Business in a Changing World McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved. Chapter 14 Accounting and Financial Statements Asst. Prof. Dr. Serdar AYAN 1

14-2 Accounting - Bookkeeping Bookkeepers -- responsible for obtaining and recording the information that accountants require to analyze a firm’s financial position. Accountants -- record financial information and understand, interpret, and develop sophisticated accounting systems necessary to classify and analyze complex financial information.

14-3 The Users of Accounting Information

14-4 Uses of Accounting Information Internal uses: Managerial accounting – internal use of accounting statements by managers in planning & directing the organization’s activities Cash flow – movement of money through organization over a daily, weekly, or monthly basis Budget – the internal financial plan that forecasts expenses and income over a set period of time.

14-5 Uses of Accounting Information External uses: – Reporting financial performance to outsiders Annual report – summary of the firm’s financial information, products, and growth plans for owners and investors. – Filing income taxes – Obtaining credit – Reporting to stockholders

14-6 External Accounting Information Stockholders and Potential Investors – Evaluate soundness of investments Government Agencies – Confirm tax liabilities – Confirm payroll – Deductions – Approve new issues of stocks and bonds

14-7 Financial Statements The end results of the accounting process are a series of financial statements. – Income statement – Balance sheet – Statement of cash flows Financial statements are provided to: – Stockholders and potential investors – Creditors – Government agencies – Internal Revenue Service

14-8 The Income Statement A financial report that shows an organization’s profitability over a period of time: – Month – Quarter – Year Key Income Statement Terms Revenue – Cost of goods sold – Gross income Expenses – Selling, general & administrative – R&D, engineering – Interest – Depreciation Net income

John’s Pizza Income Statement December 31,

14-10 Operating Budget Revenues Expenses Cash Flows Master Budget Master Budget Financial Control Cost ControlExpenditures Plan for the Future

14-11 John’s Pizza Annual Budget for 2008 SalesConsulting Total January6,500 5,00011,500 February6,000 6,00012,000 March5,800 6,20012,000 April6,100 6,50012,600 May7,000 6,80013,800 June8,100 7,60015,700 July8,600 7,80016,400 August6,900 8,00014,900 September6,700 8,70015,400 October5,900 9,00014,900 November5,000 8,50013,500 December4,500 8,00012,500 Annual $123,850 $73,850 $197,700

14-12 The Balance Sheet A “snapshot” of an organization’s financial position at a given moment – Presents an accumulation of all the company’s transactions since it began Key Balance Sheet Terms Assets ( Aktifler, varlıklar ) – Current assets – Accounts receivable Liabilities ( Pasifler, borçlar ) – Accounts payable – Accrued expenses Owner’s equity

John’s Pizza Balance Sheet December 31,

14-14 The Statement of Cash Flow Explains how the company’s cash changed from the beginning of the accounting period to the end Three categories: 1.Cash from (used for) operating activities 2.Cash from (used for) investing activities 3.Cash from (used for) financing activities

14-15 John’s Pizza Statement of Cash Flow Cash Flows from Operating Activities Cash received from revenue transactions $197,700 Cash paid for expenses ($134,300) Net Cash provided by operating activities $ 63,400 Cash Flows from Investing Activities Equipment ($11,050) Office Building ($ 73,850) Merchandise Inventory ($ 8,750) Cash Flows from Financing Activities Investment by Owners $ 85,500 Increase in Cash for Month $ 55,250

14-16 Role of Financial Management Rent and Utilities Plant and Equipment Materials Advertising-Promotions Distribution Wages, Salaries, Training Interest, Dividends, Taxes Sales from Operations Sales from Assets Retained Earnings Trade Credit Bonds Stocks Commercial Loans Management Decides How To Use Funds

14-17 Financing Operations and Growth

14-18 Long-Term Loans Leasing Bonds Preferred Stock Common Stock Sale of Assets Retained Earnings Internal Sources Internal Sources Debt Capital Equity Capital External Sources External Sources Long-Term Projects Long-Term Projects Long-Term Financing