Chp 16 Accounting and Financial Statements
Transcript of Chp 16 Accounting and Financial Statements
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.
Part 5Part 5
Managing Managing Technology and Technology and
informationinformation
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.
Chapter 16Chapter 16
Understanding Accounting and
Financial Statements
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-3
Chapter ObjectivesChapter Objectives
1. Explain the functions of accounting and its importance to the firm’s management, investors, creditors, and government agencies.
2. Identify the three basic activities involving accounting.3. Describe the roles played by public, management,
government, and not-for-profit accountants.4. Outline the steps in the accounting process.5. Describe the impact of recent ethical scandals and the
Sarbanes-Oxley Act on the accounting profession.6. Explain the functions and major components of the
three principal financial statements: the balance sheet, the income statement, and the statement of cash flows.
7. Discuss hw financial ratios are used to analyze a firm’s financial strengths and weaknesses.
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-4
Chapter ObjectivesChapter Objectives
8. Describe the role of budgets in a business.9. Explain how exchange rates influence international
accounting practices and the importance of uniform financial statements for global business.
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-5
Users of Accounting InformationUsers of Accounting Information
People both inside and outside and organization rely on accounting information to help them make business decisions
Accounting—practice of measuring, interpreting, and communicating financial information to support internal and external business decision making.
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-6
Users of Accounting Information
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-7
Business Activities That Involve Business Activities That Involve AccountingAccounting
Accountants contribute important information to help managers deal with the competitive and economic environments
They help others to understand, predict, and react to the technological, regulatory, and social and cultural environments
Accounting plays a key role in:FinancingInvestingOperating
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-8
Business Activities That Involve Business Activities That Involve AccountingAccounting
Public accountant: provides accounting services to individuals or business firms for a fee
Management accountant: accountant employed by a business other than a public accounting firmResponsible for collecting and recording
financial transactions, and preparing and interpreting financial statements used by the firm’s managers
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-9
Business Activities That Involve Business Activities That Involve AccountingAccounting
Certified Public Accountants—accountants who met specified educational and experiential requirements and passed a comprehensive examination on accounting theory and practice.
Other Certifications—Certified Management AccountantsCertified Internal Auditor
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-10
Business Activities That Involve Business Activities That Involve AccountingAccounting
Government and Not-for-Profit accountants—work for federal, state, and local governments or not-for-profit organizations—perform professional services similar to those of management accountantsInstead of an emphasis on measuring profit
or loss, they concern themselves with determining how efficiently the organizations accomplish their objectives
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-11
The Accounting ProcessThe Accounting Process
Accounting Process—set of activities involved in converting information about individual transactions into financial statements.
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-12
The Accounting Process
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-13
The Accounting ProcessThe Accounting Process
The Impact of Computers and the Internet on the Accounting ProcessHas simplified the process, making it faster
and easier than the manual methodWeb-based products and services growingAccounting software allows:
A do-it-once approach Numbers can be easily converted into
graphs and chartsOther automatic conversion
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-14
The Accounting ProcessThe Accounting Process
The Foundation of the Accounting SystemGenerally Accepted Accounting
Principles (GAAP)—guidelines, or standards, that accountants follow to provide reliable, consistent, and unbiased information to decision makers
Financial Accounting Standards Board (FASB)—responsible for evaluating, setting, or modifying the GAAP
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-15
The Accounting ProcessThe Accounting Process
The Foundation of the Accounting SystemSarbanes-Oxley Act of 2002Public Company Accounting Oversight
Board—five member board created by the Sarbanes-Oxley Act of 2002 to set audit standards and to investigate and sanction accounting firms that certify the books of publicly traded firms; members of the board are appointed by the SEC to serve staggered five-year terms.
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-16
The Accounting ProcessThe Accounting Process
The Accounting EquationAsset—anything of value owned or leased
by a business.Liability—claim against a firms assets by
a creditor.Owner’s equity—all claims of the
proprietor, partners, or stockholders, against the assets of a firm, equal to the excess of assets over liabilities.
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-17
The Accounting ProcessThe Accounting Process
The Accounting EquationRelationship that states that assets equal
liabilities plus owner’s equity.
Assets = Liabilities + Owner’s Equity
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-18
Financial StatementsFinancial Statements
The Balance SheetBalance sheet—statement of a firm’s
financial position - what it owns and the claims against its assets - at a particular point in time.Similar to a photograph of the firm’s
assets together with its liabilities and owners’ equity at a specific moment in time
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-19
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-20
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-21
Financial StatementsFinancial Statements
The Income StatementFinancial record of a company’s revenues,
expenses, and profits over a period of time.
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-22
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-23
Financial StatementsFinancial Statements
The Statement of Cash FlowsStatement of a firm’s cash receipt and cash
payments that presents information on its sources and uses of cash.Accrual accounting—accounting
method that records revenue and expenses when they occur, not necessarily, when cash actually changes hands.
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-24
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-25
Financial Ratio AnalysisFinancial Ratio Analysis
Ratio analysis—one of the most commonly used tools for measuring the firm’s liquidity, profitability, and reliance on debt financing, as well as the effectiveness of management’s use of its resourcesAllows comparisons with other firms and
with the firm’s own past performance
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-26
Financial Ratio AnalysisFinancial Ratio Analysis
Financial Ratios and What They Measure
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-27
Financial Ratio AnalysisFinancial Ratio Analysis
Liquidity RatiosFirm’s ability to meet its short-term
obligations when they must be paid is measured by liquidity ratios
Current ratio—compares current assets to current liabilities
Acid-test (or quick) ratio—compares quick assets – the most current liquid assets – against current liabilities
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-28
Financial Ratio AnalysisFinancial Ratio Analysis
Profitability RatiosProfitability ratios—compare the firm’s
earnings with total sales or investmentsFive important profitability ratios are:
Gross profit marginNet profit marginEarnings per shareReturn on assetsReturn on equity
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-29
Financial Ratio AnalysisFinancial Ratio Analysis
Leverage ratios—measures the extent to which a firm relies on debt financing
Activity ratios—measure the effectiveness of management’s use of the firm’s resourcesInventory turnover ratio—indicates the
number of times merchandise moves through a business
Total asset turnover—measures how much in sales each dollar in assets generates
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-30
BudgetingBudgeting
Budget—a planning and controlling tool that reflects the firm’s expected sales revenues, operating expenses, and cash receipts and outlaysQuantifies the firm’s plans for a specified
future periodServes as a financial blueprintStandard for comparison against actual
performance Cash Budget
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-31
Three-Month Cash Budget for Golden Harvest
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-32
International AccountingInternational Accounting
Accounting procedures and practices must be adapted to accommodate an international business environment
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-33
International AccountingInternational Accounting
Exchange rate—the ratio at which a country’s currency can be exchanged for other currenciesCurrency prices change daily according to
supply and demandSuch fluctuations complicate accounting
entries and practices
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.16-34
International AccountingInternational Accounting
International Accounting StandardsInternational Accounting Standards
Committee (IASC), established in 1973, promotes worldwide consistency in financial reporting practices