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Bookkeeping and Accounting Basics

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					Entrepreneurship: To go with Chapter 12

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Accounting Method
z Cash - report income received, deduct expenses as you pay them
y Used by service and construction

z Accrual - report income when earned, deduct expenses when incurred
y Used by manufacturers and retail stores

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Good Records:
z Monitor your business’s progress z Prepare your financial statements z Identify whether receipts apply to taxable or nontaxable income z Support the income, expenses, and credits you report in your tax returns

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Supporting Documents
z Gross Receipts
y Income

z Purchases
y Items you buy

z Expenses
y Costs you incur

z Employment taxes z Immigration and nationalization I-9 Forms z Assets
y Things you own

z Special expenses
y Travel, gifts, transportation, etc.

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Assets
z When and how acquired z Purchase price z Improvement costs z Depreciation z Deductions z How used z Selling price z Sales expenses
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The Accounting Equation
Assets = Liabilities + Owner’s Equity z Assets - anything that is owned z Liabilities - anything that is owed z Owner’s Equity - financial rights to the assets of a business

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Accounting Forms
z z z z z Pro Forma Financial Statements The Income Statement The Balance Sheet The Cash Flow Statement Budgets and Projections

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Pro Forma Financial Statements
z Projected statistical reports z Used to illustrate expected financial status of business in the future
y Information can be obtained from:
x Robert Morris Associates (RMA Annual Statement Studies) x Dun & Bradstreet (several different publications) x Prentice-Hall (Troy’s Almanac of Business and Industrial Ratios)
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Pro Forma Income & Expenses
z Sales Revenues z Cost of Goods Sold
y Materials, Labor, Overhead

z Gross Margin z Operating Expenses
y Selling (salaries, advertising), Research and Development, Depreciation

z Income (Loss) from Operations
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Potential Problems: Pro Forma Income Statements
z Estimate of sales revenue is critical
y Prepare two different statements

z Averages are not very encouraging in many cases
y Determine why your business will be different from the average

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Pro Forma Balance Sheets
z Try using averages derived from a number of similar businesses z Remember that actual numbers will vary, sometimes drastically, from averages

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Pro Forma Balance Sheet
z Assets
y Current Assets y Fixed Assets

z Liabilities
y Current Liabilities y Long-Term Liabilities

z Equity
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Pro Forma Cash Flow
z Beginning Cash Balance z Receipts z Cash Disbursements

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Pro Formas = Excellent Tools
z Estimate capital to start and run firm for first 3 to 6 months z Income Statement z Balance Sheet

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Budgeting
Two primary purposes: z To help project when the firm can be profitable z To help determine the cash flow expected from the operations of the firm

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Profit Plan
z Detailed list of expected sales revenue and expenses over the planning period z Planning period z Designed to set profit goals and steps to reach those goals z List all production expenses z Determine which expenses needed to generate desired level of sales
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Estimated Budget
z Objective: to increase the net income figure by examining each expenditure z First, examine each item (operations, salaries, rent, advertising, interest, etc.) z Make budget revisions to reflect changes z Plan for the cash needs of the firm
y When, and for what, will cash be needed?
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Budget Process
z Consider all the expenses your firm will incur in the first few months of operation z Cash flow - difference between cash receipts and cash payments
y If this is negative, then additional funds must be acquired

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Asset Requirements
z Tangible items required to produce sales z Percentage-of-Sales Method
y Assumes that asset requirements grow in proportion to the growth in sales y Problems
x All assets do NOT increase proportionately with sales x Fixed assets tend to increase as capacity is reached by a major addition to equip/plant
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Break-Even Analysis
Determination of the number of units sold, or dollar volume of sales, that must be generated before the firm covers all its operating costs (or……Breaks Even!)

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Break-Even Analysis:
z Contribution margin = revenue - variable costs z Fixed costs z Variable costs z Semivariable costs

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Fixed Costs
z z z z Direct materials and supplies Direct labor Overhead cost Indirect costs

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Variable Costs
z Expenses which vary directly with changes in sales levels z Variable expenses are sales driven
y Do not depend on past management decisions

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Semivariable Costs
z Cannot be identified as either fixed or variable z Arbitrary decision made to allocate amounts to fixed and how much to variable

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