chapter 1, powers et al

8/17/2019 Chapter 1, Powers Et Al

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Chapter 1

Uses of AccountingInformation and the

Financial Statements

CFGM 6102 Accounting and Financial Decision Making


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Accounting as an

Information S#stem Accounting is an information s#stem thatmeasures" processes" and communicatesnancial information about an economic

entit#% As sho'n in the &$hibit in the ne$t slide"

accounting is a lin! bet'een businessactivities and decision ma!ers%


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Accounting as an

Information S#stem


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/usiness )oals

A business is an economic unit that aimsto sell goods and services to customersat prices that 'ill provide an ade0uate

return to its o'ners% he t'o major goals of all businesses are2

Proftability3earning a su4cient return tomaintain o'ner interest

Liquidity3having enough cash to pa#debts as the# come due


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/usiness Activities

All companies pursue their business goalsb# engaging in the follo'ing activities2 Operating activities3selling goods and

services to customers5 emplo#ing managersand 'or!ers5 bu#ing and producing goods andservices5 and pa#ing ta$es

Investing activities3spending the capital a

compan# receives in productive 'a#s that helpit achieve its objectives

Financing activities3obtaining funds tobegin operations and to continue operating


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/usiness )oals and

Activities


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Financial *erformance

Anal#sis Financial analysis is the use of nancialstatements to determine that a business is'ell managed and is achieving its goals%

Perormance measures must be 'ellaligned 'ith the t'o major goals of therm2 protabilit# and li0uidit#%

Financial ratios sho' ho' the elementsof nancial statements relate to eachother%


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6anagement Accounting

Management accounting3accountinginformation for internal decision ma!ers

his is an operating report providing the

details such as2 ho' much 'as sold 'hat costs 'ere incurred

a budget for sales and costs for the ne$t#ear


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Financial Accounting

Financial accounting3accounting informationfor e$ternal decision ma!ers5 reports are calledfnancial statements%

It is important to distinguish accounting from the

'a#s in 'hich accounting information isprocessed b# boo!!eeping and managementinformation s#stems% Bookkeeping is the mechanical and repetitive

record!eeping aspect of accounting%

Management inormation systems (6IS+ consists ofthe interconnected subs#stems that provide theinformation needed to run a business%


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&thical Financial 7eporting

t!ics is a code of conduct that addresses'hether actions are right or 'rong%

&thics is especiall# important in preparing

nancial reports because users of thesereports must depend on the good faith ofthe people involved in their preparation% Fraudulent fnancial reporting can result

from the distortion of records" falsiedtransactions" or the misapplication of variousaccounting principles%


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Sarbanes8O$le# Act

he "arbanes#O$ley Act 'as passed in9::9 in response to nron %orporationand &orld%om scandals and regulates

nancial reporting and the accountingprofession%


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6atch each term 'ith one of the four denitions that follo'2

;;;; 1% 6anagement Accounting a% An unethicalpractice

;;;; 9% Li0uidit# b% A business goal ;;;; % Operating Activities ;;;; ?% Financing Activities

;;;; @% *rotabilit#

;;;; % Fraudulent nancial reporting

SOLUTION

1. d; 2. b; 3. d; 4. c; 5. c; 6. c; 7. b; . a


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Decision 6a!ers2 he Users

of Accounting Information Management refers to the people 'hoare responsible for ensuring that acompan# meet its goals of protabilit# andli0uidit#

Users 'ith a Direct nancial interest Investors' have invested capital in a compan#

and thus ac0uired part o'nership in it %reditors' those 'ho lend mone# or deliver

goods and services before being paid Users 'ith an Indirect nancial interest (a$ Aut!orities2 Companies and individuals

pa# man# !inds of ta$es%


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he Users of Accounting

Information )egulatory Agencies include "ecurities and

$c!ange %ommission *"%+ to 'hich allpublicall# traded corporations must reportperiodicall#%

Other groups include the follo'ing2 Labor Unions Advisors of Investors and Creditors Consumer )roups" Customers" and the )eneral *ublic &conomic *lanners

,overnmental and -ot#or#ProftOrgani.ations include functions raising funds and

deplo#ing scarce resources%


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he Users of Accounting

Information


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6atch each term 'ith one of the three t#pes of users ofaccounting information that follo'2

;;;; 1% a$ authorities a% Internal user

;;;; 9% Investors b% Direct e$ternal

user ;;;; % 7egulator# agencies

;;;; ?% Labor unions and consumer groups

SOLUTION

1. c; 2. b; 3. a; 4. b; 5. c; 6. c


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Accounting 6easurement

Four 0uestions must be ans'ered toma!e an accounting measurement% Bhat is measured

Bhen should the measurement be made Bhat value should be placed on 'hat is

measured o' should 'hat is measured be classied


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/usiness ransactions

A business transaction is an economicevent that aEects a business,s nancialposition%

A transaction can be an e$change of value (apurchase" sale" pa#ment" collection" or loan+bet'een t'o or more parties%

A transaction that does not involve an e$change isa none$change transaction%G For e$ample" losses

from re" .ood" e$plosion" and theft5 ph#sical 'earand tear on machiner# and e0uipment5 and theda#8b#8da# accumulation of interest%


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6one# 6easure

he money measure concept statesthat a business transaction should berecorded in terms of mone#%

ransactions bet'een countries mustinvolve the translation of amounts ofmone# using the appropriate e$c!angerate%


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&$amples of Foreign&$change 7ates


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Separate &ntit#

In accounting" a business is a separateentity/ distinct not onl# from itscreditors and customers but also from its

o'ners%


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6atch each description 'ith one of the terms that follo'2

;;;; 1% An e$change of value bet'een a% /usiness transaction

t'o or more parties

;;;; 9% 7e0uires a separate set of records b% 6one# measure for a business

;;;;


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Forms of /usiness(slide 1 of 9+

Forms o Business "ole proprietors!ip3one o'ner

he o'ner ta!es all of the prots or losses of thebusiness

he o'ner has unlimited liabilit# Partners!ip3t'o or more o'ners

In a partnership t'o or more o'ners share protsor losses based on a predetermined arrangement

O'ners have unlimited liabilit# 'hich can beavoided b# forming a limited liabilit# partnership


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Forms of /usiness(slide 1 of 9+

%orporation3a business unit chartered b#the state 6an# o'ners but managed b# a board of

directors

Legall# separate from its o'ners (thestockholders+

Stoc!holders enjo# limited liabilit#


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Humber and 7eceipts of U%S%*roprietorships" *artnerships" andCorporations


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he Corporate Form of/usiness (slide 1 of >+ Formation and Organi.ation o a

%orporation A corporation is a business unit chartered

b# the state ('hen articles oincorporation are led+ and considered aseparate legal entit# from its o'ners%

he liabilit# of corporate stoc!holders is

limited to their investment%


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he Corporate Form of/usiness (slide 9 of >+ "tock!olders

A s!are o stock is a unit of o'nership ina corporation%

%ommon stock is the most universal form ofstoc!%

Board o 0irectors he board of directors sets corporate polic#

and declares dividends%


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he Corporate Form of/usiness (slide < of >+

he authorit# to manage a corporation isgiven b# the o'ners and board of directorsto the corporate management% %orporategovernance is the oversight of a

corporation,s management and ethics b#its board of directors%

A provision of the Sarbanes8O$le# Actre0uires boards of directors to establish an

audit committee to ensure that the boardis objective in evaluating managementperformance%


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he Corporate Form of/usiness (slide = of >+ Management

Appointed b# the board of directors to carr#out corporate policies and run da#8to8da#

operations Also have the dut# of reporting the nancial

results


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he Corporate Form of/usiness(slide > of >+


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6atch each of the descriptions 'ith the terms that follo'2

;;;; 1% Issues stoc! a% Sole proprietorship

;;;; 9% O'ned b# onl# one person b% *artnership

;;;;


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he Financial Statementsand their &lements Income statement (also referred to as the

statement of operations+ the mostimportant nancial report because it sho's'hether a business achieved its protabilit#

goal through its operating activities )evenues are the increases in stoc!holders,

e0uit# that result from operating a business% $penses are the decreases in stoc!holders,

e0uit# that result from operating a business%

-et Income Bhen revenues e$ceed e$penses"the diEerence is called net income% Bhene$penses e$ceed revenues" the diEerence iscalled net loss1


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Income Statement for InglotConsultanc#" Inc%


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Statement of 7etained&arnings )etained earnings represent the

accumulated earnings generated b# abusiness,s income8producing activities lessamounts that have been paid out to the

stoc!holders% he statement of retained earnings sho's the

changes in retained earnings over an accounting period%

0ividends are distributions of resources"generall# in the form of cash" to stoc!holders"and onl# the board of directors has theauthorit# to declare them%


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Statement of 7etained&arnings for Inglot

Consultanc#" Inc%


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he Accounting &0uation


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/alance Sheet

Balance s!eet (also called the statementof nancial position+ sho's the nancialposition of a business on a certain date"usuall# the end of the month or #ear

he assets e0ual the sum of the liabilities andstoc!holders, e0uities" under the accountingequation

Assets are the economic resources of acompan# that are e$pected to benet the

compan#,s future operations% Liabilities are a business,s present obligations

to pa# cash" transfer assets" or provideservices to other entities in the future%


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/alance Sheet for InglotConsultanc#


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/alance Sheet

"tock!olders2 equity (also called shareholders’equity) represents the claims of the o'ners of acorporation (the stoc!holders+ to the assets of thebusiness% -et assets are 'hat 'ould be left over if all liabilities

'ere paid %ontributed capital is the amount that stoc!holders

invest in the business% Par value is an amount per share that 'hen multiplied

b# the number of common shares becomes the

corporation,s common stoc! amount5 it is the minimumamount that can be reported as contributed capital% Bhen the value received is greater than par value" the

amount over par value is called additional paid#incapital1


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Statement of Cash Flo's

"tatement o cas! 3o4s focuses oncompan#,s li0uidit#%

%as! 3o4s are the in.o's and out.o's

of cash into and out of a business% hestatement is organi-ed according to thethree major business activities2 Cash Flo's from Operating Activities

Cash Flo's from Investing Activities Cash Flo's from Financing Activities


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Statement of Cash Flo's forInglot Consultanc#" Inc%


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Income Statement" Statement of 7etained&arnings" /alance Sheet" and Statement ofCash Flo's


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Financial 7atios

Financial ratios sho' importantrelationships among the elements of thenancial statements%

he follo'ing nancial ratios have beensho'n to be most predictive of compan#performance2 *rot margin Asset turnover Cash .o' #ield Debt to e0uit# ratio


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Focus on FinancialStatement &lements

!"e si# ele$ents %to& 'o() on t"e *inancial

state$ents a'e used to co$&ute t"e *ou' 'atios

%botto$ 'o() t"at allo( +ou to anal+,e *inancial

state$ents and dete'$ine "o( (ell o' &oo'l+ a

co$&an+ is &e'*o'$ing- ("ic"- in tu'n- is t"e basis

*o' $aking good business decisions.


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Financial 7atio2 *rot6argin

$3,200Profit Margin =

$10,000

= 0.320,or 32.0%

Net IncomeProfit Margin

Revenues

+ using t"e net inco$e and 'e/enuest"at a&&ea' on nglot Consultanc+s

inco$e state$ent- (e can calculate

nglots &'o*it $a'gin as *ollo(s


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Complete the nancial statements that appear belo' b# determining the amounts that correspond to the letters% (Assume no ne'investments b# stoc!holders%+

Income "tatement

7evenues 9"@@>

&$penses (a+

Het income 5 *b+

"tatement o )etained arnings

/eginning balance @"9>:

Het income (c+

Less dividends >::&nding balance 56/788

Balance "!eet

otal assets (d+

Liabilities =":::

Stoc!holders, e0uit#

Common stoc! >":::

7etained earnings (e+

otal liabilities and stoc!holders, e0uit# 5 *+


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Het income lin!s the income statement and the statementof retained earnings% he ending balance of retainedearnings lin!s the statement of retained earnings and thebalance sheet%

hus" start 'ith (c+" 'hich must e0ual @>: (@"9>: J @>:8 >:: J @">::+% hen" (b+ e0uals (c+" or @>:% hus" (a+must e0ual 9":9> (9"@@> 8 9":9> J @>:+% /ecause (e+e0uals @">:: (ending balance from the statement ofretained earnings+" (f+ must e0ual 1?">:: (="::: J>"::: J @">:: J 1?">::+% Ho'" (d+ e0uals (f +" or1?">::%

SOLUTION

ll i


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)enerall# AcceptingAccounting *rinciples ,AAP are the conventions" rules" and

procedures that dene acceptableaccounting practice at a particular time%

)AA* and the Independent C*A,s 7eport %ertifed public accountant *%PA+ performs

independent audits of businesses, nancialstatements%

An audit is an e$amination of the nancialstatements and the accounting s#stems"controls" and records to ascertain that nancialstatements are in accordance 'ith )AA*%

i l i d


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Large International Certied*ublic Accounting Firms

O i i h I


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Organi-ations hat IssueAccounting Standards he Financial Accounting "tandards

Board *FA"B+ is responsible fordeveloping )AA*%

he International Accounting"tandards Board *IA"B+ setsinternational accounting standards% Issues international fnancial reporting

standards *IF)"+

IF7S is becoming increasingl# importantbecause of the acceptance of its standardsin man# nancial mar!ets throughout the'orld%

O h O i i h


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Other Organi-ations hatIn.uence )AA* !"e Public Company Accounting Oversight Board (PCAOB) is a

go/e'n$ental bod+ c'eated b+ t"e a'banes#le+ Act to 'egulate

t"e accounting &'o*ession.

!"e American Institute of Certified Public Accountants (AICPA)

in*luences GAA t"'oug" ad/iso'+ co$$ittees.

!"e Securities and Echange Commission (SEC) sets its o(n

standa'ds *o' co$&anies ("ose secu'ities a'e listed on t"e stock

e#c"anges.

!"e !overnmental Accounting Standards Board (!ASB) (as

establis"ed to issue accounting standa'ds *o' state and local

go/e'n$ents.

Internal "evenue Service (I"S) guidelines a'e establis"ed to

collect ta#es but &la+ an in*luential 'ole in t"e establis"$ent o*

accounting &'actices.

* f i l C d t


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*rofessional Conduct(slide 1 of 9+

6anagement accountants have a codeof professional ethics Integrity

Ob9ectivity Independence

0ue care

* f i l C d t


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*rofessional Conduct (slide 9 of 9+

Institute o ManagementAccountants *IMA+ the primar# professional association of

management accountants"

Code of professional conduct emphasi-esthat management accountants have a responsibilit# to be competent in their jobs" must !eep information condential e$cept 'hen

authori-ed or legall# re0uired to disclose it"

must maintain integrit# and avoid con.icts ofinterest" and communicate information objectivel# and

'ithout bias%


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6atch the follo'ing acron#ms 'ith the descriptions that follo'2

;;;; 1% )AA* a% Sets U%S% accounting standards

;;;; 9% IF7S b% Audits nancial statements

;;;; % IAS/ e% &stablished b# the FAS/

;;;; ?% *CAO/ f% &stablished b# the IAS/

;;;; @% AIC*A g% In.uences accounting standards through

member C*As

;;;; % S&C h% 7eceives audited nancial statements ofpublic companies

SOLUTION

1. e; 2. *; 3. b; 4. a; 5. d; 6. c; 7. g; . ".

chapter 1, powers et al

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