AAUP 2017: "Finances for Everyone"

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

AGENDA
Introduction
Accounting Basics and Definitions
The Income Statement
The Balance Sheet
Common Accounting Transactions
Questions and Answers

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.”

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.

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.

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.

T-Accounts
Provide a visual representation of a ledger account for
purposes of analyzing transactions.

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

Liability & Equity T-Accounts
Rules for Liability & Equity
Accounts
• Increased on the credit side
(right side).
• Decreased on the debit side (left
side).
the increase or credit side.
Liability/Equity Account
Debit
-
Decrease
Side
Credit
+
Increase Side
Normal
Balance

Income T-Accounts
Rules for Income Accounts
• Increased on the credit side
(right side).
• Decreased on the debit side (left
side).
the increase or credit side.
Income Account
Debit
-
Decrease
Side
Credit
+
Increase Side
Normal
Balance

Expense T-Accounts
Rules for Expense Accounts
• Increased on the debit side (left
side).
• Decreased on the credit side
(right side).
the increase or debit side.
Expense Account
Debit
+
Increase Side
Normal
Balance
Credit
-
Decrease
Side

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.

AGENDA
Introduction
Accounting Basics and Definitions
The Income Statement
The Balance Sheet
The Cash Flow Statement
Questions and Answers

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

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.

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.

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.

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.

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)

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.

3 Parts of the Balance Sheet
Assets =
Liabilities +
Capital / Equity

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

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)
= +

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
ASSETS LIABILITIES CAPITAL / EQUITY
= +
• Exhibit Expenses
• Maintenance
• Editorial Stipend

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
ASSETS LIABILITIES CAPITAL / EQUITY
= +

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 

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.

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

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

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

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

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

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

Pay compositor $2,500 for typesetting project.
Transaction 4
Debit
+
$2,500
Work-In-Process
Credit
-
$2,500
Cash

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

Warehouse receives the 3,000 copies from the printer.
Transaction 6
Credit
-
$13,000
Work-In-Process
Debit
+
$13,000
Finished Goods Inventory

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
Income Statement

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

Marketing pays $2,500 for ad.
Transaction 8
Debit
+
$2,500
Marketing Expense
Credit
-
$2,500
Cash
Income Statement

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

Transaction 9a
Debit
+
Accounts Receivable
Credit
-
$1,300
Postage Income
Asset Account
Income Statement
Income Account

Transaction 9b
Credit
-
$8,750
Debit
+
$8,750
Cost of Goods Sold
Asset Account
Income Statement
Expense Account

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

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
Credit
-
$1,750
Cost of Goods Sold
Asset Account
Income Statement
Expense Account

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
Debit
+
$812
Cost of Goods Sold
Asset Account
Income Statement
Expense Account

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

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
Debit
+
$1,170
Cost of Goods Sold
Asset Account
Income Statement
Expense Account

200 copies are pulped. Inventory value for copies pulped is ($3.00-$1.16)=
$2.34/copy x 200 = $468.
Transaction 13
Credit
-
$468
Debit
+
$468
Cost of Goods Sold
Asset Account
Income Statement
Expense Account

Pay author royalties - $33,000 net sales x 7.5% = $2,475.
Transaction 14
Credit
-
$2,475
Debit
+
$2,475
Royalty Expense
Asset Account
Income Statement
Expense Account

Pay author royalties - $33,000 net sales x 7.5% = $2,475.
Write-off balance of unearned advance.
Transaction 14a
Credit
-
$25
Debit
+
$25
Royalty Expense
Asset Account
Income Statement
Expense Account

Collect $34,000 from customers.
Transaction 15
Debit
+
$34,000
Cash
Credit
-
$34,000
Accounts Receivable

Pay fulfillment vendor $3,500 for services.
Transaction 16
Credit
-
$3,500
Cash
Debit
+
$3,500
Fulfillment Expense
Asset Account
Income Statement
Expense Account

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

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

Library purchases subscription to a quarterly journal for $100.
Transaction 18
Debit
+
$100
Cash
Credit
+
$100
Deferred Revenue
Asset Account Liability Account

Journal issue mails – recognize income for one issue.
Transaction 19
Debit
+
$25
Deferred Revenue
Credit
+
$25
Subscription Revenue
Asset Account
Income Statement
Income Account

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) 
Balance Sheet - June 30, 2017

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)

AAUP 2017: "Finances for Everyone"

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AAUP 2017: "Finances for Everyone"