The McGraw-Hill 36-Hour Course: Finance for Non-Financial Managers 3/E: Finance For Non-Financial Managers 3/E (Mcgraw-Hill 36-Hour Courses) - Softcover

Shoffner, H. George; Shelly, Susan; Cooke, Robert A.

Softcover

ISBN 10: 0071749551 ISBN 13: 9780071749558

Publisher: McGraw Hill, 2011

Synopsis

Make simple sense of complex financial information!

The high-profile accounting scandals of recent years have made one thing clear: You can't know too much about the company for which you work. What are the numbers? Where do you find them? How do they affect you and your staff?

This fully revised and updated third edition of The McGraw-Hill 36-Hour Course: Finance for Nonfinancial Managers provides a firm grasp on what all the numbers really mean. Designed to let you learn at your own pace, it walks you through:

• The essential concepts of finance, so you can askintelligent questions and understand the answers
• Vital statements and reports, with sections on pro forma financial statements and expensing of stock options
• The auditing process--what is measured, how it'smeasured, and how you can help ensure accuracy and completeness

With chapter-ending quizzes and an online final exam, The McGraw-Hill 36-Hour Course: Finance for Nonfinancial Managers serves as a virtual professor, providing the curriculum you need to crunch the numbers like a pro!

About this title

About the Authors

McGraw-Hill authors represent the leading experts in their fields and are dedicated to improving the lives, careers, and interests of readers worldwide

H. George Shoffner, CPA, is a founding partner of Lewis, Shoffner & Co., a CPA firm specializing in tax planning and preparation for individuals and small businesses.

Susan Shelly has written and contributed to more than 40 books, including The Complete Idiot’s Guide to Personal Finance in Your 20s and 30s and The Complete Idiot's Guide to Being a Successful Entrepreneur.

Robert A. Cooke, CPA, was a business consultant, speaker, and finance author who owned and managed several successful businesses.

Excerpt. © Reprinted by permission. All rights reserved.

The McGraw-Hill 36-Hour Course: Finance for Nonfinancial Managers

By H. George Shoffner, Susan Shelly, Robert A. Cooke

The McGraw-Hill Companies, Inc.

Copyright © 2011 Rupert Scofield
All rights reserved.

ISBN: 978-0-07-174955-8

Contents

Preface
1. Numbers, Numbers, Numbers: The Why and the How
2. Keeping Score: Sales
3. Keeping Score: Cost of Sales
4. Keeping Score: Expenses
5. Equipment and Other Things That WillBeAround for Years
6. Buying, Leasing, or Doing Without
7. The Balance Sheet
8. Ownership and Equity
9. Budgeting/Planning
10. Budget Reporting and More Budgets
11. Manufacturing and Construction
12. Analysis of an Enterprise
Appendix A: Flexible Budget Computations
Appendix B: Sources of Industry Averages
Appendix C: Sources of Information on Publicly Held Corporations
Appendix D: Dates Pertinent to Dividends on Publicly Held Stock
Appendix E: Classes of Common Stock and Preferred Stock
Appendix F: Goodwill
Appendix G: Nonprofit Organizations
Answer Key to Review Questions and Case Studies
Glossary
Index

Excerpt

CHAPTER 1

NUMBERS, NUMBERS, NUMBERS: THE WHY AND THE HOW

STATISTICS AND NUMBERS THAT CONFOUND US

My attitude toward numbers was strongly influenced by having Miss Ball forAlgebra in the 10th grade. She was most successful—in turning off anyinterest I had in numbers! Her stated philosophy was: "Don't try to understandwhy. Just do it!" Most of us have run into such a figure at some time in ouryouth. If we ever thought that there wasn't much fun in numbers, Miss Ball madesure we forever believed it. To be fair, there were other, kinder teachers whoexplained reasons and tried to tie mathematics to popular applications. But theywere hampered by being required to use textbooks that asked questions such as:

Mary had twice as many apples in her basket as John had chickens in a number ofboxes, and the number of boxes was the square root of Alice's age. Alice wastwice as old as Mary and half of John's age. How many wings did the chickenshave and should they be fried or broiled?

Who cares? This attitude carries over to our adult lives. We hear statisticsabout the gross national product, the unemployment rate, stock prices, averages,the national debt, and our employer's productivity gains. We know that all ofthese things are important, but the basketball game or the latest movie on HBOis usually more appealing.

SCORES: NUMBERS WE ENJOY

Yes, these experiences made most of us averse to numbers, particularly when theyappear formally on tax returns, financial reports, bank statements, and soforth. But note that we still find numbers to be friendly in informal areas suchas the point spread in the Super Bowl, a golf handicap, or a tennis score. Thoseof us who have been to Las Vegas or Atlantic City know all the combinations ofnumbers that add up to 21, although we would rather we had never becomeacquainted with the combinations that add up to 22 or more.

Years after my experience with Miss Ball, I became comfortable with numbers andspent much of my time involved with them. How? I took the easy step from sportsand other leisure activities to business. I say it's an easy step, for businesshas been described as "sports, but for real." Business is competitive. If youcommit a foul, the judge will penalize you, and score is kept in dollars. So, ifyou need or want to be more comfortable with financial reports and the like,think of them as scorecards. If your company, division, or other area ofresponsibility has made more profit or reduced expenses, you have won. The prizeis more income, a promotion, or both. For example:

You manage a restaurant for the G-Spoon Eatery chain. Compared to last year,sales have increased by $500,000. Net profit has increased by $100,000, and netincome as a percentage of sales is 17 percent, compared to 5 percent last year.It sounds good, but it's still a bunch of numbers—pretty dry stuff.However, if you make some more computations, you find that, because of theincrease in sales and profits, your bonus will be $50,000. Now the numbersbecome much more interesting. And if you want to equate that $50,000 to beingable to turn in your old Chevrolet for a Porsche, the numbers become extremelyinteresting.

So, as you read on in this chapter, think of the numbers as a scorecard. Just asa tennis book will explain the intricacies of tennis scorekeeping, this and thefollowing chapters will explain the intricacies of business scorekeeping. Orthink of it this way: Most of us like to talk (remember all those bull sessionsas a teenager?); in other words, we are social animals who like to communicatewith each other. When we communicate about boyfriends, girlfriends, spouses,war, peace, or Uncle Lem, words are the language of communication. When wecommunicate about business, we use numbers as well as words, for financialnumbers are the basic language of business. So, when you study financialnumbers, you are merely adding to your vocabulary.

SIMPLICITY MAKES IT EASIER

In most of the examples and case studies in this book, you will find numbersrounded to the nearest hundreds or thousands of dollars because that makes iteasier to understand the concepts. You can do the same with your own numbers. Ifyou are dealing in millions of dollars, round off the numbers you are workingwith to the nearest thousand. If you are dealing in thousands, round off to thenearest hundred, and so on. Of course, pennies should almost always bedisregarded (unless you are dealing with costs per each item, as discussed inthe next paragraph). After all, if sales are actually $8,573,425.76, and youround it off to $8,573,000 you have introduced an error of only 0.005 of 1percent—hardly enough to alter any decisions made based upon the report.

Accountants call this concept materiality. A material error isone which is large enough to cause people to make a decision that is differentfrom a decision they would make if they had the correct figures.

For instance, let's say you are the president of the Pointless Pencil Company.Your accounting department has a clerk who, after rounding off too many numbersand making several errors, computes that each pencil costs $0.01 to manufacture.You and your chief accountant decide, therefore, that you can sell the pencils,in jobber lots, at $0.013 each. You do so, and after several months find thatthe company checkbook has a zero balance and many bills remain unpaid. Youraccountant reviews the clerk's figures and finds that he rounded the cost fromthe actual figure of $0.014 per pencil to $0.01. Of course, had you known thatthe pencils really cost you $0.014, you would not have run the company intobankruptcy by selling them for only $0.013 each. The error the clerk made was awhopping 29 percent ($0.004 ÷ $0.014) and was obviously material, for it causedan incorrect decision. The moral: Round off whenever it will not be material (asthe 0.005 percent error in the first example), but be careful. Sometimes even afraction of a penny can be material.

GOING INTO BUSINESS (OUR NOVEL)

Business schools use the case study method of instruction. Why should we bedifferent? What follows is a story of a company that starts in simple fashion asa retailer. The evolution of this company will serve to illustrate many basicconcepts. In later chapters, the company expands into service, contracting, andmanufacturing, so nearly all types of businesses are illustrated.

You did know that accountants are frustrated novelists, didn't you? That is why,woven through the figures in this book, you will find the story of Rosie Rouseand how she started and ran the Spouse House Company. What's a Spouse House?Until recent times, disgraced or out-of-favor spouses were banished to thedoghouse in the backyard. Poor Rover, displaced from his home, had to do thebest he could under the porch or in the bushes. Now, with the emerging supportfor animal rights, Rover can no longer be evicted from his doghouse. Thedisgraced spouse must find shelter elsewhere. Here is a new need, a newmarket—shelter for discredited spouses.

Rosie is the first to see this new market, and the first to fill it. She decidesto sell Spouse Houses—buildings that are much larger than doghouses butsmall enough to fit in backyards. These buildings include amenities such asrecliner, carpet, and insulation. She starts the business by making arrangementswith Fred's Sheds, a manufacturer of Dutch colonial garden storage sheds. Tofill Rosie's orders, Fred will modify sheds into Spouse Houses by adding theamenities.

Rosie rents a small office, has a telephone installed, and places someadvertising in the newspaper. She also has some stationery and business cardsprinted and leases (for one year) the automobile in which she will make salescalls. During January, her first month, the following occurs:

* Rosie sells three Spouse Houses at $1,500 each, for cash.

* She purchases the three Spouse Houses from Fred's Sheds for $900 each. Shepays him for two of the Spouse Houses ($1,800) and promises to pay him for thethird one on February 5.

* She pays $800 for her office ($400 for January rent and $400 as a securitydeposit).

* She pays $150 to purchase a telephone and $30 for service during January. She buys newspaper advertising for $300.

* On February 5, she receives an electric bill for electricity used duringJanuary. It totals $100.

* She charges the January rent of the automobile ($280) to her credit card,which she does not pay until February 15.

Now, because you are reading this book, Rosie has selected you to be heraccountant. She asks for a report on her January business. There are a couple ofways you can prepare it for her.

BASIC CONCEPT (CASH ACCOUNTING AND ACCRUAL ACCOUNTING)

Report Version 1

Cash receipts and cash disbursements (what went into or out of Rosie's checkbookand/or pocket):

For clarification, let's define the headings of "cash receipts" and "cashdisbursements." Cash receipts are all the checks, money orders,and cash received in a given period of time. Cash disbursementsare all the checks written (and mailed) or cash paid out in a given period oftime.

Report Version 2

Income and expense (what was earned and what were the costs and expenses relatedto the earnings):

There's a difference between the two reports. Just looking at Rosie's checkbookas reflected in report 1 indicates she is ahead by $1,420 but in report 2, shehas a net income of only $690. Why the difference? While the differences maylook obvious, let's review them in detail, for they are simple examples of whatis forever confusing about sophisticated financial reports and budgets.

Report 1 is just a reflection of Rosie's checkbook, but report 2 is based onwhat accountants call the matching principle. If three SpouseHouses are sold during January, the offsetting cost of those sales, which is thecost of three Spouse Houses, should be recorded as the January cost that matchesthe January sales. So, the cost (at $900 each) of the three Spouse Houses soldin January (at $1,500 each) of $2,700 is displayed as the "cost of goods sold,"even though the third house was not paid for as of January 31. In other words,the matching principle requires that expenses be deducted fromrelated revenues in the periods in which they occur.

Similarly, report 2 for January reflects the expense of car rental of $280, eventhough Rosie does not write a check for it until February 15. We cannot tie thecar rental expense to a particular product sale, as we could tie the cost of thethird Spouse House to its sale. However, we can tie it to a timeperiod—the month of January, in this case. Because January has come andgone, the related automobile rental expense has occurred; it ismatched with January and therefore is listed as a Januaryexpense, regardless of when payment is made.

This process of recording transactions when they happen (not when they are paidfor) to meet the matching principle is called accrualaccounting. It is the basis on which all publicly held companies reporttheir earnings, and it reflects better the true results of a company'soperations. For instance, report 1 suggests that Rosie may have $1,420 to spendas she pleases. Of course, she doesn't, partly because she owes Fred's Sheds$900 of that cash, she owes the credit card company $280 for the car rental, andshe owes the electric company $100.

There are two other differences between reports 1 and 2, or between cash andaccrual accounting. Report 1 records the $800 as paid for the office rent anddeposit. In the accrual report 2, it is listed as only $400, the rent forJanuary. The $400 deposit is not an expense of January. In fact, it is never anexpense, for some day Rosie (or one of her heirs) will close the office andreceive a refund of the $400. In the same way, the purchase of the telephone isnot an expense of January, but an expense of all the years during which it maylast and be used by the company. Actually, a very small part of that cost of thetelephone is January expense, but it is so small that we can ignore it for now.In Chap. 5 we will cover this item and its computation, which is knownas depreciation.

WHEN TO USE AND NOT USE CASH ACCOUNTING

One of the accounting rules is that, with few exceptions, reports of the incomeof a business should be prepared on the accrual basis. You may ask If accrualaccounting is preferred, why even discuss cash-basis accounting? The answer isthat the cash-basis bookkeeping is very simple, and for small companies in abusiness of providing service, it may be adequate. If you are on a cash basis,you have only to take your checkbook to your accountant in order to have a taxreturn prepared. (Of course, you can save some accounting fees if you or anassistant do some of the basic bookkeeping before you hand over your records tothe accountant.)

Another reason to use the cash method of accounting is that the Internal RevenueService (IRS) will allow certain businesses to compute their income taxes usingthe cash basis. (Check with your tax advisor as to the rules for your type ofbusiness.) This may or may not be an advantage, depending on circumstances.

Consider Dr. Drybones: Every day he sees several patients and conducts medicalprocedures for which he sends out bills. While a few patients may write a checkfor his services as they leave his office, most of the doctor's invoices go toinsurance companies and health maintenance organizations (HMOs). Due to thebureaucracy of these payers, it may be weeks or even months before he is paidfor his services. In the meantime, of course, he has had to pay his employees(medical assistant, receptionist, billing clerk) and rent, purchase medicalsupplies, and meet other expenses with immediate cash outlays. If he computedhis income taxes by using the accrual method, all those invoices that he sentout today would show up on his tax return as income. In other words, he would bepaying tax on money that he may not see for months and, in some cases, may neversee. Obviously, it is to his advantage to consider only the money collected asincome. As to his expenses, he can deduct his expenses almost immediately as hepays for them. (Do you think his medical assistant would wait for her paycheckfor three months until the doctor is paid? Fat chance!)

If a business pays for a product after making a sale and collecting cash for thesale (as Rosie did for the third Spouse House), the cash basis would be adisadvantage. For the sake of explanation, assume that Rosie had to file and payincome taxes monthly. Using the cash method (report version 1), she would paytax on $1,420 of income. Using the accrual method (report version 2), she wouldpay tax on only $690 of income.

It is also possible to combine the accrual and cash method of accounting. Referback to the report versions 1 and 2. The major difference in net income iscaused by the third Spouse House, for which Rosie did not pay until February. Onthe other hand, if she paid the telephone bill a month early or a month later,the $30 item would make little difference in the computation of income. So, tobetter reflect actual income and at the same time avoid the detailed work ofaccruing expenses, many companies use the accrual method to compute grossprofits (see report version 2) and the cash method to report general expenses.In fact, unless your business is quite small (sales of under $1 million at thiswriting) and you want to report your taxes on the cash basis, the IRS willrequire that you at least use this combination method.

Of course, if you do not keep a significant amount of inventory, the combinationmethod and the IRS rules are not factors. For instance, Dr. Drybones' inventoryconsists of only disposable gloves, tissues, and Band-Aids. He does not have toworry about reporting any part of his business using the accrual method.

A FEW BASIC TERMS

There are some terms in report 2 that will be with us not only for the rest ofthis book, but for the rest of our lives:

Sales refers to what is charged to customers for goods orservices. The term is used almost synonymously with revenue.

Revenue refers to the income that flows to an enterprise beforededuction for any costs or expenses. In a business, the term is used almostsynonymously with sales. In government and nonprofitorganizations, it includes taxes and grants.

Cost of goods sold means the cost, to the company, of themerchandise that was sold to customers.

Gross profit is what's left after you subtract cost of goodssold from sales. (Gross margin means about the same thing.)

While on the subject of margin, let's go over the distinction between tworelated terms: Profit margin percentage and markup percentage. Profit marginpercentage is the difference between the selling price and the cost price ofa product, divided by the selling price. Markup percentage isthat same difference (between selling price and cost price) divided by the costprice. We can apply this to Spouse Houses. The facts are as follows:

Expenses are other costs that are not matched with sales as partof cost of goods sold, but are matched with a specific time period, as, forexample, the Spouse House Company's rent of $400 per month.

Net income, also called net profit orearnings, is what's left after you subtract expenses from costof goods sold. The "net" part does not refer to basketball or tennis, but itmight relate to fishing in that the "fish left in the net" are what is left ofsales after all the costs and expenses have drained out. This net income isoften referred to as the bottom line. You will hear accountantsuse net as a verb, saying that a minus figure was nettedto a positive figure. They mean that, for example, if —3 is netted to +5,the result is 2.

(Continues...)

(Continues...)

Excerpted from The McGraw-Hill 36-Hour Course: Finance for Nonfinancial Managers by H. George Shoffner. Copyright © 2011 by Rupert Scofield. Excerpted by permission of The McGraw-Hill Companies, Inc..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Edition details

• Publisher: McGraw Hill
• Publication date: 2011
• Language: English
• ISBN 10: 0071749551
• ISBN 13: 9780071749558
• Binding: Paperback
• Edition number: 3
• Number of pages: 352