The History Of Financial Management Accounting Essay

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As a manager, you need a method for measuring your companys success; finance is one tool at your disposal. Finance can be defined as the process of maximizing profits without jeopardizing the firm's ability to pay its bills (Larson et al. 1994, p. 151). Financial management helps managers make decisions to increase profits for the company without causing the company to fail. Managers must have a basic idea of all the finances his or her company has in order to perform his or her job well. If there are questions or uncertainty, consult the financial expert in your firm. Figure 1 presents finances compared to the parts of a tree.

Branches &Trunk

Roots

FruitC:\Users\Scotty\AppData\Local\Microsoft\Windows\Temporary Internet Files\Content.IE5\7KWKIGFA\MC900441870[1].wmf

Figure 1. Finances compared as a tree (Smith 2004).

Financial activities (Roots): Financial contribution from the owner with equity shares in return. For example, creditors loan money in return for interest and principle payments.

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Investing activities (Branches and trunk): Capital is used to invest in assets such as building, equipment, machinery and vehicles.

Operating activities (Fruit): Produce goods and service that are sold to customers.

Financing a small business

To finance your company you can either find venture capitalists, Small Business Administration loans or grants from the government. The Small Business Administration offers many different low interest loans for small businesses. You should visit your local bank to see what loans are offered by them. Federal governmental grants are provided from tax dollars for use in starting only non-profit firms. State and local governments and non-profit organization may provide grants to small businesses. These grants may require you to match funds in order to be a recipient (SBA 2012).

Basic Financial Definitions:

To better understand financial management, let's take a look at some important financial definitions:

Assets: items, property, and rights owned by a company that can be used to generate economic benefits. Assets = Liabilities + Equity

Liabilities: a company's debt and payables. The total amount of liabilities is the amount the company has borrowed and must repay.

Stockholders' Equity: consists of contributed capital and retained earnings. To examine the net worth of the company, the fundamental equation is: Assets- Liabilities= Equity.

Financial Statements:

Financial statements are important tools contributing to the success of a company. Financial statements require accurate and timely information to be effective. They should be reliable, consistent and accurate to ensure they are simple to understand. The main financial statements a firm uses to manage its success are a balance sheet, income statement, return on earnings and cash flow.

Balance Sheet: presents the firm's assets, liabilities, and owners' equity. A balance sheet provides an estimation of your company's worth at one point in time. They are typically done on the last day of each month (Smith 2004).

Balance sheet:

Assets

Liabilities

Current Assets

Current Liabilities

Cash

Accounts payable

Short-term investments

Other payables

Accounts receivable

Current maturities of long-term debt

Inventory

Deferred revenues

Prepaid expenses

Long-term investments

Long-term liabilities

Notes receivable

Notes payable

Land

Bonds payable

Debt securities

Mortgage payable

Equity securities

Property, production equipment

Equity

Intangible assets

Contributed capital

Retained earnings

An example of a balance sheet (Yahoo! Finance 2012):

Annual Data

All numbers in thousands

Period Ending

Dec 30, 2011

Dec 30, 2010

Dec 30, 2009

Assets

Current Assets

Cash And Cash Equivalents

953,000  

1,467,000  

1,869,000  

Short Term Investments

-  

-  

49,000  

Net Receivables

612,000  

615,000  

141,000  

Inventory

476,000  

478,000  

447,000  

Other Current Assets

68,000  

81,000  

82,000  

Total Current Assets

2,109,000  

2,641,000  

2,588,000  

Long Term Investments

213,000  

210,000  

214,000  

Property Plant and Equipment

8,515,000  

8,866,000  

9,188,000  

Goodwill

40,000  

40,000  

40,000  

Intangible Assets

-  

-  

-  

Accumulated Amortization

-  

-  

-  

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Other Assets

1,481,000  

1,406,000  

1,047,000  

Deferred Long Term Asset Charges

240,000  

266,000  

1,055,000  

Total Assets

12,598,000  

13,429,000  

15,250,000  

Liabilities

Current Liabilities

Accounts Payable

929,000  

1,074,000  

948,000  

Short/Current Long Term Debt

12,000  

-  

7,000  

Other Current Liabilities

-  

-  

-  

Total Current Liabilities

941,000  

1,074,000  

955,000  

Long Term Debt

4,466,000  

5,060,000  

5,683,000  

Other Liabilities

2,831,000  

2,315,000  

3,020,000  

Deferred Long Term Liability Charges

93,000  

366,000  

1,538,000  

Minority Interest

4,000  

2,000  

10,000  

Negative Goodwill

-  

-  

-  

Total Liabilities

8,335,000  

8,817,000  

11,206,000  

Stockholders' Equity

Misc Stocks Options Warrants

-  

-  

-  

Redeemable Preferred Stock

-  

-  

-  

Preferred Stock

-  

-  

-  

Common Stock

671,000  

670,000  

264,000  

Retained Earnings

176,000  

181,000  

2,658,000  

Treasury Stock

-  

-  

-  

Capital Surplus

-  

-  

1,786,000  

Other Stockholder Equity

3,416,000  

3,761,000  

(664,000)

Total Stockholder Equity

4,263,000  

4,612,000  

4,044,000  

Net Tangible Assets

4,223,000  

4,572,000  

4,004,000  

Income statement: Accounts for all activities associated with operating the business (revenues, expenses). The income statement provides a measure of profit and performance to show management efficiency over a period of time. These are typically done monthly, but need to be generated quarterly. Net income is the most important number disclosed in the income statement. The net income your firm makes from the sale of products or services to customers may be used in three ways: 1) reinvested in the production assets, 2) returned to the creditor as a form of repayment for debt, and/or 3) returned to the owners of the company in the form of dividends beautiful (Smith 2004). Below your will find what is required in an income statement and how to calculate income.

Operating revenues

-Operating expenses

=Operating income

+Other revenues

-Other expenses

=Net income before taxes

-Income taxes

=Net Income after taxes

/Number of shares

=Income per share

Revenues: Total dollar value of goods and services sold during a given time period.

Expenses:

Cost of Goods Sold (COGS): the business' costs to purchase goods that are later resold or any manufacturing expense.

COGS= starting inventory + purchasing - ending inventory

Operating expenses: costs incurred from regular business operations.

i.e. marketing, wages, administrative, taxes, insurance, rent, utilities.

Revenues - Expenses = Income

Gross Profit or margin

The difference between sales and COGS.

The money available to cover operating expenses.

Operating Income

The amount of income left over after subtracting operating expenses.

Net Income after taxes:

The amount left to the business after income has been paid.

Table 1. Example of an income statement (Yahoo! Finance 2012)

Weyerhaeuser Income Statement

Quarterly Data

All numbers in thousands

Period Ending

Mar 30, 2012

Dec 30, 2011

Sep 29, 2011

Jun 29, 2011

Total Revenue

1,494,000  

1,615,000  

1,569,000  

1,610,000  

Cost of Revenue

1,290,000  

1,317,000  

1,283,000  

1,343,000  

Gross Profit

204,000  

298,000  

286,000  

267,000  

Operating Expenses

Research Development

7,000  

9,000  

7,000  

7,000  

Selling General and Administrative

84,000  

127,000  

138,000  

126,000  

Non Recurring

12,000  

31,000  

41,000  

7,000  

Others

-  

-  

-  

-  

Total Operating Expenses

-  

-  

-  

-  

Operating Income or Loss

101,000  

131,000  

100,000  

127,000  

Income from Continuing Operations

Total Other Income/Expenses Net

12,000  

12,000  

15,000  

9,000  

Earnings Before Interest And Taxes

113,000  

143,000  

115,000  

136,000  

Interest Expense

87,000  

88,000  

86,000  

117,000  

Income Before Tax

26,000  

55,000  

29,000  

19,000  

Income Tax Expense

(15,000)

(10,000)

(104,000)

(4,000)

Minority Interest

-  

-  

-  

-  

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Net Income From Continuing Ops

41,000  

65,000  

133,000  

23,000  

Non-recurring Events

Discontinued Operations

-  

-  

24,000  

(13,000)

Extraordinary Items

-  

-  

-  

-  

Effect Of Accounting Changes

-  

-  

-  

-  

Other Items

-  

-  

-  

-  

Net Income

41,000  

65,000  

157,000  

10,000  

Statement of Retained Earnings: compares expenses to revenue over a certain time frame and shows a profit or loss for the company.

Cash Flow Statement: shows the changes in the business's working capital from the start of the year. This statement lists sources of funds and the use of them. Below you will find the items included in a cash flow statement.

Operating activities

+ Cash collection

− Cash paid

= Net cash increase (decrease) from operating

Activities (1)

Investing activities

− Purchases of securities or property

+ Sales of securities or property

Activities (2)

= Net cash increase (decrease) from investing

Financing activities

+ raised capital from issuing equity or entering

debt

− Dividends or debt payments

= Net cash increase (decrease) from financing

Activities (3)

(1) + (2) + (3) = Increase (decrease) in cash balance + Beginning cash balance

Financial Ratios:

Financial ratios provide a firm with a quick assessment tool for measuring performance of a company. Ratios are a comparison of two values and should be compared with other financial ratios to interpret their relative meaning. You can compare the ratios with other wood products industrial averages to determine the relative success of the business.

Return on Assets:

Measures the efficiency of a firm; the ability to generate a profit using the assets available.

Asset Turnover

Shows the effectiveness of generating sales revenues using assets available.

Return on Sales

Shows the percentage of each sales dollar that is profit.

Leverage

Shows the debt level of a company.

Return on Equity

Presents stockholders with the return on their investment.

Bookkeeping and other finance sources:

If your company does not have an inside source for your accounting needs, an outside source may be beneficial. An outside accounting source will allow you to focus on other business tasks, such as expanding your business. Depending on your company needs in financial services, these sources can provide payroll, accounts payable and receivable, financial statements, cash flow management, and even tax preparation.

Conclusions:

Finance management allows companies to see the reality in their business and look at things objectively. As a manager, you may not have a full understanding of financial analysis; however, a basic knowledge of finances will help you effectively manage your business. Consult a financial manager or accountant if financial management is unclear or questions arise.

Larson, P., M. J. Tentnowski, and S.M. Hensley. 1994. The Virginia entrepreneur's guide. How to start and manage a business in Virginia. University Press. Missoula, MT. 323p.

Smith, R.L. 2004. Measuring success. Presentation. Virginia Tech. Blacksburg, VA.

Small Business Administration (SBA) 2012. Explore loans, grants, and funding. Available at: http://www.sba.gov/category/navigation-structure/starting-managing-business/starting-business/loans-grants-funding. Accessed August 6, 2012.

Yahoo! Finance 2012. Financial reports. Available at: http://finance.yahoo.com/. Accessed June 27, 2012.