Austin Community College

1. Austin Community College Accounting Department Presents Math for Accounting: Financial Concepts

2. Examples • Financial accounting math concepts

3. Actual Accounting Examples Some of the concepts may be new you. Don’t worry – you will cover these in detail. For now – let’s focus on the math concepts.

4. Tools Use your calculator Print the narrative

5. Depreciation • Applies to assets: • used in business • expected to benefit the business for more than one year • Represents the allocation of cost over the life of the asset $ $ $ $ $

6. Units of Output Method Allocate cost based on output miles driven machine hours copies made

7. Units of Output Method Facts: Cost of Photocopier: $60,000 Estimated total copies: 2,000,000

8. Computation Cost Estimated Copies Depreciation per copy $60,000 2,000,000 3 cents or $0.03 per copy

9. $0.03 per copy -- Uses • Allocate the cost of the photocopier • Based on actual copies made • Determine the cost of making one copy • External – setting the selling price • Internal – developing a budget and recording depreciation

10. Current Ratio • Measure of liquidity • How quickly can a company pay its current debt • Amounts due within one year

11. Current Classified Balance Sheet provides data Current Assets Cash Accounts Receivable Merchandise Inventory Current Liabilities Accounts Payable Salaries Payable Rent Payable

12. Current Ratio Current Assets $500,000 Current Liabilities $250,000 = 2 Interpretation: For every $1 of current liabilities, the company has $2 of current assets.

13. Gross Profit Net Sales (Cost of Goods Sold) Gross Profit • Amount of each net sales dollar • Available to cover operating costs • Provide for net income

14. Gross Profit Margin Net Sales (Cost of Goods Sold) Gross Profit • The relationship of Gross Profit to Net Sales • Decimal • Percentage

15. Gross Profit Margin Net Sales $200,000 100% Less: Cost of Goods Sold 125,000 Gross Profit $ 75,000 37.5% 75,000/200,000 = .375 .375 X 100 = 37.5 %

16. Sales Tax • Sales Tax Rate: 8.25% • Gross Taxable Sales: $96,000 What is the total amount due from customers?

17. Sales Tax 8.25 % = .0825 96,000 X 8.25 % = 7,920 OR 96,000 X .0825 = 7,920 $96,000 + $7,920 = $103,920

18. One Step Computation 96,000 X 108.25 % = 103,920 OR 96,000 X 1.0825 = 103,920

19. What If • Sales Tax Rate: 8.25% • Amount Collected: $103,920 What is the total amount of taxable sales?

20. What If Taxable Sales 1 +Sales Tax Rate Amount Collected ? X 1.0825 = 103,920 ? X 1.0825 = 103,920 1.0825 1.0825 Taxable Sales = 96,000

21. Employer Payroll Tax • Taxes are withheld from employees’ wages • Employers also have to pay taxes • One common employer payroll tax • FUTA – .8% of the first $7,000 • You will cover additional taxes later.

22. Federal Unemployment Tax (FUTA) Jones Inc - First Quarter 2008 Total payroll: $15,400 FUTA: .8% of the first $7,000 of wages Compute the FUTA liability

23. Federal Unemployment Tax (FUTA) .8% is less than 1 % To convert .8% to a decimal: Move the decimal two places to the left .8% .008

24. Federal Unemployment Tax (FUTA) 7,000 X .008 = 56 1% is .01 7,000 X .01 = 70 Thus we know the answer must be less than 70. 70 X 80% = 56

25. Purchase Price Allocation • A corporation purchases land and building for $850,000. • Tax Appraisal – Land $ 270,000 Building $ 650,000 Determine the amounts to be allocated to the land and building

26. Purchase Price Allocation $ 270,000 29.3 % 70.7 % $ 650,000 $920,000 100 % 270/920 X 100 = 29.3478260869565 650/920 X 100 = 70.6521739130435

27. Allocation of Purchase Price $ 249,050 850,000 X .293 600,950 850,000 X .707 $ 850,000 249,050 + 600,950

28. Summary • Proper Tools • Calculator, Excel, Pencil and Paper • Reasonable answer • Practice • Help • Instructor/Tutor • Classmates, friends, family