Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: THEend8_
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?