“What I wish I knew about Accounting,
when I was 20” & Case Method
Overview
April 8, 2014
E140A Accounting Workshop
1
Why is accounting important?
• Insight into a company’s financial health
• Current and potential investors rely on
financial statements to make decisions
• Common base metrics for comparison
– Compare to companies across industries
– Compare financial ratios to determine liquidity,
profitability, growth metrics
• Helps executives plan ahead (cash burn rate)
and build a narrative around numbers.
E140A Accounting Workshop
2
Key Accounting Concepts
• Financial vs. Managerial Accounting
– Financial Accounting focuses on external reporting
– Managerial Accounting internal operations & budgeting
• For Profit, Not for Profit, Governmental Accounting
– Generally Accepted Accounting Principles (GAAP)
• Accrual vs. Cash Basis
– The timing of when revenue and expenses are reported.
– Cash Basis: small companies and personal finances
– Accrual Basis: large companies
E140A Accounting Workshop
3
Basic Financial Statements
Balance sheet
Income statement
E140A Accounting Workshop
Cash flow
statement
4
Balance Sheet: Basic Principles
Assets = Liabilities + Equity
What the company owns
(used to generate income)
How the ownership of assets was
financed (by third parties or by the
owners)
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5
Balance Sheet
• A snapshot of the investing and financing
activities of a firm
Balance Sheet of XYZ Corp. - 31 December of 2008 (in thousand $)
Cash
Current
Assets Accounts
Receivable
Shareholders’
equity
is
(liquid in less than a year)
• Liabilities
areInventories
creditors’
the owners’
claim
claims on the assets of
• Contributed
capital
a
firm.
The
claims
Property, plant and
Fixed
Assets
equipment
(paid-in
capital):
thethe
result from
benefits
(less depreciation)
amount
firm has invested
previously
• Retained
earnings:
Intangibles
received from
the
Other
Assets
(less
depreciation)
increase
due
creditors in equity
to operationsInvestment Securities
Current Liabilities
Accounts Payable
Salaries Payable
Assets are economic
Accrued Expenses
resources
Income Taxes Payable
(payable in less than a year)
Short Term debt
• An asset has the ability
(bonds issued,
loans)
tobankprovide
future
benefits to theCommon Stock
Additional Paid-in Capital
company
Shareholders’
Equity
Long-Term Liabilities
Retained Earnings
Total Assets
= Total Liabilities + Shareholders’ Equity
E140A Accounting Workshop
6
What is Stanford’s biggest Asset?
A)
B)
C)
D)
E)
Investments
Works of Art
Student Loans
Plant & Buildings
The Students
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Balance Sheets Comparison
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Receivable . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . .
Short Term Investments . . . . . . . . . . .
Other Current Assets . . . . . . . . . . . . . .
Total Current Assets: . . . . . . . . . . . . . . . . . .
Property, Plant and Equipment . . . . . .
Intangible Assets . . . . . . . . . . . . . . . . .
Other Long Term Assets . . . . . . . . . . .
Total Assets: . . . . . . . . . . . . . . . . . . . . . . . .
Wal-Mart
HP
Google
($B)
6.6
5.9
40.7
1.8
55.0
112.3
20.7
5.5
193.4
($B)
8.0
21.4
7.5
14.1
51.0
12.3
55.5
10.8
129.5
($B)
10.0
6.4
34.6
1.7
52.8
9.6
8.9
0.8
72.6
55.9
6.3
62.3
47.1
12.3
121.7
71.3
193.4
34.3
8.1
8.1
50.4
22.6
17.5
90.9
38.6
129.5
7.1
1.2
0.5
8.9
3.0
2.6
14.4
58.1
72.6
Liabilities and Shareholders’ Equity
Accounts Payable . . . . . . . . . . . . . . . . .
Notes Payable . . . . . . . . . . . . . . . . . . .
Other Current Liabilities . . . . . . . . . . . . .
Total Current Liabilities . . . . . . . . . . . . . . . .
Long Term Debt . . . . . . . . . . . . . . . . . . .
Other Noncurrent Liabilities . . . . . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ Equity . . . . . . . . . . . . . . . . . .
Total Liabilities and Shareholders’ Equity . .
E140A Accounting Workshop
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Evolution of a Balance Sheet
Ann’s Mini Mart
September 1, 2013
Liabilities and Equity
Assets
Cash……………………… $10,000
Total…………………… $10,000
Contributed Capital …… $10,000
Total…………………… $10,000
$10,000
$10,000
E140A Accounting Workshop
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Evolution of a Balance Sheet
Ann’s Mini Mart
September 2, 2013
Liabilities and Equity
Assets
Cash………………………$15,000
Total…………………… $15,000
$5,000
Note Payable ……...………$ 5,000
Paid-in Capital…..……… $10,000
Total…………………… $15,000
$5,000
E140A Accounting Workshop
10
Evolution of a Balance Sheet
Ann’s Mini Mart
September 3, 2013
Assets
Liabilities and Equity
Cash……………………… $13,000
Inventory………………….. $2,000
Total…………………… $15,000
Note Payable ……...………$5,000
Paid-in Capital…..……… $10,000
Total…………………… $15,000
$2,000
$2,000
E140A Accounting Workshop
11
Evolution of a Balance Sheet
Ann’s Mini Mart
September 4, 2013
Assets
Liabilities and Equity
Cash……………………… $14,100
Inventory………………….. $1,300
Total…………………… $15,400
Note Payable ……...………$5,000
Paid-in Capital…..……… $10,000
Retained Earnings…………. $400
Total…………………… $15,400
$1,100
$700
$400
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12
Evolution of a Balance Sheet
Ann’s Mini Mart
September 5, 2013
Assets
Liabilities and Equity
Cash……………………… $14,100
Inventory………………….. $3,300
Total…………………… $17,400
Accounts Payable…………$2,000
Note Payable ……...………$5,000
Paid-in Capital…..……… $10,000
Retained Earnings…………. $400
Total…………………… $17,400
$2,000
$2,000
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13
Evolution of a Balance Sheet
Ann’s Mini Mart
September 6, 2013
Assets
Liabilities and Equity
Cash……………………… $12,100
Inventory………………….. $3,300
Land………………………. $10,000
Total…………………… $25,400
Accounts Payable…………$2,000
Note Payable ……...………$5,000
Mortgage Payable………....$8,000
Paid-in Capital…..………. $10,000
Retained Earnings…………. $400
Total…………………… $25,400
$10,00
0
$2,000
$8,000
E140A Accounting Workshop
14
Balance Sheet Analysis
•
Working Capital: Cash needed to sustain business activity through the
cash flow cycle while paying the company’s bills and employee’s salaries.
= Current Assets - Current Liabilities
•
Liquidity Ratios: Measures of the ability to meet short term financial obligations
– Current Ratio = Current Assets / Current Liabilities
– Quick Ratio = (Current Assets – Inventory) / Current Liabilities
– Debt to Assets = Total Debt/ Total Assets
• Operational Efficiency Measures
– Inventory Turnover = Cost of Sales per year / Current Inventory
– Receivable Turnover = Accounts Receivable / Sales
– Accounts Payable Collection Period = Accounts Payable / Cost of Sales
E140A Accounting Workshop
15
Balance Sheet Interactive
http://www.sec.gov/edgar/searchedgar/companysearch.html
Find 3 interesting trends that you would like to share with the class
regarding the company’s balance sheet…
Team #
Company
Bonus question?
Team 1
Tesla Motors (Ticker:TSLA)
What is the accumulated net
operating losses as of Dec 13?
Team 2
Apple (Ticker:AAPL)
What was the highest selling
Apple product for 2013?
Team 3
Google (Ticker:GOOG)
What opinion was expressed
by the company auditors?
Team 4
Facebook (Ticker:FB)
Who was the highest paid
executive for 2013?
E140A Accounting Workshop
16
Balance Sheet and Income Statement
Assets = Liabilities
+
Equity
Assets = Liabilities +
Contributed
Capital
Assets = Liabilities +
Contributed
+
Capital
Retained Earnings,
Beginning of Period
Assets = Liabilities +
Contributed
+
Capital
Retained Earnings,
Revenues - Expenses
+
Beginning of Period
for Period
+
Retained Earnings
+
E140A Accounting Workshop
Net Income
for Period
-
Dividends
for Period
Dividends
for Period
17
What is Stanford’s biggest source of revenue?
A)
B)
C)
D)
E)
Student Tuition Income
Investment Income
Sponsored Research
Health Care Services (Stanford Hospital)
Gift Revenue
E140A Accounting Workshop
18
Income Statement
Reports the economic results of a company over a time
period. It shows the derivation of earnings or losses.
Income Statement of Bike Corp. – year 2013
+ Revenues or Sales
- Cost of Revenue (product cost or COGS)
= Gross Profit
- Sales and Marketing
- General and Administrative
- Research & Development
- Depreciation and Amortization
= Operating Income (EBIT)
+ Interest Income (expense) Net
= Net Income before Taxes
- Income Tax Provision
- Extraordinary Items
= Net Income
$M
127.2
97.5
29.7
13.5
3.3
1.6
9.7
(0.7)
9.0
1.9
7.1
% Rev.
100%
76%
24%
Net Income = Revenues – Expenses (Rev>Exp)
Net Loss = Revenues – Expenses (Rev<Exp)
E140A Accounting Workshop
7%
5%
19
Income Statement Comparison
+ Revenues or Sales
- Cost of Revenue (COGS)
= Gross Profit
- SG&A*
- Research & Development
- Depreciation and Amortization
= Operating Income
+ Other Income / Expenses Net
+ Interest Income (expense) Net
= Net Income before Taxes
- Income Tax Provision
= Net Income
HP
Google
Wal-Mart
($B)
($B)
($B)
127.2
97.5
29.7
13.5
3.3
1.6
9.7
(0.7)
9.0
1.9
7.1
37.9
13.2
24.7
7.8
5.2
11.7
0.6
12.3
2.6
9.7
447.0
335.1
111.8
85.3
26.6
0.1
(2.3)
24.4
7.9
15.7
SG&A = Selling, General and Administrative Expenses
E140A Accounting Workshop
20
Income Statement Analysis
• Some Profitability Measures:
– Gross Margin = Gross Profit / Sales
– Operating Margin = Operating Income / Sales
– Profit Margin = Net Income / Sales
• Other Important Measures:
– Earnings Per Common Share (EPS) = Net Income /
Common Shares
– Price Earnings Ratio (P/E) = Market Price Per Share /
Earnings Per Share
E140A Accounting Workshop
21
Income Statement Comparison
+ Revenues
- Cost of Revenue (COGS)
= Gross Profit
- SG&A*
- Research & Development
- Depreciation and Amortization
= Operating Income
+ Other Income / Expenses Net
+ Interest Income (expense) Net
= Net Income before Taxes
- Income Tax Provision
- Extraordinary Items
= Net Income
Google
Wal-Mart
($B)
($B)
37.9
13.2
24.7
7.8
5.2
11.7
0.6
12.3
2.6
9.7
447.0
335.1
111.8
85.3
26.6
0.1
(2.3)
24.4
7.9
15.7
Gross Margin:
Google: 65%
Wal-Mart: 25%
Operating Margin:
Google: 31%
Wal-Mart: 6%
SG&A = Selling, General and Administrative Expenses
E140A Accounting Workshop
22
Income Statement Interactive
finance.yahoo.com
Find 3 interesting trends that you would like to share with the class
regarding the company’s income statement…
Team #
Company
Team 1
Tesla Motors (Ticker:TSLA)
Team 2
Apple (Ticker:AAPL)
Team 3
Google (Ticker:GOOG)
Team 4
Facebook (Ticker:FB)
E140A Accounting Workshop
23
Cash Flow Statement
– Net Income vs. Cash:
– Net Income = Revenues – Expenses (Accrual Basis)
– Cash = (Cash Basis)
– Timing: Revenues and costs are not necessarily recognized when
cash is transacted (e.g. accounts receivable, depreciation etc.)
– Three components: Operating, Financing, Investing Activities
– Operating – cash spent to generate company sales/revenue
– Financing – mostly cash inflows
– includes cash received through debt or equity financings
– cash spent on repayment of such obligations
– Investing activities: mostly cash outflows (includes cash spent
on acquiring company assets (equipment, buildings, etc)
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E140A Accounting Workshop
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Cash Burn Rate
• Burn Rate –
– Measure of (negative) cash spent per month
– The rate at which a new company uses it’s
venture capital to finance it’s operations, before
generating positive cash flow.
– Ex. Period 6 months; Revenues =$100K,
Expenses $220K; Capital Remaining $200K
• What is the cash burn rate?
• How many month’s of runway?
E140A Accounting Workshop
26
Accounting – from Startup to IPO
Start-up
•
•
•
•
IPO
Still need Financial Statements
– Familiarity with Investors
– If you need to get credit, most Banks or
Merchants will not transact unless they
think a company has cash
Higher emphasis on cash flow, burn rate,
Income Statement (P&L) to stay solvent
Keeping good financial records
– Equity agreements, tax filings, bank
statements, contracts, stock options
Set internal controls to avoid embezzlement
of funds and unaccountability in spending
•
•
•
•
•
Higher emphasis on Financial Statements,
internal controls, SOX compliance, S-1
• Need A/R and A/P clerks, Tax
accountants, Internal/External auditors
Looking at how to scale & remain profitable.
Cash still very important, but now you are
thinking of how to re-invest it in the future of
the business.
Rapid growth = many challenges with cash
Looking at company liquidity and maintaining
a steady capital structure
E140A Accounting Workshop
27