Chapter 14Integrating Accounting, Finance, Marketing and

Economics

Accounting and Finance for Entrepreneurs

EBD-301

Dr. David P. Echevarria Slide 1All Rights Reserved

Dr. David P. Echevarria All Rights Reserved

THE IMPORTANCE OF ECONOMICS

• Essential Elements of Macroeconomics– Supply and Demand

• Supply from perspective of producer• Demand from perspective of consumer

– Equilibrium: market clearing price• S = D

– Competition• Perfect• Monopoly

Slide 2

: Supply vs Demand, and Equilibrium

• What causes a change in Equilibrium?

– Disruption in supply– Lower production costs– Decrease in demand– Increase in demand

Dr. David P. Echevarria Slide 3All Rights Reserved

Dr. David P. Echevarria All Rights Reserved

THE IMPORTANCE OF ECONOMICS

• Essential Elements of Microeconomics– Efficient Scale of Plant

• Right size >>> lowest cost of production• Capacity vs Utilization

– Production Function• Mix of Labor and Capital used in producing goods

and/or services• Labor vs Capital intensive production function

Slide 4

Dr. David P. Echevarria All Rights Reserved

THE IMPORTANCE OF MARKETING

• Consumer Behavior– Decision making process– Decision making criteria

• Construction the Marketing message– Communication the bundle of benefits– Importance of market research

• Getting the message out

Slide 5

Dr. David P. Echevarria All Rights Reserved

ESSENTIAL ELEMENTS OF FINANCIAL ANALYSIS

• Generally Accepted Accounting Principles– Rules by which transaction events are

• measured• recorded• reported

– GAAP Standards permit• orderly presentation• uniformity across all companies (US)• reliability (at least in theory)

Slide 6

Dr. David P. Echevarria All Rights Reserved

ESSENTIAL ELEMENTS OF FINANCIAL ANALYSIS

• Balance Sheet– Assets

• Current (Cash, A/R, INV, PPE)• Fixed (property and equipment)

– Liabilities• Current (A/P, N/P, Accruals)• Long-Term (mortgage debt, deferred taxes payable)

– Owner’s Equity• Capital• Retained Earnings (profits reinvested in the business)

Slide 7

Dr. David P. Echevarria All Rights Reserved Slide 8

INCOME STATEMENT

• Revenues - Net Sales• Expenses

– Direct Expenses• Labor• Materials

– Indirect Expenses• Selling, General and Administrative

Dr. David P. Echevarria All Rights Reserved Slide 9

INCOME STATEMENT

• Non-cash Expenses– Depreciation– Amortization

• Non-Operating Income and Expenses– Interest paid on amounts borrowed– Interest income on short-term investments

Dr. David P. Echevarria All Rights Reserved Slide 10

INCOME STATEMENT

• Taxes– Federal– State

• Distributions to equity capital providers– Cash dividends– Stock dividends (if incorporated)

• Earnings reinvested in business (retained)

Dr. David P. Echevarria All Rights Reserved Slide 11

STATEMENT OF CASH FLOWS

• Purpose– Reconcile changes in cash balance at the

beginning of the fiscal year with the cash balance at the end of the fiscal year.

– Identify where the cash came from and how it was utilized.

– Three distinct activities are examined:• Operations, Investing and Financing

Dr. David P. Echevarria All Rights Reserved Slide 12

STATEMENT OF CASH FLOWS

• Operating Sources and Uses of Cash– Uses of cash

• investing in inventory and accounts receivable• paying amounts owed

– Sources of cash• collecting accounts receivable• accruing wages and salaries payable, taxes payable• Depreciation and amortization• Deferred income taxes

Dr. David P. Echevarria All Rights Reserved Slide 13

STATEMENT OF CASH FLOWS

• Investing Sources and Uses of Cash– Uses of cash

• purchases of property and equipment• making short-term investments

– Sources of cash• sales of property and equipment• selling short-term investments for cash

Dr. David P. Echevarria All Rights Reserved Slide 14

STATEMENT OF CASH FLOWS

• Financing Sources and Uses of Cash– Uses of cash

• repayment of debt• capital servicing (paying interest and dividends)

– Sources of cash• Bank borrowing• Other sources of loans• selling stock (equity)

Dr. David P. Echevarria All Rights Reserved Slide 15

ECONOMIC AND ACCOUNTING PROFITS

• Accounting profits do not consider the opportunity costs of invested capital.

• Opportunity cost is defined as the returns that could be earned in a different investment with similar risk.

• Economic profits = accounting profits minus opportunity cost of capital. Also termed residual income: see Eq. (3.2)