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Chapter15.pptxUnderstanding Accounting and Financial Statements http://www.wileybusinessupdates.com
Chapter
15
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Discuss the users of accounting information.
Describe accounting professionals.
Identify the foundation of the accounting system.
Outline the steps in the accounting cycle.
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Learning Objectives
Explain financial statements.
Discuss financial ratio analysis.
Describe the role of budgeting.
Outline international accounting practices.
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Accounting is the process of measuring, interpreting, and communicating financial information to enable people inside and outside the firm to make informed decisions.
Accounting
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Open book management- sharing sensitive financial information with employees and teaching them how to understand and use financial statements.
Viewing financial information may help them better understand how their work contributes to the company’s success.
Outsiders use financial data to evaluate investment opportunities.
Open Book Management
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Financing activities provide necessary funds to start a business and expand it after it begins operating.
Investing activities provide valuable assets required to run a business.
Operating activities focus on selling goods and services, but they also consider expenses as important elements of sound financial management.
Business Activities Involving Accounting
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Public Accountants
Provide accounting services (auditing, tax preparation, consulting) to individuals or business firms for a fee
CPA
Management Accountants
Provide timely, relevant, accurate, and concise information that executives can use to operate their firms
CMA
Government and Not-for-Profit Accountants
Accounting Professionals
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Generally accepted accounting principles (GAAP) encompass the conventions, rules, and procedures for determining acceptable accounting practices at a particular time.
Financial Accounting Standards Board (FASB) is primarily responsible for evaluating, setting, or modifying GAAP in the U.S.
Sarbanes-Oxley Act (SOX) responded to cases of accounting fraud.
Created the Public Accounting Oversight Board, which sets audit standards and investigates and sanctions accounting firms that certify the books of publicly traded firms.
Senior executives must personally certify that the financial information reported by the company is correct.
Resulted in increase in demand for accountants.
The Foundation of The Accounting System
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Accounting cycle- set of activities involved in converting information about transactions into financial statements.
The Accounting Cycle
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Assets- anything of value owned or leased by a business.
Liability- claim against a firm’s 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.
Basic accounting equation- relationship that states assets equal liabilities plus owners’ equity.
Double-entry bookkeeping- process by which accounting transactions are entered; each individual transaction always has an offsetting transaction.
The Accounting Equation
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Simplifies the accounting process by automating data entry and calculations.
Available products are customized for businesses of different sizes.
Entrepreneurs and small businesses use: QuickBooks, Peachtree, and BusinessWorks.
Larger firms use larger scale software packages like: Computer Associates, Oracle, and SAP.
Software that handles accounting information for international businesses is another option. Offers different country information/language.
Some systems offer web-based packages for small and medium businesses.
Impact of Technology on Accounting
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Balance sheet— statement of a firm’s financial on a particular date.
Photograph of firm’s assets together with its liabilities and owner’s equity
Follows the accounting equation
Balance Sheet
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Sample Balance Sheet
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Income Statement— financial record of a company’s revenues and expenses and profits over a period of time
Firm’s financial performance in terms of revenues, expenses, and profits over a given time period
Reports profit or loss
Focus on revenues and costs associated with revenues
The Income Statement
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Sample Income Statement
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Statement of Owners’ Equity— is designed to show the components of the change in equity from the end of one fiscal year to the end of the next
Begins with the amount of equity shown on the balance sheet
Net income is added, and cash dividends paid to owners are subtracted
Statement of Owners’ Equity
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Sample Statement of Owners’ Equity
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Statement of cash flows— a firm’s cash receipts and cash payments that presents information on its sources and uses of cash
Accrual accounting— method that records revenue and expenses when they occur, not necessarily when cash actually changes hands
Statement of Cash Flows
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Sample Statement of Cash Flows
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Ratio analysis— tool for measuring a firm’s liquidity, profitability, and reliance on debt financing as well as the effectiveness of management’s resource utilization
Financial Ratio Analysis
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Liquidity Ratios
Cash and equivalents + short-term investments + accounts receivable
Total current liabilities
Total current assets
Total current liabilities
Current ratio compares current assets to current liabilities.
Acid-test (or quick) ratio measures the ability of a firm to meet its debt payments on short notice.
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Activity Ratios
Inventory turnover ratio indicates the number of times merchandise moves through a business.
Total asset turnover ratio indicates how much in sales each dollar invested in assets generates.
Net sales
Average of inventory
Net sales
Average of total assets
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Profitability Ratios
Profitability ratios measure the organization’s overall financial performance by evaluating its ability to generate revenues in excess of operating costs and other expenses.
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Leverage Ratios
Leverage ratios measure the extent to which a firm relies on debt financing.
Total liabilities to total assets ratio > 50 percent indicates that a firm is relying more on borrowed money than owners’ equity.
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Budgeting
Budget- planning and control tool that reflects a firm’s expected sales revenues, operating expenses, and cash receipts and outlays
Management estimates of expected sales, cash inflows and outflows, and costs
Budgets are a financial blueprint that serves as a financial plan
Cash budget- tracks the firm’s cash inflows and outflows.
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Sample Budget
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International Accounting
Accounting procedures and practices must be adapted to accommodate an international business environment.
The International Accounting Standards Committee (IASC) was established in 1973 to promote worldwide consistency in financial reporting practices. The IASC soon developed its first set of accounting standards and interpretations and, in 2001, became the International Accounting Standards Board (IASB). International Financial Reporting Standards (IFRS) are the standards and interpretations adopted by the IASB.
Exchange rates- ratio at which a country’s currency can be exchanged for other currencies
Consolidated financial statements must reflect gains and losses due to changes in exchange rates
Can have significant impact on financial statement
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