Entrepreneurship 101

allen.ginsberg@stevens.edu
2011 Stevens Institute of Technology. ll !ights !eserved
"inancial ccounting and
#sing $ogul % &utline

Part I: Financial Accounting Important terms,

definitions and concepts

Part II: Financial decisions in Mogul

'art I ( )asics of "inancial
ccounting
Important terms and definitions

Key accounting terms

Accounting equation

Accounting period

Accrual principle

Income, expenses and depreciation of assets

Sample financial statements from the simulation

Important measures of success financial ratios

Financial Accounting
!ecording of all financial transactions for a company
"etails of each transaction are entered into to
company accounts #$oo%s&' All entries are in a
monetary unit #e'g', dollars, euros, ringgits, etc'&

Accounts are summari(ed and transferred
periodically to financial statements )hich sho) the
financial condition of the company #its profits or
losses, its cash position, ho) much it o)es, etc'&
Key Accounting *erms
Assets: !esources )hich the company o)ns and can use
to generate profits #earnings&' +xamples Are:
,AS- P!.P+!*/
#0and, $uildings&
I12+1*.!I+S I12+S*M+1*S
#!a) material, In3process, finished& #Stoc%s, $onds, etc'&
A,,.41*S
!+,+I2A50+
Key Accounting *erms #continued&
Liabilities: .$ligations )hich the company o)es to
entities outside the company' +xamples are: Also
%no)n as debt

Short3term loans

0ong3term loans

*axes paya$le

Accounts paya$le to suppliers #not used in Mogul&

Key Accounting *erms #continued&
Equity: Amounts paid in to $uy an interest in the
company, plus retained earnings #all of the profits less
losses less di6idends paid out, if any, since the start of the
company&' Also %no)n as Stoc%holders7 +quity'
)efore *e de+ne the last of the three ,ey ter-s. *e should
,no* that/
Profts for a co-pany are all inco-e or revenues
-inus all e0penses
Losses occur *hen e0penses e0ceed inco-e
Owners interest in a co-pany is the a-ount of the
co-pany that the o*ner has title to or o*ns and
Dividends are cash paid to the o*ners as a re*ard for
investing in the co-pany
Key Accounting *erms #continued&
Equity = Owners Interest + Profits Loses - Diviens
It is also the 6alue of the assets remaining if all of the
lia$ilities are paid off using a6aila$le assets also %no)n
as the 5oo% 2alue of the company'
*his leads to the88''
&*ners1 interest is in the for- of stoc,
If the co-pany is public
Accounting +quation and the 5alance Sheet
Assets 9 0ia$ilities : +quity
Forms the $asis for the 5alance Sheet
Assets
0ia$ilities : +quity
Income, +xpenses and "epreciation of Assets

An other important concept used in Mogul is DEP!E"IA#IO$:

*his is an expense )hich is included in the Manufacturing ,ost of
;oods Sold #,.;S& on the Income Statement' It accounts for the
expense of o)ning assets #e'g', equipment& used in manufacturing
products' *he actual cash flo) out occurs )hen the assets are
purchased $ut the expense is spread out o6er the products during
the life of the asset and deducted from income only at the time the
products are sold #,.;S&'
It appears as Accumulated Depreciation on the 5alance Sheet as a
decrease in the 6alue of the assets'

Inco%e or sales is re6enue accounted for as goods are

deli6ered to customers

E&'enses are costs charged against re6enue to compute

profits'
2 I3
2 &#T
2 &#T
2
4&53
.ther ,oncepts *he Accounting Period
Accountin( Perio: *he time during )hich transactions )hich
cause changes in assets, lia$ilities and equity are recorded into
accounts and summari(ed for reporting to management and<or
the pu$lic #in Mogul simulation this period is a quarter of a year&'
6anuary 2012
S $ T 5 T " S
1 2 7 8 9 : ;
< = 10 11 12 17 18
19 1: 1; 1< 1= 20 21
22 27 28 29 2: 2; 2<
2= 70 71


.ne month, or one quarter or one year
.ther ,oncepts *he Accrual Principle
Accrual Princi'le: *he recording of transactions )hen they occur
regardless of )hether cash is paid out or recei6ed #a fe) companies
use Cash Accounting )hich records transactions only )hen cash is
transferred'&
Mogul uses this accrual method, so e6en though only 50% of the
cash is collected )hen a sale is made during the quarter #the rest is
collected in the next quarter&, the total amount is recorded as a sale
in the current quarter'
For example:
Illustration of the Accrual Principle
the Flo) of Ma=or +xpenses and Income
Product expenses
Materials
0a$or
.6erhead
Impro6ing quality
"epreciation
Finished ;oods
In6entory #F;I&
Sales
>uarter 1
>uarter 2
,.;S +xpense
,ash
>?@
of sales
>?@
of sales
#through
accounts
recei6a$le& 2alue of F;I sold
4nsold F;I
F;I
,ash
A 2alue of
Sales
1et Sales
Financial Statements
Inco%e )tate%ent: sho)s the Income #sales or
re6enues& and +xpenses during the period and the
resulting 1et Income after *axes'
*alance )+eet: sho)s the financial condition #assets,
lia$ilities and stoc%holder equity& of the company at the
end of each period'
"as+ ,low )tate%ent: sho)s the 1et ,ash 5alance
at the end of the quarter arising from the 6arious
acti6ities of the company during the period'
ctual and "orecasted "inancial
State-ents
*he financial statements in Mogul can sho) either the:
Actual results from the pre6ious period or the
,orecaste results for the next period
*he forecasted results are $ased on your Marketing,
Operations and Finance decisions made on your
decision sheets up to that point'
Samples of actual Mogul financial statements are:
Financial Statements in Mogul #continued&
n Inco-e State-ent ( ctual for last ?uarter
Inco-e or
Financial Statements in Mogul #continued&
An Income Statement Forecasted for next quarter
In reality this is an operations BUDGET for the next quarter, $ased on a
forecast of sales and pro=ection of expenses'
Inco-e or
Financial Statements in Mogul
)alance Sheet
Property loan B
Property loan C
,ash Flo) Statement
"etails the inflo)s #sources& and outflo)s #uses& of cash
arising from the acti6ities of the company'
*he parts of a standard cash flo) statement are:
o
,ash flo) from .perations #the usual $usiness of the company&
o
,ash flo) from In6estments #$uying assets to use in the $usiness&
o
,ash flo) from Financing acti6ities #$orro)ing or repaying de$t&
Mogul cash flo) statement sho)s similar information $ut classified as:
o
,ash Payments
o
,ash !eceipts
o
,ash 5alance
Financial Statements in Mogul #continued&
@ash "lo* State-ent
Property 0oan
Property 0oan
Property 0oan
Measures of Success in Mogul
*here are fi6e measures of success that determine your ran%ing in the
simulation results for the current quarter and for performance to date:
*he relati6e )eights of the measures are sho)n in # &
B'*otal Sales in A for all products #C>@&
C'1et Income A of net profit after taxes #C>@&
D'!eturn on Sales @ 9 #net profit&<#total sales&: a measure of ho)
efficiently sales A are turned into profit #C?@&
E'!eturn on Assets @ 9 #net profit&<#6alue of total assets&: a measure of
ho) efficiently total assets are used to generate profit #B>@&
>'Forecast +fficiency a measure of ho) close your sales forecasts
come to the actual sales #B>@&
.ther Financial !atios Sho)n on the
Performance !eport
F
,urrent ratio 9 ,urrent assets<current lia$ilities:
3 your a$ility to co6er your current lia$ilities
F
Guic% ratio 9 #,urrent assets in6entories&<current lia$ilities:
3 same as current except in6entories not counted as current asset
F
"e$t<Asset 9 *otal lia$ilities<total assets:
3 )hat proportion of your total assets are funded $y de$t #a measure of
ris%&
F
*imes interest earned 9 1et profit<total interest on de$t:
3 )hat proportion of your interest payments are co6ered $y net profit
.ther Financial !atios Sho)n on the
Performance !eport #continued&
F
In6entory turno6er 9 Sales A<ending in6entory A in period
3 -o) rapidly in6entory is $eing turned into sales #higher 6alues
indicate you are carrying less in6entory relati6e to sales&
F
Fixed asset turno6er 9 Sales A<ending fixed assets 6alue
3 -o) efficiently you are using your fixed assets to generate sales
F
*otal asset turno6er 9 Sales A<ending total assets 6alue
3 -o) efficiently you are using your total assets to generate sales
*he next three measures tell you ho) efficiently you are using in6entories and
assets to generate sales:
Part II Finance "ecisions in Mogul
-o) to raise capital #cash& to run your companyH
C>
"inancial Strategy % Te-plate
4escribe your +nancial strategy % *hat
+nancial -easures *ill you focus on
and *hat *ould you li,e to see the-
be at the end of the si-ulation Ae.g..
!eturn on Sales at least <BCD
Finance "ecisions in Mogul
*he purpose of the financial decisions in Mogul is to
assure that your company has sufficient cash during the
quarter to fund its planned operations )ithout ha6ing to
ta%e an emergency loan and to use the cash a6aila$le to
maximi(e earnings'
*hese decisions are:
F
Short3term Loans !equested
F
Short3term Invest%ents #deposits and )ithdra)als&
F
Property Loan #0ong3term loan&!equested
F
B
st
Property 0oan 3 Pay%ent #early payoff of loan&
Finance "ecisions in Mogul
)+ort-ter% Loan: the amount of cash made a6aila$le
this quarter from a $an% line of credit #up to the I*otal
0ine of ,reditJ sho)n& at the interest rate sho)n' Must
$e repaid in next quarter'
Finance "ecisions in Mogul
)+ort-#er% Invest%ent : the amount of cash in6ested or )ithdra)n from
an in6estment earning the rate sho)n #usually for excess cash )hich )ill
not $e needed in the current quarter&'
"eposits are paid in the quarter in )hich they are made' Kithdra)al
#Payment& is sho)n on the ,ash Flo) Statement' Interest income on
deposits and existing in6estments is paid in the follo)ing quarter' ,urrent
in6estment rate is >@'
Finance "ecisions in Mogul #continued&
Pro'erty Loan !equeste: a 0ong3term loan using
the plant as co3lateral at the interest rate sho)n' *he
maximum amount per loan is AL??,??? and only t)o
loans may $e outstanding at one time'
Finance "ecisions in Mogul
-
st
Pro'erty Loan E&tra Pay%ent: *his is the amount of extra payment
you )ish to ma%e on property loan MB at the penalty rate sho)n' If you
already ha6e t)o loans outstanding and )ish to issue a ta%e a ne) loan,
you )ill need to use this entry to pay off loan MB early to ma%e room for the
ne) loan'
A Financial "ecision $O# in Mogul
*he Mogul simulation assumes your company has not yet gone pu$lic that is,
stoc% has not $een sold to the pu$lic' *he stoc%holder equity sho)n on the
$alance sheet comes from capital in6ested in the company $y pri6ate indi6iduals
as is true in many startup companies'
*herefore, a method for raising capital in a pu$lic company, other than
$orro)ing, that is not a6aila$le in Mogul is to use the equity in the company to
acquire needed cash i'e', sell ne) stoc% to the pu$lic' *his is less ris%y than
$orro)ing $ut usually costs more than $orro)ing'
Finance "ecisions in Mogul
*he Financial "ecision Sheet in Mogul
Property 0oan
Pro'erty 0oan Interest !ate
Pro'erty 0oan !equested
B
st
Pro'erty 0oan +xtra Payment
+arly 0oan Payment Penalty
-ount of short%ter- loan
-ount of savings *ithdra*al
-ount of savings deposit
-ount of long%ter- loan
-ount of early loan pay-ent
Summary of the +ffects of "ecisions on the
Financial Statements

As you can see, the only effects of Financial decisions are on the:
F amount of cash a6aila$le
F costs of interests on outstanding de$t
F interest earned on excess cash

All of the effects on other financial statement items and measures of

success come from decisions in the Marketing and Operations areas
# and of course )hat the competition does&'

Assuming your sales forecasts are B??@ accurate #hard to do&, you
can get a good idea of )hat the effects of your decisions )ill $e $y
examining the ,orecaste .or proforma/ financial statements for the
next quarter'

!esults in periods $eyond the next quarter are more difficult to predict
and )ill depend to a large extent on your long3term plans, ho) )ell they
are carried out and )hat the competition does'
"inancial >uiEEes and $odule
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