Statistics and Risk Management

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1 Statistics and Risk Management Money Flow Video URL: jukebox.esc13.net/untdeveloper/videos/money%20flow.mov Vocabulary List: Measure of Central Tendencies: The measurement of a relationship between two variables. Regression: The technique of predictive relationships based upon correlational data. Sole Proprietor: Unincorporated business with one owner; the owner assumes personal liability. Corporation: A group of individuals legally established as a single entity. Nominal Data: A level of measurement that includes categorical data, such as gender, location, or age. Ordinal Data: A level of measurement that includes data that can be ranked or ordered, such as the responses to a rating scale. Interval Data: A level of measurement that includes data than can be measured in equal intervals, but does not have a true zero point, such as time or temperature. Ratio Data: A level of measurement that includes data with a true zero point; examples are measurements of height or weight. Return on Investment (ROI): A ratio between the amount of money invested and the amount of profit or loss on that investment. Gross Profit: The difference between the net sales and the cost of goods sold. Net Profit: The difference between the total revenue and total costs. Asset: Any resource than has an economic value. Liability: Any financial obligation from a past transaction that affects assets. Net Worth: The value of assets minus liabilities. 1

2 Resources: We Are Not Ants It is never too early to learn about the value of money and how to budget and save. The earlier you can teach a child about earning versus paying, the better prepared they will be to manage their own money. Learn about teaching kids about money, personal finance, allowances, and teaching to kids earn money and start their own businesses. Basic Cash Flow Statement This video by Khan Academy features a detailed explanation of a basic cash flow statement. The video uses an example problem to explain how to find the changes in a business s cash flow from one month to another via a statement. Analyzing Operating Statements These ten tips from Young Associates explain how one should go about analyzing an organization s operating statement. Each general step is followed by an in-depth explanation of how that step of the analysis should be approached. 2

3 Money Flow Practice Test TRUE and FALSE: 1. A Sole Proprietor will have unlimited liability. A. True B. False 2. A Sole Proprietor will have earnings taxed at a corporate rate. A. True B. False 3. The Income statement shows tangible assets, liabilities and net worth of an organization. A. True B. False 4. Managers do not need to read the financial statements and reports of a company. A. True B. False 5. Gross income is calculated by subtracting your Cost of Goods Sold from your Sales. A. True B. False 6. If a company s expenses are more than their revenue, they have a net loss. A. True B. False MATCHING: A. LIFO B. Book keeping C. FIFO D. Financial Accounting E. Managerial Accounting 7. This is an inventory valuation method which assumes the items purchased first by a company are the first items to be sold. 8. Refers to industry accepted accounting practices used for public accountability. 9. This is an inventory valuation method which assumes the items purchased last by a company are the first to be sold. 10. The collection of business operations data performed on an hourly/daily basis. 11. Company specific and usually used internally to identify problems 3

4 Money Flow Practice Test MULTIPLE CHOICE: 12. This shows the operating income and expenditures of a company. A. Balance Sheet B. Income Statement C. General Ledger D. Journal Entries 13. Financial statements are read by which of the following? A. Vendors B. Owners/Investors C. Government D. All of the above 14. is calculated so that management can understand what the sales of products generate in the area of profit. A. Sales B. Cost of Goods Sold C. Inventory D. Gross Profit 15. are the funds received from the normal products and services provided by an organization. A. Sales B. Profit Margin C. Gross Income D. Inventory 16. Cash, inventory and equipment can all be found on the balance sheet in what section? A. Liabilities B. Assets C. Stockholder s Equity D. None of the above 17. Special Purpose Entity s, or SPE s, are commonly used to. A. Show debt B. Show ownership C. Obscure relationships between D. None of the above different entities which are related to each other 18. A financial statement showing the operations of a business over a period of time is known as an income statement, operating statement or a and statement. A. Debit, Credit B. Gains, Losses C. Profit, Loss D. None of the above 19. The amount of profit generated by a firm in relation to the amount invested by the owners. A. Profit margin B. Sales C. Investment D. Return on Investment 20. Larger corporations need to project what they have to spend. For this they use a. A. Budget B. Balance Sheet C. Income Statement D. Sales projections 4

5 Money Flow Practice Test Key 1. A 2. B 3. B 4. B 5. A 6. A 7. C 8. D 9. A 10. B 11. E 12. B 13. D 14. D 15. A 16. B 17. C 18. C 19. D 20. A 5

6 9.1a Financial Accounting Principles Whether you work for an organization or have your own business it is important to understand business structures and how businesses operate. If you would want to start and own a business what kind of business structure would you start with. Why would you choose that type of structure? Why would you not select the other type of structures? Would you change the structure as years pass if your business was very successful and grew? What would you change it to (or NOT) and why? Answers will vary per student, but look that they have made an effort to fulfill the requirements of this assignment any various levels. You may ask yourself does this student demonstrate the ability differentiate between sole proprietor and corporation and do the really understand the difference between S and C type corporations. Did they mention profit and not-forprofit entities? 6

7 9.2a Procurement Inventory Secondary only to initial financing, procurement procedures are very important to the implementation of a business plan. Identify a business you find interesting. List as many major acquisitions as you think will be essential to start this type of business. You want to hit the ground running. You have the money and want to spend it wisely. What will it take? 7

8 9.2b Procurement Inventory Managing inventory shrinkage is a challenge for any business. Things just have a way of just walking off. Your company has priced all of their products at 50% mark up. That means if they bought a widget for $24.50, they set the sales price at $48.95 which is about $10.00 less than the manufacturer s suggested resale price of $ Your company started out this year with a cost of $154, in Inventory in the warehouse. They ended the year with a cost of $108, of Inventory. The sales for the year were $2,567, Company records show the year s purchases of stock that went toward sale amounted to $1,345, Does this company have a serious issue with inventory shrinkage or loss? How much in inventory cost dollars is missing. How many dollars in sales are missing? 8

9 9.3a Financial Data Collection What is meant by SUCCESS BREEDS SUCCESS? How does this relate to financial reports and those persons/entities who might review such reports? 9

10 9.4a Financial Operating Statements Create a Spreadsheet Revenue Statement with this set of Full Year figures. Revenue from Sales: $2,456,098 Misc. Income: $ Cost of sales: $1,234,745 Payroll: $590,890 Taxes: $196,487 Rents: $72,000 Other Expenses: $100,000 Trucks and Equipment bought at $2,345,678 and amortized at 8.333% per year. Show Titles, Summaries, Gross Profit, Net Profit and try to include some helpful ratios or percent figures. 10

11 9.5a Financial Balance Sheet Create a Spreadsheet Financial Statement with this set of End of Year figures. Cash Petty 2,000 Sales Tax Payables 16,789 Cash Checking 42,010 Payroll Tax Payables 17,208 Account Receivables 89,954 Supplier Accounts 64,236 Payable Utility Deposits 4,000 Loans Payables 703,687 Inventory 123, Equipment (Basis) 2,345, Accumulated Depreciation 1,567, You balance sheet should show the owner equity (net-worth) of a sole proprietorship or retained earnings for a corporation. Show totals for assets and liabilities. Show subtotals for short-term and long-term assets and liabilities. 11

12 9.6a Cash Flow Analysis Create a Cash Flow Statement using a Spreadsheet from the information listed below. XYZ Company made $2,000,000 last year. However, they wanted to know if they could pay out $500,000 in dividends to the stockholders. The cash they had available at the beginning of the year was $789,000. They will not allow the dividends to lower the cash account below $200,000. $1,000,000 of their sales was on credit for the year. They received $890,000 on payment for their Account Receivables. They made payments of $225,000 for equipment. The depreciation expense for the same equipment was $200,000. Can they pay the $500,000 in Dividends? What could they pay out in Dividends and still keep the cash account at $200,000? 12

13 9.6b Cash Flow Analysis Use the 9.0ss_IRR_NPVWorksheet for this assignment You have a settlement from a car wreck where you will receive $ per month for the rest of your life. Your life expectancy is 20 years. A TV Quick Cash company has offered you $150,000 right now for your settlement and they will collect the $ a month (no COLAS). Is that a good deal for you? Explain your reasoning. 13

14 9.7a Dividend Capital Gains ABC Company has 100,000 shares outstanding. They decide to pay $1.00 per share to the stockholders. This is not a public company and all of the stockholders paid $25.00 per share. What will be this year s ROI or return on investment with this soon to be declared $1.00 dividend? If the company goes public and the investors get the chance to sell their shares for $45.00 each what will be the tax per share if the capital gains tax is 15%? 14

15 9.8a Operations Budgeting Your parents have a yearly combined Gross income of $121, They have the following expenses: House payments of $21,600 Car payments of $8000 Health-dental costs of $6900 Groceries of $ Various Insurances totaling $1200 Motor Fuels for $8000 Utilities of $3789 Cell phone and Internet service of $2800 Cable TV at $ Clothing at $ Entertainment and vacations at $1500 They contribute 10% into a tax deferred college and retirement account. Finally they pay a 25% income tax-rate on their gross income. Using a Spreadsheet, compute their discretionary income if they have any. 15

16 9.9a Operations Budgeting The ABC Company wants to know if it is better to lease a fleet of 20 trucks or buy them outright. Each truck, as they want them equipped, will cost $82, with sales taxes. They can lease each one of them for 10 years at $ a month. At the end of 10 years, they can buy them for $10,000 each. If they buy the trucks outright they have secured a full pay-back loan at 6% over a 10 year period. They will fully depreciate the trucks 10% per year with an estimated recoverable value of $15,000 each at the end of the 10 year loan payback. Use a loan repayment calculator (search on web). Which do you think is the best deal for ABC? Explain your reasoning. Have some calculations to back up your claim. 16

17 Explore Activity: Virtual Business In several of the lesson assignments for this section. you came up with business ideas and models. Now you have an opportunity to try out some of your ideas. The MIT Sloan Management School has produced an on-line game called Platform Wars in which you run a video game company competing against other game console companies (think Sega vs. Sony vs. Nintendo). You make various financial decisions and then see those decisions in action with a yearly report (one turn = one year). To access the game go to: Start with the Student Instructional Video (it s about 25 minutes). Then you can proceed with the game. You can either play as an individual (no registration required just create a screen name) or as part of a class if your teacher chooses this option for your class. Be sure to keep annual records of your decisions so you can try them out again to see if what you did was just a fluke or if your strategies really work. Note there is an option to copy data to the clipboard so you can then paste into a spreadsheet or word processor. Make a presentation of your most successful strategy to the class. 17

The Art of Budgeting

Teacher's Guide $ Lesson Three The Art of Budgeting 04/09 the art of budgeting websites Effective money management requires a step-by-step plan for saving and spending. Simply, it demands a good budget.