Accounting for Managers

Operating Expense
 Selling
General and
Administrative
Depreciation and
Amortization
450,000
350,000
100,000
900,000
Operating Income
1,150,000
Other Income and
Expenses
Dividends and Interest
Interest Expense
Unusual/Extraordinary
Items
25,000
(75,000)
150,000
100,000
Income Before Tax
1,050,000
Income Tax (t = .34)
357,000
Net Revenues
693,000
Income Statement
General Widget, Inc.
December 31, 200_
Current Assets
Cash
Accounts Receivable
Marketable Securities
Inventory
Prepaid Expenses
Assets
350,000
500,000
68,000
444,400
15,000
Balance Sheet
General Widget, Inc.
December 31, 200_
Total Current Assets
1,377,400
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Test your knowledge of financial ratios. Using this matrix,
calculate the General Widget numbers on page 81. Round to
two decimal places. In calculating average payment period, use
direct materials for purchases. Use 10% as the interest rate or
cost of capital. (The answers are in the Resources section at the
end of the book.) 
Accounting for Managers
80
Assets
Liabilities
Current Liabilities
Accounts Payable
Notes Payable
Accrued Expenses
Income Taxes Payable
580,000
199,000
95,000
43,400
Long-Term Liabilities
Deferred Taxes
Long-Term Debt
350,000
2,000,000
Property, Plant, Equipment
Land
Buildings
Machinery
Furniture and Fixtures
Vehicles
Accumulated Depreciation
600,000
1,100,000
1,390,000
300,000
315,000
95,000
Net Property, Plant, Equipment
3,800,000
Total Liabilities
3,267,400
General Widget, Inc.
Balance Sheet
December 31, 200_
Total Assets
5,177,400
Total Current Liabilities
917,400
Shareholder Equity
Preferred Stock
Common Stock
Paid-in Capital
Retained Earnings
200,000
1,190,000
420,000
100,000
Total Liabilities and Shareholder Equity
5,177,400
Total Shareholder Equity
1,910,000
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Financial Ratios
81
Ratio
Formula
Answer
Current
Current Assets
Current Liabilities
Quick (Acid)
Current Assets – Inventory
Current Liabilities
Net Working
Capital
Current Current
Assets Liabilities
Accounts
Collection Period
Accounts Receivable
Sales / 360 days
Average Payment
Period
Accounts Payable
Purchases / 360 days
Fixed Assets
Turnover
Sales
Fixed Assets
Total Assets
Turnover
Sales
Total Assets
Inventory
Turnover
Cost of Goods Sold
Total Inventory
Debt-to-Assets
Total Liabilities
Total Assets
Debt-to-Equity
Long-Term Debt
Total Equity
EBIT
Interest
Times Interest
Earned
Gross Profit
Margin
Total Assets Turnover
x Net Profit Margin
Sales - Cost of Goods Sold
Sales
Operating Profit
Margin
EBIT
Sales
Net Profit Margin
Net Profit
Sales
Return on
Investment
Return on Equity
Net Profit
Shareholder Equity
Inventory to Net
Working Capital
Inventory
Net Working Capital
–
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Manager’s Checklist for Chapter 4
❏
Financial ratios are one of the best and simplest ways to
set an objective performance standard.
❏
To be meaningful, financial ratios must be viewed in com-
parison with the ratios of other entities with similar charac-
teristics.
❏
Liquidity ratios measure short-term solvency. Higher num-
bers show strength.
❏
Operational ratios show how efficiently a company uses its
assets. Generally, higher numbers show strength.
❏
Leverage ratios show how much the company uses debt
financing. Generally, lower numbers show strength.
❏
Profitability ratios measure how well the firm generates
profits. Generally, higher numbers show strength.
Accounting for Managers
82
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83
5
A
nd now, for something completely different … management
accounting!
Up to now, our focus has been on what is termed financial
accounting. Financial accounting information concentrates on
meeting the needs of external parties such as bankers and
investors. These accounting disclosures of business operations
help determine investment and lending decisions. A variety of
federal and local government laws require you to collect,
process, and report the financial information. The outside ana-
lysts receive management’s financial information in prescribed
formats that are generally equivalent from company to compa-
ny. Straying from these laws exposes management to sanctions,
fines, and imprisonment.
Financial accounting deals with past events. The information
often summarizes results at a high level. Using the notion that
the past is prologue, its analytical tools project the future based
on the results of past actions. Financial accounting ratio analy-
sis helps show performance trends and predict the future