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Finances for EveryoneAAUP Annual Meeting, Austin, Texas
Tuesday, June 13, 2017
Mike Bieker, Director, University of Arkansas Press
Robbie Dircks, CFO, University of North Carolina Press
Dan Wackrow, CFO, Harvard University Press
AGENDAIntroduction
Accounting Basics and Definitions
The Income Statement
The Balance Sheet
Common Accounting Transactions
Questions and Answers
AGENDAIntroduction
Accounting Basics and Definitions
The Income Statement
The Balance Sheet
Common Accounting Transactions
Questions and Answers
Definitions of Accounting
Accounting is the systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting, and communicating financial information. It reveals profit or loss for a given period, as well as identifies the value and nature of an organization’s assets, liabilities, and equity. www.businessdictionary.com
The American Accounting Association (AAA) defines accounting as: “the process of identifying, measuring and communicating economic information in order to permit informed judgment and decision-making by users of the information.”
Definitions of Accounting
Accounting is concerned with transactions and events having financial character. For example, hiring a new employee is qualitative information with no financial character. Thus, it is not recorded as an accounting transaction. However, the payment of salaries, payment for the printing of books, sale of books, etc. are recorded as accounting transactions because they involve financial value.
Basic Accounting Principles
Going Concern Principle – Financial Statements are prepared with the assumption that the business entity will continue to operate indefinitely.
Time Period Principle – The life of a business is subdivided into 12-month periods known as a Fiscal Year, which are the primary reporting period. However, the need for timely information leads to the preparation of more frequent reporting (monthly or quarterly).
Matching Principle – Income and related Expenses are recognized in the same period, which is the basis of Accrual accounting.
Accrual Basis of Accounting – The method of accounting used to ensure that the reporting of Income and Expenses are accurately reflected in the period in which they occur. Income is not the same as cash collections and Expense is not the same as a cash payment.
Revenue Recognition Principle – Income is recognized when earned (when service is performed or when sale occurs), regardless of when payment is received.
Expense Recognition Principle – Expenses are recognized when incurred (or used), regardless of when they are paid for.
Double-Entry Bookkeeping
Double-Entry Accounting – A system used to analyze and record business transactions.
• Debit – an entry on the left side of an account
• Credit – an entry on the right side of the account
Chart of Accounts – A list of accounts used by an organization into which all accounting transactions are recorded; sometimes referred to as the General Ledger.
T-Accounts
Provide a visual representation of a ledger account for purposes of analyzing transactions.
Asset T-Accounts
Rules for Asset Accounts
• Increased on the debit side (left side).
• Decreased on the credit side (right side).
• The normal (usual) balance is the increase or debit side.
Asset Account
Debit+
Increase SideNormal Balance
Credit-
Decrease Side
Liability & Equity T-Accounts
Rules for Liability & Equity Accounts
• Increased on the credit side (right side).
• Decreased on the debit side (left side).
• The normal (usual) balance is the increase or credit side.
Liability/Equity Account
Debit-
Decrease Side
Credit+
Increase SideNormal Balance
Income T-Accounts
Rules for Income Accounts
• Increased on the credit side (right side).
• Decreased on the debit side (left side).
• The normal (usual) balance is the increase or credit side.
Income Account
Debit-
Decrease Side
Credit+
Increase SideNormal Balance
Expense T-Accounts
Rules for Expense Accounts
• Increased on the debit side (leftside).
• Decreased on the credit side (right side).
• The normal (usual) balance is the increase or debit side.
Expense Account
Debit+
Increase SideNormal Balance
Credit-
Decrease Side
Primary Accounting Reports
Income Statement – measures the results of operations over a particular period of time by deducting all expenses from all income.
Balance Sheet – also known as the Statement of Financial Position, measures the amount of Assets (total resources), Liabilities (total owed to others), and Capital (amount left over after all obligations are paid out of existing resources) at a particular moment in time.
Statement of Cash Flows – reports the inflows and outflows of cash during a particular period of time.
AGENDAIntroduction
Accounting Basics and Definitions
The Income Statement
The Balance Sheet
The Cash Flow Statement
Common Accounting Transactions
Questions and Answers
Accounting is the language of business. You have to be as comfortable with that as you are with your own native language to really evaluate a business.
- Warren Buffet
The income statement is one of three financial statements that you should become familiar with (the other two are the balance sheet and cash flow statement). Understanding an income statement is essential in order to analyze the performance of an organization.
The income statement summarizes a company’s revenues (sales) and expenses on a periodic (monthly, quarterly, annually) basis. Net sales and net income are typically of most interest.
Income statements come with various monikers, including “statement of income,” “statement of earnings” and “statement of operations.” Other terms include “P&L,” which stands for profit and loss statement. They all mean the same thing.
The income statement “recognizes” revenue when they are realized and expenses when incurred. With accrual accounting, the flow of accounting events through the income statement doesn’t necessarilycoincide with the actual receipt and disbursement of cash. The income statement measures profitability, not cash flow.
Income Statement Accounts• Net Sales – The value of sales to customers, netting gross sales
and returns • Cost of Sales – Expense incurred for materials (pp&b), labor (f/l
editing & design), and royalties, less project related subsidies• Gross Profit – The difference between net sales and cost of
sales, but more importantly, the amount of resources available to cover all other expenses
• Operational expenses – Departmental expenses not directly related to any one project
• Operating income – Earnings from normal operations, before non-operating income or expense (eg. institutional support, endowment earnings)
• Non-book publishing income – Institutional support, endowment income, journals income, distribution services income
• Net income – aka The Bottom Line. The sum of ALL revenues and expenses.
Gross Sales 2,816,238Returns (429,595)
Net Sales 2,386,643
Cost of Goods Sold 1,156,080 (Mfg cost, Freight, Inventory W/O, Royalties)Gross Margin 1,230,563
Other Publishing Income 159,905 (Income from permissions, licenses, etc)Gross Operating Income 1,390,468
Operating ExpensesEditorial 482,779 (Salaries, Honoraria, Travel, F/L editing)
Production & Design 582,022 (Salaries, F/L design, etc)Marketing 436,231 (Salaries, Commissions, Ads, Catalogs, Direct Mail)
Order Fulfillment 260,467 (Salaries, Warehouse costs) Gen’l, Acctg & Admin 429,498 (Salaries, Equipment, Supplies, Utilities, Tele, etc)
Other 12,084Total Operating Expenses 2,203,081
Net Operating Income (812,613)Non-Book Publ. Income 750,560 (Institutional Support, Endowment Earnings,
Distribution Services, Journals income) Net Income/(Loss) (62,530)
AGENDAIntroduction
Accounting Basics and Definitions
The Income Statement
The Balance Sheet
The Cash Flow Statement
Common Accounting Transactions
Questions and Answers
Balance Sheet
Balance Sheet Definition
• A balance sheet is a financial statement that summarizes a company's (1) assets, (2) liabilities and (3) shareholders' equity at a specific point in time. These three balance sheet segments give management an idea as to what the company owns and owes, as well as the amount invested by shareholders.
3 Parts of the Balance Sheet
Assets =
Liabilities +
Capital / Equity
The Accounting Equation
• ASSETS = LIABILITIES + OWNERS EQUITY
OR
• ASSETS – LIABILITIES = OWNERS EQUITY
• Equity may also be referred to as the book value of the company
Further Breaking down the Balance Sheet
Cash
Accounts Receivable
Inventory
Prepaid Expenses
Royalty Advances
Investments
Fixed Assets
Intangible Assets
Accounts Payable
Accrued Expenses
Wages Payable
Royalties Payable
Unearned Revenue
Long Term Debt
Retained Earnings
Treasury Stock
Additional Paid in Capital
ASSETS
(Provide future benefit)
LIABILITIES
(What I owe)
CAPITAL / EQUITY
(What am I worth)= +
Further Breaking down the Balance Sheet
Cash
Accounts Receivable
Inventory
Prepaid Expenses
Royalty Advances
Investments
Fixed Assets
Intangible Assets
Accounts Payable
Accrued Expenses
Wages Payable
Royalties Payable
Unearned Revenue
Long Term Debt
Retained Earnings
Treasury Stock
Additional Paid in Capital
ASSETS LIABILITIES CAPITAL / EQUITY= +
• Exhibit Expenses• Maintenance• Editorial Stipend
Further Breaking down the Balance Sheet
Cash
Accounts Receivable
Inventory
Prepaid Expenses
Royalty Advances
Investments
Fixed Assets
Intangible Assets
Accounts Payable
Accrued Expenses
Wages Payable
Royalties Payable
Unearned Revenue
Long Term Debt
Retained Earnings
Treasury Stock
Additional Paid in Capital
ASSETS LIABILITIES CAPITAL / EQUITY= +
Further Breaking down the Balance Sheet
Cash
Accounts Receivable
Inventory
Prepaid Expenses
Royalty Advances
Investments
Fixed Assets
Intangible Assets
Accounts Payable
Accrued Expenses
Wages Payable
Royalties Payable
Unearned Revenue
Long Term Debt
Retained Earnings
Treasury Stock
Additional Paid in Capital
ASSETS LIABILITIES CAPITAL / EQUITY= +
Example University Press Balance SheetJune 30, 2016
Assets Liabilities & Equity
Current Assets Accounts Payable 25,000
Cash 10,000 Accrued Expenses 5,000
Accounts Receivable 35,000 Unearned Revenue 30,000
Prepaid Expenses 5,000 Royalties Payable 20,000
Royalty Advances 10,000 Total Liabilities 80,000
Inventory 40,000
Non-current Assets Retained Earnings 20,000
Fixed Assets 15,000 Stock 1,000
Investments 10,000 Addt’l Paid in Capital 24,000
Total Equity 45,000
Total Assets 125,000 Total Liabilities & Equity 125,000
Contra Accounts
• A contra account is an account found in an account ledger that is used to reduce the value of a related account. Items recorded in the contra account are specifically designed to offset other transactions, and are recorded as the opposite type of entry.
Examples of Contra Accounts
• Allowance for doubtful accounts
• Allowance for Sales Returns
Accounts Receivable
• Allowance for unearned / unrecoverable advances
Royalty Advances
• Allowance for obsolescence
Inventory
• Accumulated Depreciation
Fixed Assets
Why Set Up a Reserve?
• An asset contra account estimates a decline in an asset value before you have certain knowledge that it has occurred
• Provides a more accurate reflection of the value of the enterprise
• Protects the enterprise from the need to take large, unexpected “hits” to its profits• Returns reserve
• Bad debt reserve
• Inventory reserve
Assets Liabilities & Equity
Current Assets Accounts Payable 25,000
Cash 10,000 Accrued Expenses 5,000
Accounts Receivable 35,000 Unearned Revenue 30,000
Prepaid Expenses 5,000 Royalties Payable 20,000
Royalty Advances 10,000 Total Liabilities 80,000
Allow. for unrecoverable Advances (2,000)
Inventory 40,000 Retained Earnings 18,000
Non-current Assets 15,000 Stock 1,000
Fixed Assets 15,000 Addt’l Paid in Capital 24,000
Investments 10,000 Total Equity 43,000
Total Assets 123,000 Total Liabilities & Equity 123,000
Example University Press Balance SheetJune 30, 2016
AGENDA
Introduction
Accounting Basics and Definitions
The Income Statement
The Balance Sheet
Common Accounting Transactions
Questions and Answers
Common Accounting Transactions for Publishers
Sign author to write book and pay $2,500 royalty advance against royalties of 7.5% net.
Transaction 1
Debit+
$2,500
Author Royalty Advances
Credit-
$2,500
Cash
Asset Account Asset Account
Common Accounting Transactions for Publishers
Pay freelance editor $1,200 to copyedit manuscript.
Transaction 2
Debit+
$1,200
Copyedit Expense
Credit-
$1,200
Cash
Income Statement Expense Account Asset Account
Common Accounting Transactions for Publishers
Pay $119,000 in staff salaries for the month: Acquisitions - $24,500; Manuscript Editorial - $20,000; Des/Production - $22,000; Marketing -$30,000; G&A - $22,500.
Transaction 3
Debit+
$119,000
Staff Salary Expense
Credit-
$119,000
Cash
Income Statement Expense Account Asset Account
Common Accounting Transactions for Publishers
Pay compositor $2,500 for typesetting project.
Transaction 4
Debit+
$2,500
Work-In-Process
Credit-
$2,500
Cash
Asset Account Asset Account
Common Accounting Transactions for Publishers
Pay printer $10,500 for printing/binding 3,000 copies ($3.50 per unit).
Transaction 5
Debit+
$10,500
Work-In-Process
Credit-
$10,500
Cash
Asset Account Asset Account
Common Accounting Transactions for Publishers
Warehouse receives the 3,000 copies from the printer.
Transaction 6
Credit-
$13,000
Work-In-Process
Debit+
$13,000
Finished Goods Inventory
Asset Account Asset Account
Common Accounting Transactions for Publishers
Warehouse ships 300 review copies for the marketing department at $3.50 unit cost = $1,050. Postage for the shipments total $525.
Transaction 7
Debit+
$1,050
Marketing Expense
Credit-
$1,050
Finished Goods Inventory
Income Statement Expense Account Asset Account
Common Accounting Transactions for Publishers
Warehouse ships 300 review copies for the marketing department at $3.50 unit cost = $1,050. Postage for the shipments total $525.
Transaction 7a
Debit+
$525
Postage Expense
Credit-
$525
Cash
Income Statement Expense Account Asset Account
Common Accounting Transactions for Publishers
Marketing pays $2,500 for ad.
Transaction 8
Debit+
$2,500
Marketing Expense
Credit-
$2,500
Cash
Income Statement Expense Account Asset Account
Common Accounting Transactions for Publishers
2,500 copies are sold on account ($30 at 45% discount) for total sales revenue of $41,250. Invoice also includes $1,300 for shipping, for a total of $42,550. Inventory value of copies sold is $3.50/unit x 2500 = $8,750.
Transaction 9
Debit+
$42,550
Accounts Receivable
Credit+
$41,250
Book Sales Income
Asset AccountIncome Statement
Income Account
Common Accounting Transactions for Publishers
2,500 copies are sold on account ($30 at 45% discount) for total sales revenue of $41,250. Invoice also includes $1,300 for shipping, for a total of $42,550. Inventory value of copies sold is $3.50/unit x 2500 = $8,750.
Transaction 9a
Debit+
Accounts Receivable
Credit-
$1,300
Postage Income
Asset AccountIncome Statement
Income Account
Common Accounting Transactions for Publishers
2,500 copies are sold on account ($30 at 45% discount) for total sales revenue of $41,250. Invoice also includes $1,300 for shipping, for a total of $42,550. Inventory value of copies sold is $3.50/unit x 2500 = $8,750.
Transaction 9b
Credit-
$8,750
Finished Goods Inventory
Debit+
$8,750
Cost of Goods Sold
Asset AccountIncome Statement Expense Account
Common Accounting Transactions for Publishers
500 copies are returned for credit of $8,250. Inventory value of copies sold is $3.50/unit x 500 = $1,750.
Transaction 10
Credit-
$8,250
Accounts Receivable
Debit-
$8,250
Book Sales Revenue
Asset AccountIncome Statement
Income Account
Common Accounting Transactions for Publishers
500 copies are returned for credit of $8,250. Inventory value of copies sold is $3.50/unit x 500 = $1,750.
Transaction 10a
Debit+
$1,750
Finished Goods Inventory
Credit-
$1,750
Cost of Goods Sold
Asset AccountIncome Statement Expense Account
Common Accounting Transactions for Publishers
End of year inventory write-down – using 3-year write-down at $1.16/unit x 700 copies remaining in inventory = $812.
Transaction 11
Credit-
$812
Finished Goods Inventory
Debit+
$812
Cost of Goods Sold
Asset AccountIncome Statement Expense Account
Common Accounting Transactions for Publishers
500 copies are remaindered at $2.00 each for total income of $1,000. Inventory value for copies sold is ($3.00-$1.16)= $2.34/copy x 500 = $1,170.
Transaction 12
Debit+
$1,000
Cash or Accts Receivable
Credit+
$1,000
Book Sales Income
Asset AccountIncome Statement
Income Account
Common Accounting Transactions for Publishers
500 copies are remaindered at $2.00 each for total income of $1,000. Inventory value for copies sold is ($3.00-$1.16)= $2.34/copy x 500 = $1,170.
Transaction 12a
Credit-
$1,170
Finished Goods Inventory
Debit+
$1,170
Cost of Goods Sold
Asset AccountIncome Statement Expense Account
Common Accounting Transactions for Publishers
200 copies are pulped. Inventory value for copies pulped is ($3.00-$1.16)= $2.34/copy x 200 = $468.
Transaction 13
Credit-
$468
Finished Goods Inventory
Debit+
$468
Cost of Goods Sold
Asset AccountIncome Statement Expense Account
Common Accounting Transactions for Publishers
Pay author royalties - $33,000 net sales x 7.5% = $2,475.
Transaction 14
Credit-
$2,475
Author Royalty Advances
Debit+
$2,475
Royalty Expense
Asset AccountIncome Statement Expense Account
Common Accounting Transactions for Publishers
Pay author royalties - $33,000 net sales x 7.5% = $2,475.
Write-off balance of unearned advance.
Transaction 14a
Credit-
$25
Author Royalty Advances
Debit+
$25
Royalty Expense
Asset AccountIncome Statement Expense Account
Common Accounting Transactions for Publishers
Collect $34,000 from customers.
Transaction 15
Debit+
$34,000
Cash
Credit-
$34,000
Accounts Receivable
Asset Account Asset Account
Common Accounting Transactions for Publishers
Pay fulfillment vendor $3,500 for services.
Transaction 16
Credit-
$3,500
Cash
Debit+
$3,500
Fulfillment Expense
Asset AccountIncome Statement Expense Account
Common Accounting Transactions for Publishers
Purchase copier machine at a cost of $15,000 and depreciate first year assuming a 4-year expected life - $15,000 / 4 = $3,750.
Transaction 17
Credit-
$15,000
Cash
Debit+
$15,000
Furniture & Equipment
Asset Account Asset Account
Common Accounting Transactions for Publishers
Purchase copier machine at a cost of $15,000 and depreciate first year assuming a 4-year expected life - $15,000 / 4 = $3,750.
Transaction 17a
Debit+
$3,750
Depreciation Expense
Credit+
$3,750
Accumulated Depreciation
Income Statement Expense Account
Contra-Asset Account
Common Accounting Transactions for Publishers
Library purchases subscription to a quarterly journal for $100.
Transaction 18
Debit+
$100
Cash
Credit+
$100
Deferred Revenue
Asset Account Liability Account
Common Accounting Transactions for Publishers
Journal issue mails – recognize income for one issue.
Transaction 19
Debit+
$25
Deferred Revenue
Credit+
$25
Subscription Revenue
Asset AccountIncome Statement
Income Account
Assets Liabilities & Equity
Current Assets Accounts Payable $0
Cash ($122,125) Accrued Expenses $0
Accounts Receivable $300 Unearned Revenue $75
Inventory $2,500 Royalties Payable $0
Royalty Advances $0 Total Liabilities $75
Total Current Assets ($119,325) Equity
Non-current Assets Current Surplus (Deficit) ($108,150)
Fixed Assets $15,000 Retained Earnings $0
Accumulated Depreciation ($3,750)
Total Fixed Assets $11,250 Total Equity ($108,150)
Total Assets ($108,075) Total Liabilities & Equity ($108,075)
Common Accounting Transactions Balance Sheet - June 30, 2017
Common Accounting Transactions Income Statement for the Period Ending June 30, 2017
Gross Book Sales $42,250
Sales Returns ($8,250)
Net Book Sales $34,000
Postage Income $1,300
Journals Subscription Revenue $25
Total Sales Revenue $35,325
Cost of Books Sold $9,450
Royalty Expense $2,500
Total Cost of Goods Sold $11,950
Gross Margin $23,375
Operating Expenses:
Staff Salaries $119,000
Freelance Copyediting Expense $1,200
Marketing Space Advertising $2,500
Marketing Review Copies $1,050
Postage Expense $525
Fulfillment Expense $3,500
Depreciation Expense $3,750
Total Operating Expenses $131,525
Net Income (Deficit) ($108,150)
AGENDA
Introduction
Accounting Basics and Definitions
The Income Statement
The Balance Sheet
The Cash Flow Statement
Common Accounting Transactions
Questions and Answers