Wednesday morning Accounting. Accounting -- Recording, classifying, summarizing and interpreting of...
-
Upload
britney-morris -
Category
Documents
-
view
226 -
download
4
Transcript of Wednesday morning Accounting. Accounting -- Recording, classifying, summarizing and interpreting of...
Accounting
• Accounting -- Recording, classifying, summarizing and interpreting of financial events and transactions in an organization to provide interested parties needed financial information.
• Outside parties - like employees, owners, creditors, unions, investors and the government - make use of a firm’s accounting information
Financial Accounting
• Financial Accounting -- Financial information and analyses are generated for people primarily outside the organization. Outside users are interested in these questions:
- Is the organization profitable?
- Is it able to pay its bills?
- How much debt does it owe?
• Annual Report -- A yearly statement of the financial condition, progress, and expectations of the firm.– American Eagle, Disney
HOW to READ an ANNUAL REPORT
• Key things to watch for and read:- Management’s discussion and analysis of operations
- Balance sheet
- Income statement
- Statement of cash flows
- Auditor’s opinion
Managerial Accounting
• Managerial Accounting -- Provides information and analysis to managers inside the organization to assist them in decision making.
• Managerial accounting is involved with:
- Costs of production
- Costs of marketing
- Preparation and control of budgets
- Minimizing tax liabilities
Public vs. Private Accountants
• Private Accountants -- Work in a single firm, government agency, or nonprofit organization.
• Public Accountants -- Provide accounting services to individuals or businesses.
• Certified Public Accountants (CPAs) -- Accountants who have passed a series of examinations established by the American Institute of Certified Public Accountants (AICPA) and met a states requirements for education and experience.
Auditing
• Auditing -- Reviewing and evaluating the information used to prepare a company’s financial statements.
• Independent Audit -- An evaluation and unbiased opinion about the accuracy of a company’s financial statements.
• Certified Internal Auditors (CIAs) -- Accountants who have a bachelor’s degree and two years of experience in internal auditing and pass an exam administered by the Institute of Internal Auditors.
Specialized Accountants
• Tax Accountants -- Accountants trained in tax law and are responsible for preparing tax returns or developing tax strategies.
• Forensic Accountants -- When a company is suspected of fraud or other accounting wrongdoings a court will commission a forensic accountant to search for foul play. Forensic accountants look for proof a company is “cooking the books.” Please note that this is not the role of the public accountants.
The Accounting Cycle
• Accounting Cycle -- A six-step procedure that results in the preparation and analysis of the major financial statements.
GAAP
• Generally Accepted Accounting Principles– the standard framework of guidelines for financial
accounting used in any given jurisdiction; GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements.
Bookkeeping
• Bookkeeping -- The recording of business transactions. Bookkeepers divide a firm’s transactions into meaningful categories and post them into a record book or computer program called a journal.– Use of double entry bookeeping
• Ledger -- A specialized accounting book or program where all information is in one place.
• Trial Balance -- A summary of all the information in the account ledgers.
Cash vs. Accrual Accounting
• Revenue Recognition– An exchange of goods or services at an agreed
upon price with payment or promise of payment• Accounts receivable, unearned revenue
• Matching– Matching expenses with the revenue it helped to
generate; matching expenses to the time period when they are incurred
• inventory/cost of goods sold, accounts payable, prepaid expenses
Financial Statements
• Financial Statement -- A summary of all the financial transactions that have occurred over a particular period.
• Key financial statements of business are:
- Balance sheet
- Income statement
- Statement of cash flows
The Fundamental Accounting Equation
• Fundamental Accounting Equation -- The basis for the balance sheet.
• The equation must always be balanced and includes the formula:
o Assets = Liabilities + Owners Equity
Assets
• Assets -- Economic resources owned by a firm. Items can be tangible or intangible.
• Liquidity -- Ease with which assets can be converted into cash.
Classifying Assets
• Current Assets -- Items that can or will be converted to cash within one year.
• Fixed Assets -- Long-term assets that are relatively permanent such as land, buildings, or equipment.
• Intangible Assets -- Long-term assets that have no physical form but do have value such as patents, trademarks, and goodwill.
Classifying Liabilities
• Liabilities -- What the business owes to others - its debts.
• Accounts Payable -- Current liabilities a firm owes for merchandise or services purchased on credit.
• Notes Payable -- Short or long-term liabilities a business promises to pay by a certain date.
• Bonds Payable -- Long-term liabilities that the firm must pay back.
Owners’ Equity
• Owners’ Equity -- The owners’ share of the business: assets (what they own) minus liabilities (what they owe).
• Consists of:
– Paid-in Capital – amount of funds directly invested in the business by its owners
– Retained Earnings -- Accumulated earnings from the firm’s profitable operations that are reinvested in the business.
The Income Statement
• Income Statement -- The financial statement that shows a firm’s bottom line - that is, its profit after costs, expenses, and taxes.
• Net Income/Net Loss -- The revenue left over or depleted.
The Multi-Step Income Statement
• The formula for the multi-step income statement:
o Revenue
o Minus Cost of Goods Sold
o Equals Gross Profit
o Minus Operating Expenses
o Equals Net Income before Taxes (Operating Income)
o Minus Taxes
o Equals Net Income or Net Loss
Income Statement Accounts
• Revenues is the monetary value a firm received for goods sold, services rendered or other payments.
– Recall revenue recognition
• Cost of Goods Sold (or Manufactured) -- Measures the cost of merchandise the firms sells or the cost of raw materials and supplies it used in producing items for resale.
– Recall matching
• Gross Profit -- How much a firm earned by buying (or making) and selling merchandise.
Income Statement Accounts, cont’d
• Operating Expenses -- Expenses a firm incurs in selling goods and services such as rent, salaries and supplies.
• Depreciation -- The systematic write-off of the cost of a tangible asset over its estimated useful life.
Statement of Cash Flows
• The purpose is to provide info about the sources and uses of cash during a particular time period
• content and organization– operating activities: generally, any activities that enter into the determination
of net income– investing activities: transactions involved in the acquisition or disposition of
non-current assets (sale or purchase of non-current assets, sales or purchases of other company’s securities, collecting or giving a loan to a third party)
– financing activities: transactions involving the company’s debt or equity (selling or acquiring company’s own stock, issuing or repaying long-term debt, payment of dividends)
– There are two different ways to prepare the operating section of the SCF, the direct and indirect method;
Understanding Cash Flow
• Cash is the lifeblood of any business• Managing cash flow is a key consideration
of a business and can be particularly challenging for small and seasonal businesses.
Example of the Accounting Cycle
• Glorian Portrait– Transaction worksheet– Income Statement
• Retained Earnings
– Balance Sheet– Statement of Cash Flows
Financial Statement Analysis
• FSA - The assessment of a firm’s financial condition using calculations and financial ratios developed from the firm’s financial statements. Sometimes referred to as ratio analysis
• The ratios do not exist in a vacuum• By themselves, they do not provide much meaning• They need to be compared to something:
– Trends over time– Key competitors– Industry averages
FSA, cont’d
• The ratios can be broken down into– Profitability– Short-term financial position (liquidity)– Long-term financial position (leverage/financial
structure)– Efficiency/effectiveness
• Yahoo Finance and WSJ as sources of ratio analysis– American Eagle (Yahoo), American Eagle (WSJ)
International Accounting Issues
• Multinational companies must adapt their accounting reporting to the rules of multiple countries.
• Many countries have adopted International Financial Reporting Standards (IFRS) and are pushing to make them standard.
• The U.S. Securities & Exchange Commission believes there should be such a standard.
Timeline for the US move to IFRS
• 2008: SEC offers proposed timeline
• 2009: 110 large companies have the option of using IFRS
• 2011: SEC assesses progress of IFRS
• 2013: Final decision on the move to IFRS
• 2014: Large public companies will be required to report in IFRS (pending SEC decision)
• 2016: All companies will be required to report in IFRS (pending SEC decision)