DECA Competitive Events: Financial Analysis

Discuss legal considerations in the finance industry.

Financial services businesses are required to protect the privacy of the consumer information they collect. They must give consumers privacy notices that explain the company's information-sharing practices. Customers of a financial services business have the right to limit the sharing of their personal information. Additionally, information security is an important consideration in the finance industry, as companies are required to keep customer information secure.

Explain the nature of balance sheets.

A balance sheet is a summary of a business' assets, liabilities, and owners' equity. Assets are anything of monetary value that you own and are classified as current or fixed. A current asset is cash or anything that can be converted into cash in a year. A fixed asset is something used over a period of time to operate your business, like property and equipment. Liabilities are the amounts that a business owes and are classified as current or long-term. A current liability is a debt the business must pay back during the upcoming year. A long-term liability is a debt that is due after 12 months' time, such as a long-term loan. Owners' equity (or net worth) is the amount of ownership interest in the business. The difference between assets and liabilities equals the owners' equity.

Discuss how to read and reconcile bank statements.

A bank statement is a document showing activity on your account over the previous month, including a beginning and ending balance and all inflows and outflows during that time. Bank account reconciliation is when you account for the differences between the bank statement and your records (usually your checkbook register). The balances may differ because you have written checks that have not yet cleared the bank, or perhaps because you have deposited money into your account after the bank statement was prepared. To reconcile your account, start by comparing the checks you have written with those listed on the bank statement. List any outstanding checks on the reconciliation form. Subtract the total amount of outstanding checks from the ending balance on the statement. Next, add any recent deposits not on the statement to the reconciliation form. Finally, subtract any fees and add any interest as found on your bank statement to your reconciliation form. Now you should find that the adjusted bank balance and the balance in your records is the same. If there is an error, report it to your bank.

Describe the nature of budgets.

A budget is a formal, written statement of expected revenue and expenses for a future period of time. To be effective, a budget should be evaluated periodically with actual income and expenses. Revenues may include cash sales, collections on accounts receivable, and other income. Expenses include purchases, insurance, taxes, payroll, and many other things. As part of budgeting, one should follow the following steps. Set goals and prioritize them. Estimate your income. Budget for unexpected events, fixed expenses, and for variable expenses. Record what you spend. Review your spending patterns and revise your goals as needed.

Describe the nature of cash flow statements.

A cash flow statement is a monthly plan that tracks when you anticipate that cash will come into a business and when you expect to pay out cash. One purpose of a cash flow statement is to determine whether you will have enough money to pay your bills on time. Another purpose is to secure a business loan, as most lenders will request at least a first- year cash flow statement. A cash flow statement itemizes how much cash you started with, what your projected cash expenditures are, and how and when you plan to receive cash. It also shows when you will need to seek out additional funds or when you will have additional cash remaining.

Identify types of currency.

A cash sale is any transaction in which the customer pays for the item with cash or a check. A check is a written document that authorizes the transfer of money to be drawn from a bank account to a person or business. Credit enables a business or individual to purchase goods and services in exchange for a promise to pay later. It is most helpful when consumers want to make major purchases. Customers are typically issued a credit card from a bank to make such purchases. Debit is a variation of credit. Consumers using a debit card authorize a seller to withdraw funds directly from the consumer's bank account at the time of sale.

Describe how to prepare bank account documents.

A checkbook register is a booklet that you fill out for all deposits and withdrawals from your checking account. Included are sections for the check number, date of transaction, description, payment amount, reconciliation, deposit amount, and new balance on the account. You will use the checkbook register to reconcile your bank statement when it comes. Writing a check involves writing the date, the name of the payee, the amount of the payment in numerals as well as in words, your signature, and a memo if you choose. When you are cashing or depositing a check made out to you, start by endorsing the check by signing the back of it. Fill out a deposit slip to give to the bank teller with your name and account number, along with the amount of the deposit. Also, be sure to record the amount of the deposit into your checkbook register.

Describe types of financial-services providers.

A commercial bank is an institution that offers a full range of financial services, such as checking, savings, and lending. A savings and loan association is a service provider that may specialize in savings accounts and mortgage loans, but now offers a wide range of services. Mutual savings banks specialize in savings accounts and mortgages. Credit unions are nonprofit institutions that are owned by its members. Traditionally, the members of a credit union have a common bond such as employment with the same company. Credit unions offer a full range of financial services. Non-deposit financial institutions include life insurance, investment, finance, and mortgage companies. Such companies specialize in their respective industry but may offer other financial services as well. Finance companies offer higher interest rates loans to individuals and businesses that cannot borrow elsewhere, often due to credit problems.

Describe how to develop a personal budget.

A personal budget is a plan for saving and spending your money based on your income and expenses. Start your budget by defining your needs and your goals, considering both short- and long-term goals. Write them down in a list, with a target date or time frame to reach them. Next you will need to prioritize your goals, arranging the items in order of importance. Then you must estimate your income and your expenses. In your income estimate, include your wages or salary but count only your net (take home) pay. Other sources of income might include tips, gifts, and interest earned on a bank account. Estimate your expenses in two categories—fixed and variable. Fixed expenses are usually the same amount each time you pay them. Variable expenses are those that vary each month. Once these steps are completed, you create your budget. You can transfer your estimated income and expenses to a paper or computerized budget form. Indicate your savings on the budget, as well—you may want to consider this a type of expense. As you compare your income to expenses, you should see if you have enough money coming in to pay all of your expenses. It is important to be honest and realistic when creating your budget, even if it means revising some things. Also, check your progress monthly and review your spending carefully so you know if you have to cut back your expenses or increase your income.

Explain the need for accounting standards.

All accountants follow the same set of rules to prepare financial reports. The Financial Accounting Standards Board issues rules referred to as generally accepted accounting principles (GAAP). These principles provide a way to communicate financial information in a form understood by those interested in the operations and financial condition of a business. Accounting reports are used by individuals outside the business as well as inside. Outside the business, investors, lenders, consumers, competitors, and government may be interested. Workers, union leaders, and management all may have a need to see and clearly understand a business' financial situation.

Describe the nature of income statements.

An income statement is a summary of a business' income and expenses during a specific period of time. Often called a profit and loss statement, it is used to calculate revenue, costs and expenses, and profit/loss. Income statements have several major parts: total sales, net sales, cost of goods sold, gross profit, operating expenses, other income/expenses, net profit/loss before taxes, and net profit/loss after taxes. Some of these figures must be estimated or projected, such as total sales and business expenses.

Describe the concept of insurance.

An insurance policy is a contract between a business or individual and an insurance company to cover risks. Business risks include economic risks, natural risks, and human risks. Insurance companies estimate the probability of loss due to risk and determine a rate to charge for the policy, called a premium. Property insurance is one common type of insurance, which covers loss or damage to buildings and equipment. Property insurance can be purchased to cover full replacement cost, automatic increase protection, and business interruption. Liability insurance is a form of insurance that protects against damages for which a business or individual may be liable, including injury or property damage to others.

Explain forms of financial exchange. (cash, credit, debit, electronic funds transfer, etc...)

Credit enables a business or individual to purchase goods and services in exchange for a promise to pay later. It is most helpful when consumers want to make major purchases, though it is often used for more common, less expensive items. Customers are typically issued a credit card from a bank to make such purchases. Debit is a variation of credit. Consumers using a debit card authorize a seller to withdraw funds directly from the consumer's bank account at the time of sale. A cash sale is any transaction in which the customer pays for the item with cash or a check. Other forms of retail sales transactions include layaway, on-approval, and cash-on- delivery (COD). Layaway means removing merchandise from stock and keeping it in a separate storage area until the customer pays. In an on-approval sale, an agreement is made permitting a customer to take merchandise home for further consideration before paying. A COD sale is a transaction that occurs when a customer pays for goods at the time they are delivered.

Explain the purposes and importance of credit.

Credit enables businesses or individuals to obtain products or money in exchange for a promise to pay later. Businesses use credit to buy materials and supplies from other businesses. Credit makes it possible for millions of people and companies to purchase goods and services who otherwise would not have the means to do so. By extending credit, businesses provide a purchasing incentive to customers, thus enhancing their sales revenue and supporting the overall economy.

Identify ways to demonstrate the wise use of credit.

Credit is a way to receive cash or goods now and pay for them later, most commonly through the use of a credit card or a loan. Before deciding to use credit, ask yourself if you can afford the item in the first place. Also, would it be better to use your savings instead of credit? Could your credit be put to better use in some other way? Or, should you put off the purchase for a later date? You must be certain that the benefits of making the purchase now on credit outweigh its costs, including fees and interest charges. There are many ways to use credit wisely. For instance, you may be able to combine several purchases into one, thus making only one monthly payment. You will likely need a credit card for major and expensive purchases. It is often safer, and more convenient, to use a credit card when shopping or travelling. The wise use of credit will allow you the opportunity to build a better credit history, which means you are seen as a reliable person to other lenders. When using credit, avoid the temptation to buy more than you can afford. Failing to repay a loan or credit card balance will damage your credit history, and could lead to you losing your property or source of income.

Discuss the role of ethics in finance.

Ethics are guidelines for good behavior, based on knowing the difference between right and wrong. Behaving ethically means being truthful, fair, open, and mindful of the law. Companies and their executives can now be held accountable for misinformation or improper recording of a company's financial situation. A company must keep an accurate, honest, and complete record of its accounting transactions. Finance professionals should be educated about insider trading and other unethical practices. They must refrain from misrepresenting the facts to achieve short-term goals. Confidentiality must be maintained with regard to clients' personal information as well as company information. Efforts must also be made to avoid conflicts of interest between employees and customers.

Explain the role of finance in business.

Finance is the function of business that pertains to money management. A financial plan is an important element of an overall business plan. Elements that pertain to the role of finance in a business include start up/equity financing, debt financing, and growth financing. Various financial statements, such as a balance sheet and income statement, provide a way to analyze a company's overall financial standing. Managing your business' finances will include planning for profits by forecasting sales, evaluating profit potential, controlling costs, and budgeting. Business financing also requires managing taxes and credit.

Explain how to set financial goals.

Financial goals are influenced by two main factors: the time frame in which you want to achieve your goals, and the type of need that inspires your goals. Goals can be short-term (usually one year or less to achieve), intermediate (two to five years), or long-term (more than five years). Also, some goals may happen every year, while others occur only occasionally. How you establish your financial goals may also depend on whether a goal you have set involves a consumable good that you would use up quickly, a durable good that lasts longer and usually costs more, or something intangible, such as your health or an education. Keep in mind that while setting financial goals, they should be realistic, specific, have a clear time frame, and should help you decide on what action to take.

Explain the concept of accounting.

Financial information for a business can be recorded, summarized, and reported in a variety of ways. The way in which information is kept and reported is determined by the size, type, and complexity of a business. Businesses should also consider the types of decisions that will be made when designing an accounting system. Types of information to be gathered include purchases, sales, expenses, and payroll. There are two basic types of accounting methods: cash and accrual. In the cash accounting method, income and expenses are recorded at the time the money changes hands. The accrual method of accounting records transactions at the time they occur even if no money changes hands at that time. Accounting records show changes and the current account balance of each asset, liability, and owners' equity account. The recording of debit and credit parts of a transaction is called double-entry accounting. A record summarizing the information relevant to a single item in the accounting equation is called an account. With every action, at least two accounts will change. A group of accounts is called a ledger. A form for recording transactions is called a journal.

Describe the need for financial information.

Financial information includes raw data, records, and reports. Consumers are essentially buying information when dealing with financial services providers; businesses rely on accurate financial information to make sound decisions. Financial services products are bought and sold based on information about costs, returns, and risks. Financial information is used to match company resources to its planned activities and to identify additional resources that may be needed or secured. Businesses use information to identify ways to reduce expenses and invest company assets. Also, information is used to forecast for future budgeting and growth, as well as to control and manage risk. Other pieces of information that are required include sales, inventory, operating systems, personnel costs, insurance expenses, tax liability, and profitability. In addition, information must be collected regarding external factors such as economic conditions, investment alternatives, and competition.

Explain legal responsibilities associated with financial exchanges.

Legally speaking, a sale is a contract in which ownership of goods transfers immediately from the seller to the buyer for a price. If the transfer of ownership will take place at a future date, it is called a contract to sell, rather than a sale. According to the Uniform Commercial Code (UCC), goods are tangible, movable personal property. Payment occurs when the buyer delivers the agreed price and the seller accepts it. The receipt of goods is when the buyer takes physical possession of the goods. A court may find that a contract is unconscionable, or grossly unfair to one party or another. In such a case, the contract may be voided or limited.

Describe the functions of money.

Money functions as a vehicle to pay for purchases, save for the future, and build wealth. Individuals and businesses pay for any number of purchases using cash, credit, checks, and debit forms of payment. Credit enables a business or individual to purchase goods and services in exchange for a promise to pay later. In addition to personal and business purchases, money is used to pay for government services through taxes. As a savings instrument, money may be set aside in a variety of ways in order to have security for the future or to have on hand later for a large purchase. Money can be used as an investment tool, as well. Stocks, bonds, mutual funds, and retirement accounts are ways that money can be invested in order to build wealth. Other types of investment vehicles include buying real estate, precious metals, and collectibles.

Explain the use of technology in accounting.

Most businesses use some type of accounting software to record and report their business transactions. Even when using an automated system, you still need to collect and keep your source documents and each business transaction must be separated into its debit and credit parts. Computerized posting to accounts is faster and eliminates accounting errors that a person might make doing it manually. Daily, weekly, monthly, and annual reports can be generated quickly and accurately. Software is also available for tax collection and reporting.

Explain the nature of financial needs.

One aspect of developing a financial plan is to know the difference between your needs and your wants. Furthermore, you need to prioritize your needs and wants as you set your financial goals. As you do so, keep in mind your attitude toward money and ask yourself if something is more important to spend money on now or to save for the future. Having choices with money comes with a cost and with risk. Opportunity cost is the trade off of giving something up when choosing one thing over another. Financial risks that you should consider include the risks of inflation, rising or falling interest rates, loss of income, and liquidity. Liquidity is the ability to convert assets into cash without loss of value.

Explain how to maintain financial records.

Organizing your financial records helps you plan and measure your financial progress, handle routine money matters, determine the money you have now and will have in the future, and make effective decisions about saving and investing. Documents to manage include bank statements, paystubs, ownership certificates, tax forms, etc. Records may be maintained in a file cabinet, a safe-deposit box, and/or on a computer. File cabinets are useful for maintaining printed documents and records, and should be organized by type with labeled folders. Items that are difficult to replace, such as car titles and birth certificates, should be kept in a safe-deposit box. These can be rented at a bank. Alternatively, you may choose to purchase an in home fire safe for such documents. Computer programs are an excellent way to create and manage a personal budget, pay bills online, or generate financial documents that can be stored electronically.

Explain the nature of risk management.

Risk management is a plan for protecting yourself and your property as well as reducing financial losses caused by perils, hazards, or negligence. Personal risks, such as loss of income or life due to illness, disability, or unemployment are among the most common risks. Property risks are also common. Liability risks are losses caused by negligence that leads to injury or property damage. Managing risk starts with risk avoidance or avoiding a risk. You cannot avoid all risks, but you can reduce their likelihood in many cases by taking preventative measures (risk reduction). Sometimes you need to take on responsibility for a risk, such as when you know the possible loss will be small. This is called risk assumption. The most common way to deal with risk, especially large risks, is to shift it, usually to an insurance company. Risk shifting takes the financial burden of a risk and places it elsewhere for a fee.

Explain the nature of tax liabilities.

Taxes are payments you make to the government for services they provide. Tax liability is the total amount of taxes owed. Effective planning can reduce your tax liability, thus paying your fair share while taking advantage of tax benefits. The types of taxes include income, Social Security, sales, wealth and property taxes, as well as user fees. One can use several strategies to reduce tax liability. First, it is important to understand the current tax laws and how they affect you and your financial goals. Second, maintain complete and accurate tax records. Finally, learn and understand the types of taxes and how to make sound financial decisions, keeping taxes in mind.

Discuss the role of ethics in accounting.

The AICPA Code of Professional Conduct outlines a number of rules regarding ethics in accounting. A company must keep an accurate, honest, and complete record of its accounting transactions. Company audits should be carried out by an independent party. Confidentiality must be maintained with regard to clients' personal information as well as company information. Efforts must be made to avoid conflicts of interest between employees and customers. Ethical accountants exercise due care in the performance of their professional services. They should also be educated about insider trading as an unethical practice. Accountants must refrain from misrepresenting the facts to achieve short-term goals that are contrary to a business' long-term objectives. Internal auditors work independently within a business to review and improve the company's operations. They use strict standards to ensure the business sticks to its agreements, to design plans to protect assets, and to make the best use of company resources.

Identify methods to protect against identity theft.

The first step to protecting your identity is to be cautious with sensitive information and documents, including your social security number, checking and other bank account numbers, and the like. Shred any documents that contain sensitive information before throwing them out. When paying with a credit or debit card, be sure the card is always returned to you after the purchase. You may wish to keep a record of your card numbers in a place separate from your cards. Also, always look over your bank and credit card statements carefully when you receive them for mistakes and unknown charges or withdrawals.

Explain legal considerations for accounting.

The most significant changes to corporate governance and accounting practice came with the Sarbanes-Oxley Act of 2002. The act requires that CEOs, financial officers, accountants, and auditors comply with regulations and procedures designed to ensure accurate representation of companies' financial positions. It prohibits most loans to directors and executive officers, and forces company insiders to report changes in ownership within two days after a transaction has been executed. Securities regulation ensures that purchasers can learn the true nature of the securities they buy by providing a way to uncover fraud and unfair practices.

Explain the time value of money.

The time value of money is the increase of an amount of money due to interest earned over time or dividends paid. It is the idea that money invested now is worth more later because you would earn interest or dividends on it. Interest is money you earn over time as a percentage of the principal, or the original amount of money on deposit. Finding the future value of your original deposit is called compounding. With compounding, your money increases in value faster and faster over time. Figure the future value of your money by multiplying the principal by the annual interest rate, and then adding the interest to the principal. You can determine this future value for as many years as your money will be in an account.

Explain types of investments.

There are several main types of investment vehicles. Common stock is a unit of ownership of a company that entities the owner to voting privileges. Preferred stock is a type of stock that gives the owner the advantage of receiving cash dividends before common stockholders receive them. Stocks are attractive as an investment because owners share in the success of the company. A corporate bond is a corporation's written pledge to repay a specific amount of money, plus interest. Similarly, a government bond is the written pledge of a government or municipality to repay a specific amount of money, plus interest. When you buy a bond, you are lending money to a corporation or government entity for a period of time. Mutual funds are investments in which investors pool their money to buy stock, bonds, and/or other securities. The investments are selected by professional managers who work for an investment company. Their expertise can be beneficial to inexperienced investors. A final form of investment is to own real estate. The goal of this is to own property that increases in value so you can sell it at a profit or receive rental income.

Explain techniques for preparing personal income tax forms.

There are three basic income tax return forms, although hundreds of forms exist. Choose Form 1040EZ if your taxable income is less than $100,000, you have no dependents, and your income consists only of wages, salaries, and tips (among other factors). Choose Form 1040A if you have less than $100,000 in taxable income and you claim deductions, have dependents, and have capital gains distributions (among other factors). Form 1040 is an expanded version of Form 1040A, useful if you have taxable income greater than $100,000 and plan to itemize deductions, or have more complicated financial situations. To complete a tax return form, have your W-2 Form from your employer(s) on hand along with any interest and/or dividend forms. You can choose to file your tax return by using traditional paper forms and mailing them in, or you can file electronically over the Internet. In addition, you may choose to use tax preparation software to guide you through the process on your own with a computer. You may also choose to hire a tax professional to complete your return. Be sure to keep a copy of your completed form and your supporting documents in a safe place for at least six years.

Discuss considerations in selecting a financial-services provider.

When selecting a financial service provider, consider the following, depending on your needs. Consider one where...you can get the highest rate of return on a savings account. You can obtain a checking account with low or no fees. You will be able to borrow money when you need it and at a favorable interest rate. You can get free financial advice. The institution is insured through the FDIC. It has convenient locations. It offers a broad range of financial services. It has online banking or other special services you may desire.

Describe how to validate credit history.

Your credit history is maintained in a credit report from one of three credit bureaus in the U.S.—Experian, Trans Union, and Equifax. Your credit history also includes a credit rating—a number that reflects your ability and willingness to make credit payments on time. You can validate your credit history by obtaining a copy of your credit report from each of the three reporting agencies. You can obtain a copy free of charge one time per year from each agency. Once you receive a credit report, look it over carefully for errors or out-of-date information, and be sure to contact the agency promptly to make corrections.

Explain how to interpret a paystub.

Your paystub includes many important things, starting with your name and social security number. It lists the current pay period. Your current and year-to-date earnings, taxes, and deductions are listed. Current earnings may be described with your hourly rate, the number of hours worked, and your gross earnings (calculated by multiplying your hourly rate by the number of hours worked). Taxes that may be withheld from your gross pay include Federal, State, Local, FICA (Social Security), and Medicare. Other deductions might include union dues and money withheld for fringe benefits, such as health insurance. Net pay is your gross earnings less taxes and deductions.

Describe sources of income.

Your primary source of income is the wages or salary you earn from your employer. Other sources of income might include tips, gifts of money or property, and interest earned on a bank account or an investment. You may also receive money from the government.