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Entrepreneurship 101

2011 Stevens Institute of Technology. All Rights Reserved

Financial Accounting and Using Mogul - Outline

Part I: Financial Accounting Important terms, definitions and concepts Part II: Financial decisions in Mogul

Important terms and definitions Key accounting terms Accounting equation Accounting period Accrual principle

Part I Basics of Financial Accounting

Income, expenses and depreciation of assets Sample financial statements from the simulation Important measures of success & financial ratios

Financial Accounting
Recording of all financial transactions for a company Details of each transaction are entered into to company accounts (books). All entries are in a monetary unit (e.g., dollars, euros, ringgits, etc.)

Accounts are summarized and transferred periodically to financial statements which show the financial condition of the company (its profits or losses, its cash position, how much it owes, etc.)

Key Accounting Terms

Assets: Resources which the company owns and can use to generate profits (earnings). Examples Are: CASH INVENTORIES
(Raw material, In-process, finished)

(Land, buildings)

(Stocks, bonds, etc.)


Key Accounting Terms (continued)

Liabilities: Obligations which the company owes to entities outside the company. Examples are: Also known as debt Short-term loans Long-term loans Taxes payable Accounts payable to suppliers (not used in Mogul)

Key Accounting Terms (continued)

Before we define the last of the three key terms, we should know that: Profits for a company are all income or revenues minus all expenses Losses occur when expenses exceed income Owners interest in a company is the amount of the company that the owner has title to or owns and Dividends are cash paid to the owners as a reward for investing in the company Equity : Amounts paid in to buy an interest in the

company, plus retained earnings (all of the profits less losses less dividends paid out, if any, since the start of the company). Also known as Stockholders Equity.

Key Accounting Terms (continued)

Equity = Owners Interest + Profits Loses - Dividends
Owners interest is in the form of stock If the company is public

It is also the value of the assets remaining if all of the liabilities are paid off using available assets also known as the Book Value of the company.

This leads to the..

Accounting Equation and the Balance Sheet

Assets = Liabilities + Equity

Forms the basis for the Balance Sheet


Liabilities + Equity

Income, Expenses and Depreciation of Assets

Income or sales is revenue accounted for as goods are $ IN delivered to customers Expenses are costs charged against revenue to compute $ OUT profits. An other important concept used in Mogul is DEPRECIATION: This is an expense which is included in the Manufacturing Cost of Goods Sold (COGS) on the Income Statement. It accounts for the expense of owning assets (e.g., equipment) used in manufacturing products. The actual cash flow out occurs when the assets are purchased but the expense is spread out over the products during the life of the asset and deducted from income only at the time the $ OUT products are sold (COGS). It appears as Accumulated Depreciation on the Balance Sheet as a decrease in the value of the assets.

Other Concepts The Accounting Period

Accounting Period: The time during which transactions which cause changes in assets, liabilities and equity are recorded into accounts and summarized for reporting to management and/or the public (in Mogul simulation this period is a quarter of a year).
January 2012
S 1 8 15 22 29 M 2 9 16 23 30 T 3 10 17 24 31 W 4 11 18 25 T 5 12 19 26 F 6 13 20 27 S 7 14 21 28

One month, or one quarter or one year

Other Concepts The Accrual Principle

Accrual Principle: The recording of transactions when they occur regardless of whether cash is paid out or received (a few companies use Cash Accounting which records transactions only when cash is transferred.) Mogul uses this accrual method, so even though only 50% of the cash is collected when a sale is made during the quarter (the rest is collected in the next quarter), the total amount is recorded as a sale in the current quarter. For example:

Illustration of the Accrual Principle & the Flow of Major Expenses and Income
Product expenses Materials Labor Overhead Improving quality Depreciation
FGI Unsold FGI

Finished Goods Inventory (FGI)

Value of FGI sold


Quarter 1

50% $ Value of of sales Sales COGS Expense Net Sales Cash

50% of sales (through accounts receivable)


Quarter 2

Financial Statements
Income Statement: shows the Income (sales or revenues) and Expenses during the period and the resulting Net Income after Taxes. Balance Sheet: shows the financial condition (assets, liabilities and stockholder equity) of the company at the end of each period. Cash Flow Statement: shows the Net Cash Balance at the end of the quarter arising from the various activities of the company during the period.

Actual and Forecasted Financial Statements

The financial statements in Mogul can show either the: Actual results from the previous period or the Forecasted results for the next period The forecasted results are based on your Marketing, Operations and Finance decisions made on your decision sheets up to that point. Samples of actual Mogul financial statements are:

Financial Statements in Mogul (continued)

An Income Statement Actual for last quarter

Income or

Financial Statements in Mogul (continued)

An Income Statement Forecasted for next quarter

Income or

In reality this is an operations BUDGET for the next quarter, based on a forecast of sales and projection of expenses.

Financial Statements in Mogul

A Balance Sheet

Property loan 1 Property loan 2

Cash Flow Statement

Details the inflows (sources) and outflows (uses) of cash arising from the activities of the company.
The parts of a standard cash flow statement are: o Cash flow from Operations (the usual business of the company) o Cash flow from Investments (buying assets to use in the business) o Cash flow from Financing activities (borrowing or repaying debt)

Mogul cash flow statement shows similar information but classified as: o Cash Payments o Cash Receipts o Cash Balance

Financial Statements in Mogul (continued)

A Cash Flow Statement

Property Loan Property Loan

Property Loan

Measures of Success in Mogul

There are five measures of success that determine your ranking in the simulation results for the current quarter and for performance to date: The relative weights of the measures are shown in ( ) 1.Total Sales in $ for all products (25%) 2.Net Income $ of net profit after taxes (25%) 3.Return on Sales % = (net profit)/(total sales): a measure of how efficiently sales $ are turned into profit (20%) 4.Return on Assets % = (net profit)/(value of total assets): a measure of how efficiently total assets are used to generate profit (15%) 5.Forecast Efficiency a measure of how close your sales forecasts come to the actual sales (15%)

Other Financial Ratios Shown on the Performance Report

Current ratio = Current assets/current liabilities:
- your ability to cover your current liabilities

Quick ratio = (Current assets inventories)/current liabilities:

- same as current except inventories not counted as current asset

Debt/Asset = Total liabilities/total assets:

- what proportion of your total assets are funded by debt (a measure of risk)

Times interest earned = Net profit/total interest on debt:

- what proportion of your interest payments are covered by net profit

Other Financial Ratios Shown on the Performance Report (continued)

The next three measures tell you how efficiently you are using inventories and assets to generate sales:

Inventory turnover = Sales $/ending inventory $ in period - How rapidly inventory is being turned into sales (higher values
indicate you are carrying less inventory relative to sales)

Fixed asset turnover = Sales $/ending fixed assets value - How efficiently you are using your fixed assets to generate sales Total asset turnover = Sales $/ending total assets value - How efficiently you are using your total assets to generate sales

Part II Finance Decisions in Mogul

How to raise capital (cash) to run your company?

Financial Strategy - Template

Describe your financial strategy - what financial measures will you focus on and what would you like to see them be at the end of the simulation (e.g., Return on Sales at least 8%)?


Finance Decisions in Mogul

The purpose of the financial decisions in Mogul is to assure that your company has sufficient cash during the quarter to fund its planned operations without having to take an emergency loan and to use the cash available to maximize earnings. These decisions are: Short-term Loans Requested Short-term Investments (deposits and withdrawals) Property Loan (Long-term loan)Requested 1st Property Loan - Payment (early payoff of loan)

Finance Decisions in Mogul

Short-term Loan: the amount of cash made available this quarter from a bank line of credit (up to the Total Line of Credit shown) at the interest rate shown. Must be repaid in next quarter.

Finance Decisions in Mogul

Short-Term Investment : the amount of cash invested or withdrawn from an investment earning the rate shown (usually for excess cash which will not be needed in the current quarter). Deposits are paid in the quarter in which they are made. Withdrawal (Payment) is shown on the Cash Flow Statement. Interest income on deposits and existing investments is paid in the following quarter. Current investment rate is 5%.

Finance Decisions in Mogul (continued)

Property Loan Requested: a Long-term loan using the plant as co-lateral at the interest rate shown. The maximum amount per loan is $900,000 and only two loans may be outstanding at one time.

Finance Decisions in Mogul

1st Property Loan Extra Payment: This is the amount of extra payment you wish to make on property loan #1 at the penalty rate shown. If you already have two loans outstanding and wish to issue a take a new loan, you will need to use this entry to pay off loan #1 early to make room for the new loan.

A Financial Decision NOT in Mogul

The Mogul simulation assumes your company has not yet gone public that is, stock has not been sold to the public. The stockholder equity shown on the balance sheet comes from capital invested in the company by private individuals as is true in many startup companies. Therefore, a method for raising capital in a public company, other than borrowing, that is not available in Mogul is to use the equity in the company to acquire needed cash i.e., sell new stock to the public. This is less risky than borrowing but usually costs more than borrowing.

Finance Decisions in Mogul

The Financial Decision Sheet in Mogul

Property Loan
Property Loan Interest Rate Property Loan Requested 1st Property Loan Extra Payment Early Loan Payment Penalty

Amount of long-term loan Amount of short-term loanAmount of savings deposit

Amount of savings withdrawal Amount of early loan payment

Summary of the Effects of Decisions on the Financial Statements

As you can see, the only effects of Financial decisions are on the: amount of cash available costs of interests on outstanding debt interest earned on excess cash All of the effects on other financial statement items and measures of success come from decisions in the Marketing and Operations areas ( and of course what the competition does). Assuming your sales forecasts are 100% accurate (hard to do), you can get a good idea of what the effects of your decisions will be by examining the Forecasted (or proforma) financial statements for the next quarter. Results in periods beyond the next quarter are more difficult to predict and will depend to a large extent on your long-term plans, how well they are carried out and what the competition does.

Financial Quizzes and Module Evaluation

Quiz 1 Module Evaluation Click on icon for hyperlink to quizzes & survey

Quiz 2 Module Evaluation

Module Survey Evaluation