Accounting and Financial Statement Basics

Flow of funds Spend management

• Goes upstream • Consolidates internal demand

(customer > producer > supplier)
• Not linear
Advantages:
• Reduces cash-to-cash cycle
time
• Improves customer-supplier
relationships
• Reduces imbalances between
larger and smaller supply chain
players
across the business and
partners to find areas for
discounts
• Manages the outflow of funds
in order to buy goods and
services
• Coordinates closely with
accounts payable
Standard Costing

A cost accounting system that uses cost

units determined before production for
estimating the cost of an order or product.

COST = VOLUME x RATE

 Balance Sheet for Two Years
What
What
Financial
Financial value
value at
at What
What organization
organization Expect
Expect to
to convert
convert to
to Portion
Portion owed
owed
organization
organization
point in time
point in time owns
owns cash within one year
cash within one year this year
this year
owes
owes
In Thousands (000) In Thousands (000)
December 31, 2010 2011 December 31, 2010 2011
ASSETS LIABILITIES
CURRENT ASSETS CURRENT LIABILITIES
CASH AND CASH EQUIVALENTS $ 783 $ 908 ACCOUNTS PAYABLE 604 660
INVENTORY 400 437 SHORT-TERM NOTES PAYABLE 60 75
PREPAID EXPENSES Not
Not easily
easily — — TOTAL CURRENT LIABILITIES 664 735
ACCOUNTS RECEIVABLE 514 562
converted
converted
TOTAL CURRENT ASSETS 1,697 1,907 LONG-TERM
- LIABILITIES Owed
Owed
to
to cash
cash LONG-TERM DEBT 600 600
FIXED ASSETS TOTAL LIABILITIES
beyond
beyond 1,264 1,335
GROSS PROPERTY, PLANT, AND EQUIPMENT 600 700 one
one year
year
LESS ACCUMULATED DEPRECIATION 75 121 OWNERS’ EQUITY
NET PROPERTY, PLANT, AND EQUIPMENT 525 579 COMMON STOCK (PAR VALUE) 10 10
ADDITIONAL PAID-IN CAPITAL 440 440
TOTAL ASSETS $ 2,222 $ 2,486 RETAINED EARNINGS 508 701
TOTAL OWNERS’ EQUITY 958 1,151

TOTAL LIABILITIES AND

OWNERS’ EQUITY $ 2,222 $ 2,486
Assets
Assets =
= Liabilities
Liabilities +
+
Owners’ Equity
Owners’ Equity
Funds
Funds from
from owners
owners (what
(what remains
remains
after
after deducting
deducting liabilities)
liabilities)
Income Statement for Two Years
Profit
Profit or
or loss
loss over
over In Thousands (000)
period
period ofof time
time For the Years Ending 2010 2011
REVENUE (SALES) 2,769 3,026
Expenses LESS: COST OF GOODS SOLD (COGS)
Expenses from
from 2010 2011
providing goods/
providing goods/ DIRECT LABOR 380 410
services
services that
that generate
generate DIRECT MATERIALS 990 1,120
revenue
revenue FACTORY OVERHEAD 311 300
TOTAL COGS –1,681 –1,830
Revenue
Revenue −
− COGS
COGS == GROSS PROFIT 1,088 1,197
Gross Profit
Gross Profit LESS: OPERATING EXPENSES 2010 2011
SELLING EXPENSES 249 272
Expenses
Expenses not
not directly
directly
GENERAL AND ADMINISTRATIVE 166 182
linked
linked to specific units
to specific units
LEASE EXPENSE 83 91
sold
sold
TOTAL OPERATING EXPENSES –498 –545

Gross LESS: DEPRECIATION –40 –46 The

Gross Profit
Profit The
LESS: INTEREST EXPENSE –39 –39 “bottom
− Operating Exp.
− Operating Exp. “bottom
− Depreciation
− Depreciation NET INCOME (PROFIT) BEFORE TAXES 512 567 line”
line”
− Interest
− Interest Exp.
Exp. INCOME TAXES –169 –300
− Income Taxes
− Income Taxes NET INCOME (PROFIT) $ 343 $ 267
=
= Net
Net Income
Income NET INCOME (AS A PERCENTAGE OF REVENUE) 12% 9%
Statement of Cash Flows for Two Years

In Thousands (000)
Viable
Viable firm
firm needs
needs positive
positive cash
cash Change
Year Change in
in cash
cash 2010 2011
flow
flow from
from operations
operations in
in most
most balance
OPERATING SECTION balance over
over
years.
years. period
AFTER-TAX NET INCOME period $ 343 $ 267
DEPRECIATION ADD - BACK 40 46
Depreciation
Depreciation added
added back
back (INCREASE)/DECREASE IN INVENTORY (68) (37)
(doesn’t reduce cash).
(doesn’t reduce cash). (INCREASE)/DECREASE IN ACCOUNTS RECEIVABLE (87) (48)
INCREASE/(DECREASE) IN ACCOUNTS PAYABLE 102 56
CASH FLOW FROM OPERATIONS 330 285
Increase
Increase in
in inventory
inventory or
or
accounts receivable reduces
accounts receivable reduces INVESTING SECTION
cash.
cash. CAPEX SPEND (CAPITAL EXPENDITURES) (100) (100)
CASH FLOW FROM OPERATIONS AND INVESTMENT 230 185
Increase
Increase in
in business
business investment
investment New
New debt
debt
decreases
decreases cash.
cash. FINANCING SECTION or equity
or equity
ADDITIONAL EQUITY CAPITAL — — provides
provides
LESS DIVIDENDS PAID (50) (75) cash
cash
Net
Net Income
Income INCREASE/(DECREASE) IN LONG-TERM DEBT — —
+/−
+/− Change
Change in in (Δ)
(Δ) Operating
Operating INCREASE/(DECREASE) IN SHORT-TERM NOTES (15) 15
+/ − Δ Investing CASH FLOW FROM OPERATIONS, INVESTMENTS,
+/ − Δ Investing AND FINANCING 165 125
+/ −Δ
+/ − Δ Financing
Financing
+
+ Beginning Cash
Beginning Cash BEGINNING CASH BALANCE 618 783
=
= Ending
Ending Cash
Cash ENDING CASH BALANCE $ 783 $ 908