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AAUP 2017: "Finances for Everyone"

AAUP 2017: "Finances for Everyone"

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Facilitator: Robbie Dircks, Associate Director & CFO, University of North Carolina Press
Panelists: Mike Bieker, Director, University of Arkansas Press; Dan Wackrow, Chief Financial and Operating Officer, Harvard University Press

Facilitator: Robbie Dircks, Associate Director & CFO, University of North Carolina Press
Panelists: Mike Bieker, Director, University of Arkansas Press; Dan Wackrow, Chief Financial and Operating Officer, Harvard University Press

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AAUP 2017: "Finances for Everyone"

  1. 1. Finances for Everyone AAUP 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
  2. 2. AGENDA Introduction Accounting Basics and Definitions The Income Statement The Balance Sheet Common Accounting Transactions Questions and Answers
  3. 3. AGENDA Introduction Accounting Basics and Definitions The Income Statement The Balance Sheet Common Accounting Transactions Questions and Answers
  4. 4. 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.”
  5. 5. 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.
  6. 6. 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.
  7. 7. 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.
  8. 8. T-Accounts Provide a visual representation of a ledger account for purposes of analyzing transactions.
  9. 9. 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 Side Normal Balance Credit - Decrease Side
  10. 10. 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 Side Normal Balance
  11. 11. 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 Side Normal Balance
  12. 12. Expense T-Accounts Rules for Expense 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. Expense Account Debit + Increase Side Normal Balance Credit - Decrease Side
  13. 13. 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.
  14. 14. AGENDA Introduction Accounting Basics and Definitions The Income Statement The Balance Sheet The Cash Flow Statement Common Accounting Transactions Questions and Answers
  15. 15. 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
  16. 16. 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.
  17. 17. 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.
  18. 18. 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 necessarily coincide with the actual receipt and disbursement of cash. The income statement measures profitability, not cash flow.
  19. 19. 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.
  20. 20. Gross Sales 2,816,238 Returns (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 Expenses Editorial 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 12,084 Total 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)
  21. 21. AGENDA Introduction Accounting Basics and Definitions The Income Statement The Balance Sheet The Cash Flow Statement Common Accounting Transactions Questions and Answers
  22. 22. Balance Sheet
  23. 23. 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.
  24. 24. 3 Parts of the Balance Sheet Assets = Liabilities + Capital / Equity
  25. 25. 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
  26. 26. 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) = +
  27. 27. 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
  28. 28. 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 = +
  29. 29. 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 = +
  30. 30. Example University Press Balance Sheet June 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 
  31. 31. 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.
  32. 32. 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
  33. 33. 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
  34. 34. 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 Sheet June 30, 2016
  35. 35. AGENDA Introduction Accounting Basics and Definitions The Income Statement The Balance Sheet Common Accounting Transactions Questions and Answers
  36. 36. 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
  37. 37. 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
  38. 38. 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
  39. 39. 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
  40. 40. 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
  41. 41. 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
  42. 42. 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
  43. 43. 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
  44. 44. 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
  45. 45. 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 Account Income Statement Income Account
  46. 46. 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 Account Income Statement Income Account
  47. 47. 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 Account Income Statement Expense Account
  48. 48. 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 Account Income Statement Income Account
  49. 49. 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 Account Income Statement Expense Account
  50. 50. 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 Account Income Statement Expense Account
  51. 51. 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 Account Income Statement Income Account
  52. 52. 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 Account Income Statement Expense Account
  53. 53. 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 Account Income Statement Expense Account
  54. 54. 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 Account Income Statement Expense Account
  55. 55. 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 Account Income Statement Expense Account
  56. 56. 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
  57. 57. Common Accounting Transactions for Publishers Pay fulfillment vendor $3,500 for services. Transaction 16 Credit - $3,500 Cash Debit + $3,500 Fulfillment Expense Asset Account Income Statement Expense Account
  58. 58. 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
  59. 59. 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
  60. 60. 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
  61. 61. Common Accounting Transactions for Publishers Journal issue mails – recognize income for one issue. Transaction 19 Debit + $25 Deferred Revenue Credit + $25 Subscription Revenue Asset Account Income Statement Income Account
  62. 62. 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
  63. 63. 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)
  64. 64. AGENDA Introduction Accounting Basics and Definitions The Income Statement The Balance Sheet The Cash Flow Statement Common Accounting Transactions Questions and Answers

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