable, Inventory, and Prepaid Expenses–Property, Plant & Equipment–Long-Term Investments–Intangible Assets (goodwill)–Other Assets (patents, copyrights, etc.)EGR 403 - Cal Poly Pomona - SV2 6Liabilities•Liabilities are amounts owned to third parties.•Two types of liabilities–Current (bills): Accounts Payable, Accrued Liabilities, Notes Payable–Long-Term (loans, bonds): Long-Term Notes Payable, Mortgages Payable, Long-Term Accrued LiabilitiesEGR 403 - Cal Poly Pomona - SV2 7Equity•Equity is sometimes called “Owner’s Equity” or “Shareholder’s Equity”•Equity is a valuation of what has been invested and reinvested. It is a total of:–Common Stock–Additional Paid-In Capital–Retained Earnings (from P&L)EGR 403 - Cal Poly Pomona - SV2 8Balance Sheet(Left Side Total = Right Side Total)Assets•Current Assets–Cash–Inventory–Accounts Receivable•Long Term–Equipment–Building and Land–GoodwillLiabilities•Current Liabilities–Accounts Payable–Line of Credit•Long Term Debt–Mortgages–BondsEquity•Stock•Retained EarningsEGR 403 - Cal Poly Pomona - SV2 9Balance Sheet Uses•The balance sheet reveals to managers, owners, and potential investors the financial health of the company.•Each industry has a different blend of assets, liabilities, and equity that typify a successful company. •Ratios are used to analyze the balance sheet (e.g., Acid Test = Current Assets/Current Liabilities, Debt/Equity Ratio, etc.)EGR 403 - Cal Poly Pomona - SV2 10Inventories•Inventory refers to the raw materials, work-in-process, and finished goods that are owned by the company. •Inventory represents capital that is tied up. Until the product is sold it is not an expense...it is still an asset. •High inventory costs can hurt your profitability.•Much emphasis is placed on business today on meeting customer needs with minimal inventory.EGR 403 - Cal Poly Pomona - SV2 11Bonds•Sold to raise money. Also popular with utilities, state, and local governments.•Bonds are rated based on the financial stability of the company, city, or state. The higher the rating, the less the risk of losing your investment. •Bonds have a “Face Value” of $1000, but are bought and sold at market value. The market value determines the true interest rate on the bond.EGR 403 - Cal Poly Pomona - SV2 12Bonds (Cont’d)•Face value: $1,000•Stated interest rate: 10%•Term: 5 Years•Date sold: April 1, Year 1•Interest payment dates: April 1 & October 1•Market value: What the bond is actually selling for in the bond marketEGR 403 - Cal Poly Pomona - SV2 13Bonds (Cont’d)•The relationship between the stated interest rate for a bond issue and the market interest rate (effective interest rate) determines whether the bonds will sell for:–a discount: sells for < $1000 (stated interest rate < market interest rate)–face value: sells for $1000 (stated interest rate = market interest rate)–a premium: sells for > $1000 (stated interest rate > market interest rate)EGR 403 - Cal Poly Pomona - SV2 14Common Stock•Shares of ownership are sold to provide capital to finance the beginning or expansion of a corporation. These shares are called “common stock.”•Owners of common stock usually receive dividends from profits four times a year (quarterly dividends). •An “IPO” is the Initial Public Offering of common stock to make ownership available to the public.•The New York Stock Exchange (NYSE), Amex, and NASDAQ are places where many common stocks are then sold or “traded” by shareholders.EGR 403 - Cal Poly Pomona - SV2 15Common StockCommon stockholders have the right to:•Share in the residual assets of a corporation when it is liquidated•Share proportionately in common stock dividends•Maintain their fractional ownership interest (the “preemptive right”)•Vote on key matters facing the corporation•Participate in annual stock holder meeting (if any)EGR 403 - Cal Poly Pomona - SV2 16Preferred StockPreferred stockholders generally have the right to:•Receive an annual dividend before common stockholders are paid a dividend•Receive the liquidation value of their stock (upon the termination of a corporation) before common stockholders receive any distributionEGR 403 - Cal Poly Pomona - SV2 17Investing in Stocks and Bonds•Stock is usually traded in blocks of 100 shares. Profit is made two ways:–Dividends - distributions of quarterly profits –Appreciation - selling the stock for more than you paid for
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