Automotive Dealership Accounting Principles KRUSE MENNILLO LLP 1

Automotive Dealership Accounting Principles KRUSE MENNILLO LLP 1

Purposes of Accounting Monitor Financial Health n Evaluate Operating Controls n Provide Planning Information n KRUSE MENNILLO LLP 2

Evaluate Operating Controls n Via Financial Statements • Dealer Income Statements • Dealer Balance Sheets n Via Analytical Feedback • Financial Ratios • Versus Established Goals KRUSE MENNILLO LLP 3

Provide Planning Information n Benchmarks for Employees and Managers n Periodic Analysis n Correction of Out-of-Line Conditions KRUSE MENNILLO LLP 4

Basic Accounting Equation n Assets = The “Things” A Business Owns Liabilities = The People A Business Owes Net Worth = The Net Value of a Business (Owner’s Equity) KRUSE MENNILLO LLP 5

Double Entry System n T-Account Format n Debits n Credits KRUSE MENNILLO LLP 6

T-Account Format Assets and Debits on Left n Liabilities and Credits on Right n Firm Net Worth on Lower Right n KRUSE MENNILLO LLP 7

T-Account/Double Entry Basics KRUSE MENNILLO LLP n Each transaction impacts Asset, Liability or Net Worth account balance n Assets, Liabilities, and Net Worth must increase or decrease equally 8

Transaction: New Car Sale with Cash Deposit n Debit • Cash KRUSE MENNILLO LLP n Credit • Customer Deposits 9

Transaction: Dealership Purchases Vehicle from Factory n Debit • Inventory, New Vehicles KRUSE MENNILLO LLP n Credit • Wholesale Finance Liability, New Vehicles 10

Transaction: Sale of Vehicle on Conditional Sales Contract n Debits • Contracts in Transit • Customer Deposit • Due from Financing Institution • Inventory-Used Vehicles KRUSE MENNILLO LLP n Credits • Sales, New Vehicles • Accrued Sales Tax • Accrued License and Title • Finance and Insurance Income 11

Transaction: Sale of Vehicle on Conditional Sales Contract n Overallowance Illustration • Vehicle Selling Price • Trade Value 18980 6500 (Actual Trade Value: 6000) • Dealer Overallowance n 500 Two Methods for handling overallowance KRUSE MENNILLO LLP 12

Transaction: Sale of Vehicle n Debits • Cost of Sales KRUSE MENNILLO LLP n Credits • Vehicle Inventory 13

Transaction: Account for Sales Tax and License Fees n Debits • Accrued Sales Taxes • Accrued License and Title Tax KRUSE MENNILLO LLP n Credits • Cash 14

Transaction: Settle Finance Liability on New Car n Debit • Wholesale Finance Liability, New Vehicles KRUSE MENNILLO LLP n Credit • Cash 15

Transaction: Dealership Reconditions Vehicle- In Process n Debit • Work in Process. Parts • Work in Process. Mechanical KRUSE MENNILLO LLP n Credit • Inventory-Parts • Accrued Payroll 16

Transaction: Dealership Reconditions Vehicle-Close R. O. n Debit • Inventory, Used Vehicles • Cost of Sales, Labor, Internal KRUSE MENNILLO LLP n Credit • Sales-Labor. Internal • Inventory, Work in Process, Labor 17

Transaction: Dealership Reconditions Vehicle-Close R. O. n Debit • Inventory, Used Vehicles • Cost of Sales-Parts KRUSE MENNILLO LLP n Credit • Sales-Parts-Internal • Work in Process. Parts 18

Transaction: Reconditioned Vehicle Sold for Cash n Debits • Cash Sales • Cost of Sale, Used • Reconditioning, Used Vehicles KRUSE MENNILLO LLP n Credits • Sales, Used Vehicles, Retail • Accrued Sales Tax • Accrued License and Title Tax • Inventory, Used Vehicles 19

Transaction: Used Vehicle Delivery n Debits • Cash on Hand KRUSE MENNILLO LLP n Credits • Cash Sales 20

Transaction: Labor Sale to Customer (Open Account) n Debits • Customer Accounts Receivable • Cost of Sales, Customer Labor KRUSE MENNILLO LLP n Credits • Sales, Customer Labor • Inventory, Work in Process, Labor 21

Transaction: Warranty Work Performed n Debits • Factory Claims • Cost of Sales, Warranty Claims, Labor • Cost of Sales, Warranty Claims, Parts KRUSE MENNILLO LLP n Credits • Sales, Warranty Claims, Labor • Sales, Warranty Claims, Parts • Inventory, Work in Process, Labor • Inventory, Parts 22

Transaction: Credit Received from Factory for Warranty Work n Debits • Accounts Payable. Factory KRUSE MENNILLO LLP n Credits • Factory Claims 23

Transaction: Parts Purchase on Open Account n Debits • Inventory, Parts KRUSE MENNILLO LLP n Credits • Accounts Payable 24

Transaction: Payment for Parts Purchased on Open Account n Debits • Accounts Payable KRUSE MENNILLO LLP n Credits • Cash Discount Earned 25

Transaction: Parts Sold on Open Account n Debits • Customer Accounts Receivable • Cost of Sales, Parts, Wholesale KRUSE MENNILLO LLP n Credits • Sales, Parts, Wholesale • Inventory, Parts 26

Dealership Balance Sheet n Snapshot of Dealership’s Financial Status n Captures Dealership’s Historical Financial Performance KRUSE MENNILLO LLP 27

Balance Sheet Components n Asset Accounts n Liability Accounts n Net Worth Accounts KRUSE MENNILLO LLP 28

Current Assets: Cash n Cash on Hand n Cash in Bank n Contracts in Transit KRUSE MENNILLO LLP 29

Current Assets: Receivables n Total of Accounts Receivable n Sum of Notes Receivable-Customer, Accounts Receivable-Customer, less Allowance for Doubtful Accounts KRUSE MENNILLO LLP 30

Current Assets: Inventories n Vehicle Related • • n Demonstrators New Cars and New Trucks Used Cars and Used Trucks Other Automotive For inventory purposes, valued at cost KRUSE MENNILLO LLP 31

Current Assets: Inventories (LIFO) n Last-in-First-Out Inventory Valuation Method KRUSE MENNILLO LLP 32

Current Assets: Inventories n Parts and Mechanical Department Related • Parts and Accessories • Tires • Gas, Oil, and Grease KRUSE MENNILLO LLP 33

Current Assets: Inventories n Parts and Mechanical Department Related (Continued) • • • Paint and Body Shop Materials Sublet Repairs Work in Process Labor Other Miscellaneous Assets Received in Trade KRUSE MENNILLO LLP 34

Current Assets: Cash Equivalents n n n Securities Factory Receivables Due from Finance Companies KRUSE MENNILLO LLP 35

Current Assets: Cash Equivalents n Warranty Claims n Insurance Commissions Receivable n Prepaid Expenses • Taxes • Insurance • Other KRUSE MENNILLO LLP 36

Current Assets: Total n Equals Total of Cash Receivables Inventories Cash Equivalents KRUSE MENNILLO LLP 37

Working Assets n Driver Training Vehicles n Lease and Rental Units n Lease and Rental Accumulated Depreciation KRUSE MENNILLO LLP 38

Current Assets + Working Assets = Total Current and Working Assets KRUSE MENNILLO LLP 39

Fixed Assets n Land n Buildings n Equipment n Accumulated Depreciation KRUSE MENNILLO LLP 40

Other Assets n Life Insurance-Cash Values n Notes and Accts. Receivable. Officers n Notes and Accts. Receivable- Others n Other Investments and Miscellaneous Assets KRUSE MENNILLO LLP 41

Total Assets Equals: Total Cash and Contracts + Total Receivables + Total Inventory + Working Assets + Fixed Assets + Other Assets KRUSE MENNILLO LLP 42

Current Liabilities n Accounts and Notes n Accruals KRUSE MENNILLO LLP 43

Current Liabilities: Accounts and Notes n Accounts Payable n Notes Payable n Credit Balances and Deposits KRUSE MENNILLO LLP 44

Current Liabilities: Accruals n Interest Payable n Wage-Related Payables n n Insurance Payable Taxes & Other Payables KRUSE MENNILLO LLP 45

Long-Term Liabilities n Long-Term Debt n Mortgages Payable, Real Estate KRUSE MENNILLO LLP 46

Total Liabilities = Total Current Liabilities + Total Long-Term Liabilities KRUSE MENNILLO LLP 47

Net Working Capital Formula: Total Current & Working Assets + Qualified Loans to Dealership + Accumulated LIFO Write-Down - Total Current Liabilities & Long-Term Debt KRUSE MENNILLO LLP 48

Net Worth n Capital Stock & Additional Paid-In Capital n Retained Earnings n Net Profit or Loss, Year to Date KRUSE MENNILLO LLP 49

Dealership Income Statement n Measures Dealership Profit and Loss Performance for a Given Time Period n Compiled from Individual Department Profit and Loss Performance KRUSE MENNILLO LLP 50

Income Statement Components Total Revenue - Cost of Sales Gross Profit - Expenses Net Income KRUSE MENNILLO LLP 51

Total Revenue n Total Sales for all Departments • • • New Vehicle Used Vehicle Service Parts Body Shop Finance and Insurance KRUSE MENNILLO LLP 52

Cost of Sales n Variable Department • New and Used Vehicles • Finance and Insurance n Parts Department n Mechanical Department & Body Shop KRUSE MENNILLO LLP 53

Gross Profit Calculation Net Sales - Cost of Sales = Gross Profit KRUSE MENNILLO LLP 54

Dealership Expenses n Variable Expenses n Personnel Expenses n Semi-Fixed Expenses n Fixed Expenses KRUSE MENNILLO LLP 55

Variable Expenses n Expenses which rise and fall with business activity n Primarily new and used vehicle selling expenses KRUSE MENNILLO LLP 56

Variable Expenses n Consist of: • Vehicle Sales Persons’ Compensation • Delivery Expense • Policy Work, New and Used Vehicles KRUSE MENNILLO LLP 57

Personnel Expense n Salaries • • Owner Supervision Clerical Other Salaries and Wages KRUSE MENNILLO LLP 58

Personnel Expenses n Absentee Compensation n Taxes, Payroll n Employee Benefits n Pension Plans KRUSE MENNILLO LLP 59

Semi-Fixed Expenses n Used Vehicle Maintenance Expense n Company Vehicle Expense n Office Supplies and Expenses n Other Supplies KRUSE MENNILLO LLP 60

Semi-Fixed Expenses n Advertising n Contributions n Policy Work, Parts and Service n Outside Services, Data Processing KRUSE MENNILLO LLP 61

Semi-Fixed Expenses n Outside Services, Other n Travel and Entertainment n Membership, Dues, and Publications n Legal and Audit Expenses KRUSE MENNILLO LLP 62

Semi-Fixed Expenses n Telephone Expense n Training Expense n Interest-Notes Payable and Other n Miscellaneous Expenses KRUSE MENNILLO LLP 63

Fixed Expenses n Rent n Amortization-Leaseholds n Repairs-Real Estate KRUSE MENNILLO LLP 64

Fixed Expenses n Depreciation-Buildings and Improvements n Taxes-Real Estate n Insurance-Buildings and Improvements KRUSE MENNILLO LLP 65

Fixed Expenses n Interest-Mortgages n Heat, Light, Power, and Water n Insurance-Other n Taxes-Other KRUSE MENNILLO LLP 66

Fixed Expenses n Repairs-Equipment n Depreciation-Equipment n Equipment Rental KRUSE MENNILLO LLP 67

Total Fixed Overhead n Total of: • Personnel Expenses • Semi-Fixed Expenses • Fixed Expenses n Used to calculate fixed absorption KRUSE MENNILLO LLP 68

Profit or Loss Calculations n Operating Profit or Loss • Gross Profit - Total Expenses n Net Profit or Loss • Operating Profit or Loss • Net Additions or Deductions KRUSE MENNILLO LLP 69

Net Additions and Deductions n Adjustments for Doubtful Accounts n Other Deductions KRUSE MENNILLO LLP 70

Net Profit or Loss After Income Taxes and Bonuses n Bonuses • Employees • Owners n Income Taxes, Current Year KRUSE MENNILLO LLP 71

Dealership Profit Centers n All revenue-producing departments are considered separate businesses KRUSE MENNILLO LLP 72

Dealership Profit Centers n Each department is credited with revenue for its activities. n Each department is charged with expenses directly associated with its activities. KRUSE MENNILLO LLP 73

General and Administrative Expenses n General and Administrative Expenses benefit most or all departments. n They must be appropriately charged to individual departments. KRUSE MENNILLO LLP 74

Dealership Profit Centers n Tests each department’s ability to stand on its own and its contribution to the overall organization KRUSE MENNILLO LLP 75

Profit Center Statements n Separate Profit and Loss Statements are generated for each department: • • • New Vehicles Used Vehicles Lease and Rental Mechanical Body Shop Parts and Accessories KRUSE MENNILLO LLP 76

DOC Statement n Daily Operating Controls • Day-by-Day Performance Against Monthly Forecast • Formatted in Working Days Only • Generated Every Day (Before Work Starts) • Reviews Key Variables for Management Control KRUSE MENNILLO LLP 77

DOC Statement Contents Departmental Performance for: • New and Used Vehicles • Parts and Accessories • Mechanical & Body Shop • Finance and Insurance n Departmental Compilations n Business Operations DOC n KRUSE MENNILLO LLP 78

DOC: New and Used Vehicles Unit Sales • Car • Truck n Gross Profit n Variable Expenses n Commissions Accrued n KRUSE MENNILLO LLP 79

DOC: Mechanical and Body Shop Sales • Customer • Warranty • Internal n Gross Profit • Customer • Warranty • Internal n KRUSE MENNILLO LLP 80

DOC: Mechanical and Body Shop n Retail Repair Orders Generated n Retail Labor per RO n Retail Parts per RO KRUSE MENNILLO LLP 81

DOC: Parts and Accessories Retail Sales • Gross Profit n Warranty • Sales • Gross Profit n Internal Parts Transfer n KRUSE MENNILLO LLP 82

DOC: Finance and Insurance Gross Profit • Departmental Gross Profit • Gross Profit per Contract n Percentages of Penetration • Credit Life • Accident and Health • Warranty n KRUSE MENNILLO LLP 83

Fixed Overhead Expenses Personnel Expense • Pay Plans • Budgeted Salary Costs n Semi-Fixed Expenses • Budgeted Accounts n Fixed Expenses • Spread Daily n KRUSE MENNILLO LLP 84

Departmental Compilation DOC New and Used Vehicle Gross Profit, less Variable Costs n Parts and Accessories Gross Profit n Mechanical and Body Shop Gross Profit n Finance and Insurance Gross Profit n n Total Dealership Gross Profit Less Fixed Overhead Expenses KRUSE MENNILLO LLP 85

Business Operations DOC Total Cash on Hand n Liquid Assets n • Cash in Bank Accounts • Accounts Receivable – Contracts in Transit – Receivables, Parts and Service – Factory Receivables • Warranty and Rebates KRUSE MENNILLO LLP 86

Business Operations DOC • Finance Contracts Outstanding – Reserve • Vehicle Equity – Used Inventory – Net New Vehicle Equity KRUSE MENNILLO LLP 87

Month-End Checklist Enter all documents for month in appropriate journals n Create journal entries • Accruals • Work in Process • Preliminary Schedules • Physical Inventory of New and Used Vehicles n KRUSE MENNILLO LLP 88

Month-End Checklist n Create Journal Entries • Tax Deposits by month end • Review General Journal entries to insure balance n Finalize all Accounts and Run Trial Balance • Review Statement for errors • Print final Statement (closes month) KRUSE MENNILLO LLP 89

Month End Checklist Statement must be completed on a timely basis n Distribute as needed n • Dealer Principal – Complete Financial Results • Dealership General Manager – All Department Income Statements • Department Heads – Department Income Statements KRUSE MENNILLO LLP 90

Monitoring Financial Health n ROI n Measures Return on Investment n Traditional ROI Formula: Net Income / Owner’s Equity KRUSE MENNILLO LLP 91

Monitoring Financial Health GMROI: Gross Margin Return on Investment n Measures by Gross Margin and Inventory (Investment) Turns n Formula: Gross Margin x Inventory Turns n Formula Goal: 150% n KRUSE MENNILLO LLP 92

Expense Control Formula n Importance of Expense Control: • To Dealership Net Profit $ expense / return on sales % = sales coverage needed Example: $1 exp. / 2% return = $50 coverage KRUSE MENNILLO LLP 93

Fixed Absorption Total Gross Profit of: • Mechanical Department • Body Shop • Parts Department Divided by: Total Fixed Overhead KRUSE MENNILLO LLP 94

Dealership Cash Management n Cash management is the key to longterm dealership viability n Dealerships tend to experience volatile cash balances n Manufacturers’ policies drive cash considerations KRUSE MENNILLO LLP 95

Manufacturer Cash Management Requirements n Cash On Hand Requirements n Inventory Requirements n Accounts Receivable Requirements KRUSE MENNILLO LLP 96

Manufacturer Cash Management Requirements n Prepaid Expenses n Fixed Assets n Other Assets KRUSE MENNILLO LLP 97

Cash Management Policies Dealership cash situation should be reviewed with top management daily n Key accounts: • Accounts Receivable • Factory Receivables • Cash on Hand • Inventories n KRUSE MENNILLO LLP 98

Days Supply of Cash n Average Total Expenses Per Month n Customer Deposits and Taxes Payable n Net Cash KRUSE MENNILLO LLP 99

Net Cash n Cash on Hand, End of Month • Total Cash and Contracts • Less Cash in Bank Credit Balance KRUSE MENNILLO LLP 100

Average Monthly Expenses YTD Total Expenses, Less • YTD Amortization, Leaseholds • YTD Depreciation, Buildings and Improvements • YTD Depreciation, Equipment n Total Divided by Number of Months in Statement n KRUSE MENNILLO LLP 101

Deposits and Taxes Payable n Total of the following accounts: • Customer Deposits • Payroll Taxes Payable • Sales Taxes Payable • Other Taxes Payable KRUSE MENNILLO LLP 102

Days Supply Cash Formula Net Cash Divided by the Total of: • Average Monthly Expenses • Customer Deposits and Taxes Payable Multiply Above Total By 30 for Days Supply KRUSE MENNILLO LLP 103

Where did the cash go? n Used Car Inventory • Less Floor Plan Parts Inventory n Factory Receivables n Warranty Receivables n Prepaid Expenses n Accounts Receivable n Fixed Assets n KRUSE MENNILLO LLP 104

Where did the cash go? n Purchase activities related to fixed assets n Net Change in Non-Cash Accounts n Net Income or Loss KRUSE MENNILLO LLP 105

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Ratio Calculation Exercise n The remainder of this workbook is devoted to financial ratios, which can be calculated from the workshop financial statement. n The ratios reflect the profitability, debt, and liquidity status of the dealership KRUSE MENNILLO LLP 108

NET PROFIT MARGIN (Return on Net Sales) Net Profit / Net Sales YTD Net Profit After Taxes & Bonuses Page No. Line No. Divided by: Net Sales YTD Page No. Line No. Equals: Net Return on Sales KRUSE MENNILLO LLP 109

NET PROFIT MARGIN (Return on Net Sales) Net Profit / Net Sales YTD Net Profit After Taxes & Bonuses Page No. 1 A Line No. 60 1 A Line No. 1 Divided by: Net Sales YTD Page No. Equals: Net Return on Sales KRUSE MENNILLO LLP 110

PERCENT RETURN ON INVESTMENT Net Profit / Equity Net Profit After Taxes YTD Page No. Line No. Divided by the Sum of: Common Stock Page No. Line No. Retained Earnings Page No. Line No. Equals: Percent Return on Investment KRUSE MENNILLO LLP 111

PERCENT RETURN ON INVESTMENT Net Profit / Equity Net Profit After Taxes YTD Page No. 1 Line No. 58 Divided by the Sum of: Common Stock Page No. 1 Line No. 45 Retained Earnings Page No. 1 Line No. 48 Equals: Percent Return on Investment KRUSE MENNILLO LLP 112

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ACID RATIO (SLIDE 1) (Quick Ratio) Total Current Assets Less Inv & Prepaids / Total Current Liabilities - Notes Payable N. V. Total Current Assets Page No. 1 Line No. 38 (+p. 4, l. 58 LIFO Adjustment) 4 Line No. 58 1 Line No. Less Sum of: Total Inventories Page No. Total Prepaids Page No. 35, 36, 37 Equals Current Assets - Inventories & Prepaids KRUSE MENNILLO LLP 116

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DEBT TO ASSETS Total Debt / Total Assets Total Liabilities Page No. 1 Line No. 38 1 Line No. 60 (+p. 4, l. 58, LIFO Adjustment) Divided by Total Assets Page No. Equals Debt to Assets KRUSE MENNILLO LLP 120

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RECEIVABLES: MONTHS SUPPLY MEHCANICAL, PARTS AND BODY SHOP YTD Chargeable Sales / 12 Mechanical, Parts and Body Shop Receivables Page No. 4 Line No. 49 Total Mechanical, Parts and Body Shop Sales, YTD Page No. 3 Line No. 59 Less Warranty and Internal Sales, YTD Plus Cash Sales, YTD Page No. 3 -4 Line No. 24, 25, 26, 35 45, 46 -55 Equals: YTD Chargeable Sales Divide by 12 for Avg. Mo. Chargeable Sales KRUSE MENNILLO LLP 125

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WARRANTY RECEIVABLES: MONTHS SUPPLY YTD Sales/ 12 Warranty Claims Page No. 1 Line No. 33 YTD Warranty Sales - Mechanical Labor Page No. 3 Line No. 24 YTD Warranty Sales - Parts Page No. 3 Line No. 45 YTD Warranty Sales - Body Shop Page No. 3 Line No. 35 Ttl Sales Warranty Claims YTD Total / # Stmt. Mo. = Month Avg. Sales KRUSE MENNILLO LLP Equals: Warranty Claims: Months Supply 127

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BASIC ASSETS AS A % OF CURRENT ASSETS Basic Assets / Current and Working Assets Total Cash and Contracts Page No. 1 Line No. 10 4 Line No. 58 Total Inventories Page No. Less: Cash in Bank-Credit Balance Page No. 1 Line No. 7 Line No. 42 (+p. 4, l. 58 LIFO Reserve) Total Basic Assets Total Current and Working Assets Page No. 1 Equals: Basic Assets as a % of Current Assets KRUSE MENNILLO LLP 129

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PARTS AND ACCESSORIES INVENTORY MONTHS SUPPLY (SLIDE 1) Parts and Accessories Inventory Page No. KRUSE MENNILLO LLP 4 Line No. 56 135

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BREAKEVEN POINT New and Used Vehicle Sales Needed to Cover Unabsorbed Fixed Overhead 6. ) Unabsorbed Overhead (Net Burden or "Nut") (Fixed Overhead Expense - Fixed Operations Gross Profit) 7. ) Average Month Net Burden (Unabsorbed Overhead / 12) 8. ) YTD Gross Profit Per New Vehicle Page No. 3 Line No. 28 9. ) PNVR Variable Selling Expenses YTD Page No. 2 Line No. 8 10. ) Retained Gross (Variable Net) PNVR YTD (YTD Gross PNVR - PNVR Variable Selling Expenses YTD) KRUSE MENNILLO LLP 157

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BREAKEVEN POINT New and Used Vehicle Sales Needed to Cover Unabsorbed Fixed Overhead 11. ) YTD Gross Per Used Vehicle Retailed Page No. 3 Line No. 1 12. ) YTD PUVR Variable Selling Expenses Page No. 2 Line No. 8 13. ) Retained Gross (Variable Net) PUVR YTD (YTD Gross Per Used Vehicle Retailed - YTD PUVR Variable Selling Expenses) KRUSE MENNILLO LLP 159

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