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Overview Ch.

13 & 14
Explain the advantages and disadvantages of a direct channel of
Differentiate between types of market coverage
Explain how the distribution process can be accelerated
Explain how retailers serve customers
Explain how wholesalers can serve manufactures and retailers
Explain how promotion and advertising can benefit firms
Describe the steps involved in personal selling
Describe the sales promotions methods that are used
Describe how firms can use public relations to promote products
Explain how firms select the optimal mix of promotions to use
Accounting and Financial
(Chapter 15)
Chapters Overview

Mid test: Part I Part III

Final Test: Part IV Part VI

See Course Syllabi and Lessons Plan for

more details

Learning Objectives

Explain how firms use accounting

Discuss how firms can ensure proper
financial reporting
Explain how to interpret financial
Explain how to evaluate a firms financial
Accounting and Financial
Management decisions
such as how much to
produce and how many
employees to hire

Accounting Function Marketing decisions

Summary and analysis such as pricing and the Firm's Firm's
of a firms financial amount of promotion Earnings Value
condition necessary

Finance decisions such

as the amount of debt
financing versus equity
financing that is
Bookkeeping vs. Accounting

Bookkeeping Accounting
Start of accounting Analyze
Record/journalize Recommend
The Use of Accounting
To shareholders, creditors
Firms use accounting firms to ensure accuracy
This is called financial accounting
Should comply GAAP (General Accepted Accounting Principles)
FASB (Financial Accounting Standards Boards), SEC (Securities
and Exchange Commission), and IRS (Internal Revenue Service)
Decision Support
Budgeting, products decision, production level
This is called managerial accounting
Measure performance of individual, divisions, products
Internal auditors may be used to ensure efficient operations
Financial Reporting
Accounting is flexible
Can use different methods to give different outcomes
By inflating certain financial aspects
Ex: calculating depreciation (straight-line method vs
double declining method); direct vs indirect income
statement report.
So hire external auditors
Remember Arthur Andersen & Enron?
Board should ensure proper accounting
But they have personal interests!
The Accounting System
Users of Accounting Information
Many types of organizations use accounting information
to make business decisions
The reports needed vary according to the information
each user requires
An accountant must prepare the appropriate forms
Users Type of Report
Government taxing authorities (e.g. The Tax returns
Internal Revenue Service)
People interested in the organizations Financial statements found in annual reports
income and financial position (e.g. Owners, (e.g. Income statement, balance sheet,
creditors, financial analysts, suppliers) statement of cash flows)
Managers of the firm Financial statements and various internally
distributed financial reports
Steps in the Accounting
Interpreting Financial Statements

Financial Statement -- A summary of all the financial

transactions that have occurred over a particular period
Income statement
Indicates the firms revenue, costs and earnings over a period of time
(such as a quarter or year)
Balance sheet
Reports the book value of all the firms assets, liabilities and owners
equity at a given point in time
statement of cash flows,
shows how changes in balance sheet accounts and income affect
cash and cash equivalents, and breaks the analysis down to
operating, investing and financing activities.
All financial statements must be analyzed along with
other information to perform a complete evaluation
Income Statement
Net sales
Reflect the total sales adjusted for any discounts
Cost of goods sold (COGS)
The cost of the materials used to produce the goods
that were sold
Gross profit
Equal to net sales minus the cost of goods sold
Operating expenses
Composed of selling expenses and general and
administrative expenses
Income Statement [2]

Earnings before interest and taxes (EBIT)

Gross profit minus a firms operating expenses
Earnings before taxes
Earnings before interest and taxes minus interest
Net income/earnings after taxes
Earnings before taxes minus taxes
Income Statement [3]
Balance Sheet

Asset: anything OWNed by a firm

Liability: anything Owed by a firm
Owners equity/stakeholders equity
Firms normally support a portion of their
assets with funds of the owners
Basic acounting equation
Assets = Liabilities + Owners Equity
Owned = Owed + Owners Claims
Balance Sheet [2]
Current assets
Assets that will be converted into cash within one year
Cash: represents checking account balances
Marketable securities: short-term securities that can easily be
sold and quickly converted to cash if additional funds are needed
Accounts receivable: sales that have been made but for which
payment has not yet been received
Inventories: composed of raw materials, partially completed
and finished products that havent yet been sold
Fixed assets
Assets that the firm will use for more than one year
Include the firms plant and equipment
Depreciation: a reduction in the value of fixed assets to reflect
deterioration in the assets over time
Balance Sheet [3]
Current (short-term) liabilities:
Accounts payable
money owned by the firm for the purchase of materials
Notes payable
Short-term loans to the firm made by creditors such as bank
Long-term liabilities (debt)
Liabilities that will not be repaid within one year
Owners equity
The par (or stated) value of all common stock issued, additional paid-in
capital and retained earnings
Additional paid-in capital: the dollar amount received from issuing
common stock that exceeds par value
Retained earnings: the accumulation of the firms earnings that are
reinvested in the firms assets rather than distributed as dividends to
Balance Sheet [4]
Statement of Cash flow
Ratio Analysis

An evaluation of the relationships between

financial statement variables
Measure of liquidity
Measure of efficiency
Measure of financial leverage
Measure of profitability
Useful for detecting a firms strengths and
Measure of Liquidity

Firms ability to meet short-term obligations

High liquidity is safety but too high is
waste of cash
Two common liquidity measures:
Current ratio
current ratio = current assets
current liabilities
Quick ratio (exclude inventory)
quick ratio = cash + marketable securities + accounts
current liabilities
Measure of Efficiency

How efficient you manages your assets!

Asset turnover = net sales
total assets
Do you produce enough inventory?
Inventory turnover = cost of goods sold
More sales with less asset is favorable
Financial Leverage
Represents the degree to which a firm uses borrowed fund to finance its
Firms with a high degree of financial leverage
higher fixed financial costs (interest expenses)
debt repayment problems, more risks
Firms that obtain a larger proportion of funds from equity financing
smaller debt payments, less risk
Debt-to-equity ratio: measure of the amount of long-term financing
provided by debt relative to equity
Debt-to-equity ratio = long-term debt
owners equity
Times interest earned ratio: measure a firms ability to cover its
interest payments
Times interest earned = EBIT
Annual interest expense
Measures of Profitability

Indicate the performance of a firms operations

during a given period
Net profit margin: measure of net income as a
percentage of sales
net profit margin = net income
net sales
Return on assets (ROA): measure the return (net
income) of the firm as a percentage of the total
amount of assets utilized by the firm
ROA = net income
total assets
Measures of Profitability [2]

Return on equity (ROE): measure the

return to the common stockholders as a
percentage of their investment in the firm
ROE = net income
owners equity

Stockholders prefer ROE to be very high because

a high ROE indicates a high return relative to the
size of their investment.
Limitations of Ratio Analysis

Comparing some firms with an industry

average can be difficult because the firms
operate in more than one industry
Accounting practices vary among firms
Firms with seasonal swings in sales may
show large deviations from the norm at
certain times but not at others

A firms financial condition is important to

financial managers, to the firms
creditors and to investors
The key financial statements necessary
to perform a thorough evaluation are the
income statement and balance sheet
Most financial ratios help evaluate one of
four characteristics: liquidity, efficiency,
financial leverage and profitability