Chapter 15 Business Financial Records

Chapter 15 Business Financial Records Lesson 15.1 Types of Financial Records Financial Records - Financial Records - organized summaries of a business’s financial information and activities - Main purpose - to determine if the business is profitable - Make it possible for owners and managers to understand financial performance and make the best possible decisions while using the company’s resources - All companies must determine what records to keep, how to prepare and maintain them, and who should be responsible for the records - Record Keeping System - a manual or automated process for collecting, organizing, and maintaining the financial information of a business - - Whether a record-keeping system is simple or complex, it contains four elements: - Records - People - Procedures - Tools The system must be accurate, keep information safe and secure, and provide timely and accurate information - Businesses are replacing old financial record keepers (cash registers) with point-of-sale (POS) terminals - POS terminals include cash register functions but also have credit and debit card processing capabilities, and a scanner that reads product barcodes to update inventory records. - Accounting - the process of recording, analyzing, and interpreting financial activities of a business - Most firms use accounting software programs to maintain their financial records - - Simplifies and speeds the record-keeping process while reducing errors Data Processing - the set of activities involved in obtaining, recording, organizing, and maintaining the financial information of an organization - - Location where data processing activities occur - Contains the computers, software, security systems, and personnel Some business choose to purchase all their data processing services - Others purchase services for selected tasks such as maintaining inventory records or payroll systems - It is common for businesses to divide their accounting department into several sections - Each is responsible for handling one or more specific accounting activities, such as: - Maintaining cash records - Receipt and payment records - Depreciation records - Tax and payroll records Types of Financial Records - Cash Records - Money taken in by a business - a written record of the transaction must be prepared and entered into the business’s record-keeping system no matter the size of the cash receipt - Cash Disbursements - Cash payments made by a business - Businesses must develop specific procedures for employees to follow when receiving payments by cash or checks and when using cash for purchases - Businesses may also accept credit - With credit, goods and services are provided with the expectation of future payment by the customer - Accounts Receivable Record - shows what each customer purchases, pays, and owes - When a credit sale is made, an electronic or paper record of the transaction is transmitted to the accounting department - The accounting department enters the sale into the accounts receivable record - Accounts Payable Record - identifies the credit purchases of a business, amounts owed, and payments made - - Records details of credit purchases Asset - anything of value owned - Businesses need to have a variety of assets - Buildings - Vehicles - Equipment - Inventory - Depreciation - The gradual loss of an asset’s value due to age and wear - Fixed Assets - expensive assets of a business that are expected to last and be used for a long time - Ex. buildings, land, and expensive equipment - Depreciate over time (except land) - Value of each fixed asset is recorded by the company when purchased - Book Value - the total amount of depreciation deducted from the asset’s original value - Property may also decrease in value because of obsolescence (when an asset is still usable but out of date or inadequate for a particular purpose) - Financial statements do not provide detailed info about their assets - Businesses maintain detailed special records for all fixed assets - Provide info such as asset description, date of purchase, cost, monthly depreciation expense, and asset book value - Asset Book Value - the original cost less accumulated depreciation - Tax and Payroll Records - Federal and state tax laws require every business to keep adequate records in order to report its income and expenses, file required forms, and calculate and pay taxes - Employers must withhold a certain percentage of each employee’s wages for federal income tax purposes - - Businesses must keep detailed payroll records for each employee: - Hours worked - Wage or salary rate - Regular and overtime wages paid - All types of deductions and withholding made from the employee’s wages Personal information about customers and employees must be secure from theft and misuse and should also be protected from natural hazards - Companies use secure areas such as vaults and safe rooms for records, computer equipment, and data storage Lesson 15.2: Budgets and Budgeting Business Budgets - - The financial practices of successful businesses include: - Maintaining a complete and up to date set of financial records - Having detailed financial records reviewed regularly by objective professionals - Keeping accurate records of business inventory - Using financial budgets as planning and management tools Budget - is a written financial plan for business operations developed for a specific period of time - often developed for six months or a year but can cover a longer or shorter time period depending on the type of budget and the nature of the business - project and offer detail on the business’s estimated revenue and expenses over the time period - Start-Up Budget - projects income and expenses from the beginning of a new business until it is expected to become profitable - Usually prepared in large and established businesses whenever a new venture is being planned such as: - - Introduction of a new product - Expansion into a new market - Development of a new type of business operation Usually require large expenditures of equipment, inventory, salares and operating expenses - Operating Budget - a plan showing projected sales, costs, expenses, and profits for the ongoing operations of a business - Projects operating income and expenses for the entire business or for a specific part of the business for an identified time period - Useful planning tool because it uses the same financial categories as the company’s income statement - Cash Budget - an estimate of the flow of cash into and out of the business over a specified time period - Needed to make certain that enough cash will be available at the right times to meet payments as they come due - Cash comes into the company from two primary sources: - Cash receipts - Borrowing - shows as cash flowing in and repayments as cash flowing out when each payment is due - Used to ensure businesses have money Capital Budget - a financial plan for replacing fixed assets or acquiring new ones - Important because acquiring assets ties up large sums of money for long periods of times - A wrong decision can be costly - Sales Budget - a forecast of the sales revenue a company expects to receive in a month, a quarter or a year - Estimated sales are usually projected for sales territories, types of customers, sales representatives, geographic areas, or product categories - Each of the sales managers responsible for various areas make estimates for the sales and expenses of their unit - - Use those estimates to prepare a final sales budget Numerous factors influence sales estimates - Specific operating and management factors of each company - Economic conditions - Major competitors Administering the Budget - Managers often prepare three budget estimates - 1. Assume that sales will be less than expected - 2. Considers what most likely will occur - - Followed unless anticipated conditions change 3. Assume sales will be better than expected If sales are less than expected, the business can shift immediately to the first set of budget figures - Vice versa, the business can shift to the third set of business figures - Managers must use the budget to monitor ongoing operations and control expenses - The use of budgets and a budgeting system cannot guarantee the success of a business, but can help reduce losses or increase - Whether a business is a success or not can be determined only after the budget time periods have passed Lesson 15.3: Financial Reports - Every business must: - Keep thorough and accurate records - Prepare important financial reports regularly - Interpret the financial info in the reports - Make decisions that will have a positive influence on future financial results - Businesses most often use: - Balance sheet - a financial statement that reports a business’s assets, liabilities, and capital on a specific date - Liabilities - claims against assets - Capital (net worth) - the value of the owners’ investment in the business after subtracting liabilities from assets - Has two sides: assets are listened on the left and liabilities and capital are listed on the right - Accounting Equation - assets = liabilities + capital - Merchandise Inventory - the value of goods purchased to sell to customers at a profit - Accounts Receivable - The amount customers owe the business - Accounts Payable - the amount the company owes for purchases it made on credit - Income statement (profit and loss statement) - a financial statement that reports information about a company’s revenues and expenses for a specific period - Usually prepared monthly, quarterly, or semiannually - Have three major parts: - 1. Revenue - income earned for the period, such as from the sale of goods and services - 2. Expenses - all costs incurred in operating the business, such as the cost of equipment and supplies, inventory, and wages - When revenue is greater than expenses, the company has earned a profit - When expenses are greater than revenue, the company has incurred a loss - To earn revenue, a retail business purchases merchandise from suppliers and sells it to customers at a profit. - Cost of Goods Sold - The amount the retailer pays the supplier for the merchandise it buys and sells - Includes the amount the company paid for raw materials and parts to make its products - A large deduction from revenue Gross Profit - the amount remaining after subtracting the cost of goods sold from revenue - Net Profit - the amount remaining after subtracting all expenses from revenue except taxes - Operating Expenses - all expenses not directly associated with producing or purchasing merchandise the business sells - The net result of the business activity reported in the form of revenue, cost of goods sold, expenses, and profit on the income statement appears in one form or another on the balance sheet - Lesson 15.4: Analyzing Financial Data Using Financial Information - Managers use financial statements to understand the financial health of a business - Must be prepared in a way that provides a clear and understandable picture of the financial health of an organization - Cash Flow - the movement of cash into and out of a business - Money comes in immediately as a result of the sale of goods and services for cash and later from customers who buy on credit - Regardless of the size of a business, cash is both a short-term and a long term concern - Must have cash on hand to pay bills when they are due and to plan ahead for large cash payments - Working Capital - the difference between current assets and current liabilities - Current - assets and liabilities that are expected to be exchanged for cash within one year or less, such as accounts receivable and payable - When current assets are much larger than current liabilities, businesses are better able to pay current liabilities - The amount of working capital is one indicator that a business can pay its shortterm debts - Larger amounts make it easier to borrow money, because lenders feel assured that they will be repaid - Managers use ratios to examine different areas of the business for possible financial problems - - Use to identify possible problems needing corrective action - Lenders use ratios to decide whether a company is a good loan risk investors. If the company’s current ratio keeps decreasing each period, then its liabilities are growing faster than its assets Sources of Financial Information - In some situations, businesses may need general advice or special help with a financial problem - Accountants, bankers, and financial consultants can provide expertise beyond what the company’s employees and managers can provide - Accounts understand the complex systems used to collect, sort, and summarize financial data - Can analyze and explain the meaning and importance of the details found on financial statements - Also help managers interpret financial data and make suggestions for financial aspects - Certified Public Accountant (CPA) - a person who has met a state’s education, experience, and examination requirements in accounting - Audit - an examination of a company’s financial records by an expert to verify their accuracy - Bankers also assist businesses with financial decisions - Are well informed about the financial condition of businesses - Provide advice on how and where to get loans - Aware of businesses’ problems and needs Consultant - someone who gives professional advice or offers professional services - hire consultants with specific expertise to help managers solve problems or to provide services that are not available within the business - Many state and federal government agencies provide financial information and other resources for businesses - Small Business Administration - an agency of the federal government that provides information, advice, and assistance in obtaining credit and other financial support for small businesses. *Chapters 16-22 from the Cengage Learning Business Management Textbook are not effective in the curriculum