OBJECTIVES:

How to
a) apply and interpret financial statements
b) use other parts of the system for analysts
c) use the system as a base for budget and cost analysis

MATERIAL AIDS:

Aids 30, 31, 32

PROCEDURE:

A month or two after the students have completed sets of financial statements, give them a class on the use and application of these statements and the rest of the system.

1.

The Profit and Loss Statement - organized to facilitate marginal utility analysis.

1.1 Demonstrate the effect of variable costs upon sales revenues.
a) Show how "costs of sales" and "cost of goods sold" affect marginal utility
b) Labor costs generally, may be treated as a fixed cost. Only treat it as a variable coat when it truly (in accordance with the accounting data, not intuition) shows a marked monthly variance reflected in production changes. To match labor and inventory costs is extremely complicated and we suggest the fixed coat method, Any variance is averaged out over time.

1.2 Demonstrate how marginal utility must cover fixed costs to have profits
a) The salary of the owner (or owners) is included among the fixed costs for psychological reasons.
- We never want him to see profits unless they are over what he personally takes out of the business.
- This way he will treat his personal expenses as a cost and perhaps thinks twice before spending money he knows 0a company needs.
- To convince him he should budget his expenses in a fixer weekly salary and live within it.
b) If sales taxes are paid and do not really have a relationship to sales, they should be treated as a fixed coat.

2.

The Balance Sheet

2.1 Examine the relation between Assets, Liabilities, and Capital and the effect of profit or losses.

2.2 Explain current assets, current liabilities, and the concept of Working Capital.
a) Working Capital is included in our Balance Sheet.
b) Show how the purchase of machinery, payment of long term debt, and monthly losses affect Working Capital. Aids 30, 31.
c) Explain difference between liquidity and Working Capital.

3.

Other Analytical Aspects of the System.

3.1 Control of Inventories and Receivables "If the company has Working Capital but no cash on hand, it has probably invested too much in inventories, has a large amount receivables with a slow rotation, or both".
a) Explain inventory control and suggest simple ways to construct systems (Aid 32).
b) Demontrate how to speed-up receivables rotation.
- the Individual Account Section can serve as a Kardex if payment dates are included in the entries.

3.2 The Book of Accounts
a) The analysis of all monthly accounts and costs shows seasonality as well as changes in costs.
b) Facilitates historical analysis.

4.

The Focus of Class Instruction

4.1 The owner should evaluate his own company as if he were planning to purchase it.

4.2 Pointing out weak points and strong points the owner should present his analysis to the group for discussion.

4.3 Create a fictiticus company if you the instructor, see that the owners would prefer not to discuss their companies' problems in front of others.

5.

Other Farms of Analysis

5.1 Cash Flow Systems . . all the information is provided

5.2 Budgetary Control ... based upon historical cat. and cash flow projections

5.3 Variable Cost Analysis of Products,
a) Isolate monthly Fixed Costs
b) Assign monthly variable costs of raw materials and sales costs to each product and compare them to sales figures ... this comparison will show the break-even point for each product.
c) The percentage of total sales per product' the sales coat percentage per product and the cost of goods sold percentage per product are all one needs to establish an elementary break-even point and cost analysis Remember that this does not take into account a very important variable.. the time of production! One must take the appropriate time measurements.