Pop-up Exercise: WHY IS ACCOUNTING IMPORTANT? 1. Accounting is the official business language. 2. Important life-skill (T-shaped people)

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1 Copyright 214 by the Board of Trustees of the Leland Stanford Junior University and Stanford Technology Ventures Program (STVP). This document may be reproduced for educational purposes only. AUTUMN 214 E145 TECHNOLOGY ENTREPRENEURSHIP ACCOUNTING WORKSHOP DIMITRE DIMITROV Popup Exercise: WHY IS ACCOUNTING IMPORTANT? 1. Accounting is the official business language 2. Important lifeskill (Tshaped people) 3. Storytelling with numbers 4

2 BASIC FINANCIAL STATEMENTS Income Statement Net Income (Profit) = Revenues Expenses Balance Sheet Assets = Liabilities + Equity Cash Flows Statement (Classification of Cash) Operating Financing Investing Activities 3 BASIC ACCOUNTING PRINCIPLES Generally Accepted Accounting Principles (GAAP) The accounting rule book on how to create financial statements Accrual vs. Cash Accounting The timing of when revenue and expenses are reported Cash Basis Accrual Basis

3 EVOLUTION OF ACCOUNTING Basic Financial Statements Optimum Tax Structure Full Financial Statements Convert Cash to Accrual ERP Accounting System Company Auditors & Internal Controls Popup Exercise: WHAT IS STANFORD S BIGGEST SOURCE OF REVENUE? A) Student Tuition Income B) Investment Income C) Sponsored Research D) Health Care Services (Stanford Hospital) E) Gift Revenue 6

4 INCOME STATEMENT Reports the economic results of a company over a time period. It shows the derivation of earnings or losses. Income Statement $M % of Rev + Revenues (Sales) Cost of Revenue (product cost) = Gross Profit Sales and Marketing General and Administrative Research & Development = Operating Income (EBIT) + Interest Income (expense) Net = Net Income before Taxes Income Tax Provision Extraordinary Items = Net Income (Profit) (.7) % 77% 23% 7% 5% Net Income = Revenues Expenses (Rev>Exp) Net Loss = Revenues Expenses (Rev<Exp) 7 INCOME STATEMENT COMPARISON HP ($B) Google ($B) WalMart ($B) + Revenues or Sales Cost of Revenue = Gross Profit SG&A* Research & Development Depreciation and Amortization = Operating Income + Other Income / Expenses Net + Interest Income (expense) Net = Net Income before Taxes Income Tax Provision = Net Income (Profit) Gross Margin: HP: 23% Google: 65% WalMart: 25% Operating Margin: HP: 7% Google: 31% WalMart: 6% Profit Margin: HP: 5% Google: 25% WalMart: 3% (.7) (2.3) *SG&A = Selling, General and Administrative Expenses Low Margin High Margin Low Volume (avoid this quadrant) BMW High Volume Amazon Apple

5 INCOME STATEMENT ANALYSIS + Revenues or Sales Cost of Revenue = Gross Profit Selling & Marketing Cost General and Administrative Research & Development = Operating Income + Other Income / Expenses Net + Interest Income (expense) Net = Net Income before Taxes Income Tax Provision = Net Income (Profit) Gross Margin 213: Facebook: 76% Angie s List: 72% Operating Margin 213: Facebook: 35% Angie s List: % Profit Margin 213: Facebook: 19% Angie s List: % Facebook ($M) (56) (51) Angie s List ($M) (31) (2) (33) (33) (51) (2) (53) (53) Popup Exercise: WHAT % OF COMPANIES DO YOU THINK GO BANKRUPT WITHIN THE 1 ST YEAR OF ACHIEVING A RECORD SALES YEAR? 5%

6 CASH FLOW STATEMENT Cash Flows Statement Operating Financing Investing (Income statement) (Balance Sheet) (Balance Sheet) Cash Receipts from: Customers Cash Paid for: Inventory Salaries Marketing R&D Administrative Costs Cash Receipts from: Borrowing Issuance of Stock Cash Paid for: Repayment of Loans Repurchase of Stock Dividends Cash Receipts from: Sale of Property Sale of Equipment Sale of Investments Cash Paid for: Purchase of Property Purchase of Equipment Purchase of Investments 11 BURN RATE Ex. Period 12 months; Revenues =$2M, Expenses $6.8M; Capital Remaining $1M What is the cash burn rate? How many month s of runway? $2M $6.8 = $4.8M $4.8/12 = $4K per month $1M/$4K = 25 months or runway 2

7 BALANCE SHEET Assets = Liabilities + Equity What the company owns (used to generate income) Creditors Shareholders (Owners of Company) How the ownership of assets was financed (by third parties or by the owners) Popup Exercise: WHAT IS STANFORD S BIGGEST ASSET? A) Investments B) Plant & Buildings C) Works of Art D) Cash & Cash Equivalents E) The Students

8 BALANCE SHEET ACCOUNTS A snapshot of the investing and financing activities of a firm Current Assets (liquid in less than a year) Cash Accounts Receivable Inventories Current Liabilities (payable in less than a year) Accounts Payable Salaries Payable Income Taxes Payable Fixed Assets Property, plant and equipment LongTerm Liabilities (bonds issued, bank loans) Short Term Debt Other Assets Intangibles Investment Securities Shareholders Equity Common Stock Retained Earnings Total Assets = Total Liabilities + Shareholders Equity BALANCE SHEET COMPARISON Assets Cash Accounts Receivable Inventories Prepayments Other Current Assets Total Current Assets: Property, Plant and Equipment Intangible Assets Other Long Term Assets Total Assets: Liabilities and Shareholders Equity Accounts Payable Notes Payable Accrued Expenses Other Current Liabilities Total Current Liabilities Long Term Debt Other Noncurrent Liabilities Total Liabilities Shareholders Equity Total Liabilities and Shareholders Equity.. Walmart Cisco Genentech

9 BALANCE SHEET ANALYSIS Assets Cash Accounts Receivable Inventories Prepayments Other Current Assets Total Current Assets: Property, Plant and Equipment Intangible Assets Other Long Term Assets Total Assets: Liabilities and Shareholders Equity Accounts Payable Notes Payable Accrued Expenses Other Current Liabilities Total Current Liabilities Long Term Debt Other Noncurrent Liabilities Total Liabilities Shareholders Equity Total Liabilities and Shareholders Equity.. Walmart Cisco Current Ratio: WalMart: Current Ratio:.9 Current Cisco: 2.4 Assets Current Liabilities Inventory Turnover: Inventory WalMart: Turnover: 7.8 Cisco: Cost of 9.5 Sales Current Inventory Accounts Receivable Collection Accounts Receivable Period: WalMart: Collection.1 Period: Accounts Cisco:.11 Receivable Sales Accounts Payable Collection Accounts Period: Payable WalMart: Collection.11 Period: Account Cisco:.6 Payable Cost of Sales Debt to Assets: WalMart: Debt to Assets: 59% Cisco: Total 41% Debt Total Assets THANK YOU! E145:SESSION 2 1/2