Chapter 15: Accounting

Download Chapter 15: Accounting

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14th edition

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<ul><li> 1. Chapter15Understanding Accounting andFinancial Statements</li></ul> <p> 2. Learning Goals1 Explain the functions and identify the 5 Explain the functions and majorthree basic activities involving accounting. components of the four principal financial statements: the balance2 Describe the roles played by public, sheet, the income statement, themanagement, government, and not-for- statement of owners equity, and theprofit accountants.statement of cash flows.3 Identify the foundations of the accounting 6 Discuss how financial ratios aresystem, including GAAP and the role of used to analyze a companysthe Financial Accounting Standards financial strengths and weaknesses.Board (FASB). 7 Describe the role of budgets in a4 Outline the steps in the accounting cycle, business.and define double-entry bookkeeping and 8the accounting equation. Outline accounting issues facing global business and the move toward one set of worldwide accounting rules. 3. Accountings Accounting is the process of measuring, interpreting,and communicating financial information to enablepeople inside and outside the firm to make informeddecisions. 4. Open Book Managements Open book management- sharing sensitivefinancial information with employees andteaching them how to understand and usefinancial statements.s Viewing financial information may help thembetter understand how their work contributesto the companys success.s Outsiders use financial data to evaluateinvestment opportunities. 5. Business Activities InvolvingAccountings Financing activities provide necessary funds tostart a business and expand it after it beginsoperating.s Investing activities provide valuable assetsrequired to run a business.s Operating activities focus on selling goods andservices, but they also consider expenses asimportant elements of sound financialmanagement. 6. Accounting Professionalss Public Accountantss Provide accounting services (auditing,tax preparation, consulting) to individualsor business firms for a fees CPAs ManagementAccountantss Provide timely, relevant, accurate, andconcise information that executives canuse to operate their firmss CMAs Government and Not-for-Profit Accountants 7. Foundation of Accounting Systemss Generally accepted accounting principles (GAAP) encompassthe conventions, rules, and procedures for determiningacceptable accounting practices at a particular time.s Financial Accounting Standards Board (FASB) is primarilyresponsible for evaluating, setting, or modifying GAAP in theU.S.s Sarbanes-Oxley Act (SOX) responded to cases of accountingfraud.s Created the Public Accounting Oversight Board, which setsaudit standards and investigates and sanctions accountingfirms that certify the books of publicly traded firms.s Senior executives must personally certify that the financialinformation reported by the company is correct.s Resulted in increase in demand for accountants. 8. The Accounting Cycles Accounting cycle- set of activities involved inconverting information about transactions intofinancial statements. 9. The Accounting Equations Assets- anything of value owned or leased by abusiness.s Liability- claim against a firms assets by a creditor.s Owners equity- all claims of the proprietor, partners, orstockholders against the assets of a firm, equal to theexcess of assets over liabilities.s Basic accounting equation- relationship that statesassets equal liabilities plus owners equity.s Double-entry bookkeeping- process by whichaccounting transactions are entered; each individualtransaction always has an offsetting transaction. 10. Impact of Technology on Accountings Simplifies the accounting process by automating dataentry and calculations.s Available products are customized for businesses ofdifferent sizes.s Entrepreneurs and small businesses use: QuickBooks,Peachtree, and BusinessWorks.s Larger firms use larger scale software packages like:Computer Associates, Oracle, and SAP.s Software that handles accounting information forinternational businesses is another option. Offersdifferent country information/language.s Some systems offer web-based packages for small andmedium businesses. 11. Balance Sheets Balance sheet statement of a firmsfinancial positionwhat it owns and theclaims against its assetsat a particular pointin times Photograph of firms assets together with itsliabilities and owners equitys Follows the accounting equation 12. Sample Balance Sheet 13. Income Statements Income Statement financial record of acompanys revenues and expenses andprofits over a period of times Firms financial performance in terms ofrevenues, expenses, and profits over a giventime periods Reports profit or losss Focus on revenues and costs associated withrevenues 14. Sample Income Statement 15. Statement of Owners Equitys Statement of Owners Equity isdesigned to show the components of thechange in equity from the end of one fiscalyear to the end of the nexts Begins with the amount of equity shown onthe balance sheets Net income is added, and cash dividendspaid to owners are subtracted 16. Sample Statement of Owners Equity 17. Statement of Cash Flowss Statement of cash flows a firms cashreceipts and cash payments that presentsinformation on its sources and uses of cashs Accrual accounting method that recordsrevenue and expenses when they occur, notnecessarily when cash actually changeshands 18. Sample Statement of Cash Flows 19. Financial Ratios Analysiss Ratio analysis tool for measuring a firms liquidity,profitability, and reliance on debt financing as well asthe effectiveness of managements resource utilization 20. Liquidity Ratios Total current assetssCurrent ratio comparescurrent assets to currentliabilities.Total current liabilitiess Cash and equivalents Acid-test (or quick) ratio+ short-term investments measures the ability of a firm+ accounts receivable to meet its debt payments on short notice.Total current liabilities 21. Activity Ratios Net salessInventory turnover ratioindicates the number oftimes merchandise movesAverage of inventorythrough a business. Net salessTotal asset turnover ratioindicates how much in saleseach dollar invested in assetsgenerates. Average of total assets 22. Profitability Ratioss Profitability ratios measure the organizations overallfinancial performance by evaluating its ability togenerate revenues in excess of operating costs andother expenses. 23. Leverage Ratioss Leverage ratios measure the extent to which a firmrelies on debt financing.s Total liabilities to total assets ratio &gt; 50 percent indicates thata firm is relying more on borrowed money than owners equity. 24. Budgetss Budget- planning and control tool that reflects a firmsexpected sales revenues, operating expenses, andcash receipts and outlayss Management estimates of expected sales, cash inflowsand outflows, and costss Budgets are a financial blueprint that serves as afinancial plans Cash budget- tracks the firms cash inflows andoutflows. 25. Sample Budget 26. International Accountings Accounting procedures and practices must be adapted toaccommodate an international business environment.s The International Accounting Standards Committee (IASC) wasestablished in 1973 to promote worldwide consistency in financialreporting practices. The IASC soon developed its first set ofaccounting standards and interpretations and, in 2001, became theInternational Accounting Standards Board (IASB). InternationalFinancial Reporting Standards (IFRS) are the standards andinterpretations adopted by the IASB.s Exchange rates- ratio at which a countrys currency can beexchanged for other currenciess Consolidated financial statements must reflect gains and losses dueto changes in exchange ratess Can have significant impact on financial statement </p>