chapter 14 integrating accounting, finance, marketing and economics accounting and finance for...

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


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


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


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


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


INCOME STATEMENT

• Non-cash Expenses– Depreciation– Amortization

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


INCOME STATEMENT

• Taxes– Federal– State

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

• Earnings reinvested in business (retained)


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



• 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



• 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



• 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)


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)

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