Financial Planning Mark Schnoor, MBA January 24, 2008 LEAD
Accounting Core Competency Decision Making Accounting is a system that measures, processes, and communicates financial information…it is not your business All organizations engage in 3 primary accounting activities: financing, operating, and investing Accounting Communication Measurement Processing
The Accounting Equation • Assets = Liabilities + Owners’ Equity • Assets are economic resources owned by a business that are expected to benefit future operations • Liabilities are present obligations of a business to pay cash, transfer assets, or provide services to other entities in the future • Owners’ equity represents the claims by the owners of a business to the assets of the business
Revenues, Expenses, and Profit • Revenues and expenses are the increases and decreases in owners’ equity that result from operating a business • When revenues exceed expenses, the difference is called net income; when expenses exceed revenues, the difference is called net loss. • What about IMSA…Are we making money here folks?! IMSA is a non-profit organization • Over 30% of the US economy is generated by not-for-profit organizations
Communication through financial statements • The income statement summarizes the revenues and expenses incurred by a business over a period of time • The balance sheet shows the financial position of a business on a certain date • The statement of retained earnings shows the changes in retained earnings over a period of time • The statement of cash flows explains the change in cash in terms of operating, investing, and financing activities over a period
Wow! That looks complicated and not very practical…How do I get started?
Real Examples • Leasing Space • Salary • Grants • Donations • Volunteer Labor • Sales Expenses Revenues
Recognition, Valuation, and Classification Business transactions are economic events that affect the financial position of a business entity. To measure a business transaction, the accountant must decide when the transaction occurred, what value to place on the transaction, and the components of the transaction should be categorized
Recognition Consider buying an office desk... When do you recognize the purchase? 1. An employee sends a requisition to the purchasing department 2. The purchasing department sends a purchase order to the supplier 3. The supplier ships the desk 4. The company receives the desk 5. The company receives the bill 6. The company pays the bill
Valuation • Valuing is assigning monetary value to a business transaction • GAAP state that the original cost or historical cost is appropriate in most cases but it is often not the most accurate measure of value Consider buying a building…
Classification • Consider the purchase of tools… • A repair expense or an asset?
The Double-Entry System • The double-entry system, the backbone of accounting, evolved during the Renaissance • The first systematic description of double-entry bookkeeping appeared in 1494, two years after Columbus discovered America, in a mathematics textbook by Fra Luca Pacioli • The system is based on the principle of duality, which means that every economic event has two aspects—effort and reward, sacrifice and benefit, source and use–that balance or offset each other