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Automation and Decisions
Data Insights Action Results Where might automation impact the gap? What is the nature of the gap? Is it valid to argue that a good decision leads to a good result? • Data and analytics enables decisions that are based on rational evidence, rather than experience. • In a rapidly changing environment, the value of experience is limited. Therefore, embedding analytics in the business will drive better business results. • Is this argument deductive or inductive? Finance as a “Lens” Financial Accounting: • Standard financial metrics are used to communication with external stakeholders • Governed by law and principles – GAAP/IFRS GAAP – Generally Acceptable Accounting Principles IFRS - International Financial Reporting Standards Finance as a “Lens” Managerial Accounting: • Information used within the company so that its management can operate the company more effectively Financial and Managerial Accounting Financial Statements Balance Sheet – Describes assets controlled by the business and how those assets are financed • Assets = Liabilities + Owners Equity Income Statement (P&L) – Describes achievement of revenue, and resourse expended to produce that achievement • Income = Revenues - Expenses Uses of Financial Statements Managers – Assess performance and identify areas requiring intervention Shareholders – Understand how capital is being managed Outside investors – Identify opportunities Lenders and suppliers – Assess credit worthiness Balance Sheet Representation of the company’s: • Financial health - company’s ability to meet its obligations over the long term • Liquidity – company’s ability to meet current obligations Measures operating performance Produced periodically – quarterly and annually Why is understanding financial health important for both for-profit and non-profit organizations? Components of Balance Sheet Assets - What the company owns • Listed in order of liquidity - ease with which they can be converted to cash • Presented at the lower of the purchase price or market value at the time of the financial statement • Tangible assets are depreciated over their useful life Liabilities • Amounts that the company owes to others for products and services it has purchased and amounts that it has borrowed Assets – Liabilities = Equity Balance Sheet Assets Liabilities Shareholder Equity Assets Why are two years shown? Dollar amount of services provided or products delivered that have not yet been paid for by customer Funds in checking accounts in commercial banks, and securities with very short maturities (90-120 day maturity) Intangible assets, e.g. brands All non-current assets that are aggregated because they are too small to list separately. Investment made in the manufacture, production or purchase of products Amount paid, at time of purchase, for the fixed assets that the company owns (or lower) minus depreciation Liq ui di ty Inventory Financial investment that the company has made in the manufacture, production, or purchase (retail store) of products that will be sold to customers • Finished goods - completed products ready for shipment to customers. Reported value includes costs directly associated with completing the product • Work in process - value has been added by the company but it is not yet ready to be delivered to the customer • Raw materials - products or components that have been received from vendors or suppliers to which the company has done nothing Investments and Intangible Assets Ownership of other companies Partial equity stakes in other companies, including joint ventures Patents, Trademarks, Copyrights Goodwill - Value of acquisition(s) above the value of the assets on the balance sheet Reported at the lower of cost or market Fixed Assets Tangible assets owned by the company and used in the operation of its business that are expected to last more than one year • Land • Buildings • Machinery and Equipment • Vehicles Gross book value - original amount paid for the tangible assets that the company currently owns, subject to the lower of cost or market accounting rule Depreciation Tangible assets are depreciated over their useful life Straight-line depreciation - most common method of depreciation • Gross book value (cost base of asset) divided by the number of years in the useful life of the asset Net book value – Gross book value minus depreciation What is the reported net book value of an asset that is fully depreciated? Total Liabilities - Sum of Current Liabilities (Must be paid within 1 yr) and Long-term Debt (Payment longer than 1 yr) Liabilities Amount borrowed from bank or other lender, and not yet repaid Amounts owed to vendors or suppliers for products delivered and services provided for which payment has not yet been made Liabilities that had a maturity of more than one year when the funds were originally borrowed, but are now due in less than one year Expenses and Expenditures Expenditure - disbursement of cash or a commitment to disburse cash (Costs that maximize long-term value of business) • EX: Capital investment - recognized over a period of operation Expense - recognition of the expenditure and its recording (income statement) for accounting purposes in the time period(s) that benefited from it (costs that need to be incurred for the business to operate) • Matching principle (GAAP)- Expenses should be recorded in the period of time that benefited from the expenditure rather than the period of time in which the expenditure occurred. • Accrued expenses – outstanding charges at date of reporting. Total expense reported on income statement, but liability for outstanding debt reported on balance sheet. Balance Sheet Balance Income Statement Measures the company’s achievement (revenue) and the resources (expenses) that were expended to produce that achievement Describes the performance of the company over a period of time, usually a month or a year • Also called a statement of operations or a profit and loss statement (P&L) Revenue - Expenses = Profit or Net Income Income Statement Dollar amount of products and services provided to customers during the year. Recorded when the customer received and approved products or services purchased (Earnings before Interest, Taxes, Depreciation and Amortization EBIDTA = Gross Profit – SG&A) Cost of producing or purchasing the goods that are delivered to customers Cost of operating the company Portion of capital expenditure allocated to current year. Profit after costs of operating the company Revenue minus all operating and non-operating costs Cost of Goods Sold Cost of producing or purchasing the goods that are delivered to customers Includes: • Raw materials • Purchased components • Direct labor • Operating and repairing the equipment used to manufacture the product • Other manufacturing expenses, including utilities and maintenance of the production facility Gross Margin Across Industries Industry Gross Profit Margin Auto Repair & Maintenance 21% Construction 19% Hotels & Hospitality 76% Maintenance Services 30% Restaurants 67% Retail 22% Tax Services 90% Transportation 47% Why are the gross margins of Tax Services and Construction so different? https://www.caminofinancial.com/profit-margin-by-industry/ General and Administrative Expenses Cost of operating the company - not associated directly with producing the product Includes: • Staff expenses (accounting, computer operations, senior management) • Selling expenses (salaries, travel) • Promotional expenses (advertising, trade shows) • Research and development (technological research) Net Margin 21% - “Tax Cuts and Jobs Act” 2022 Net Margin = $17,105/$157,403 = 10.9% Amount of profit that the corporation has achieved during the year Net Margin = Net Earnings/Revenue Did the profitability of Home Depot increase from 2020 to 2022? Breakout discussion 15 minutes to compare Home Depot and Lowes based on what we have learned • What is the big difference in current assets? Why is there a difference?