Accounting and Financial Statements Chapter Fourteen Accounting and Financial Statements

The Nature of Accounting The recording, measurement, and interpretation of financial information, often used in making business decisions.

Types of Accountants Public Accountant An independent professional who provides accounting services to the public (individuals or firms) for a fee. A Certified Public Account (CPA) is an individual who has been certified in the state in which he or she resides by meeting state requirements for accounting, education, and experience and by passing a 2 1/2 -day accounting examination. Private Accountant An accountant employed by a corporation, government agency, or other organization. Can be either a CPA or a CMA (Certified Management Accountant).

Is it Accounting or Bookkeeping? Bookkeeping is much narrower and more mechanical than accounting. Bookkeeping is typically limited to routine day-to-day business transactions and obtaining and recording information that accountants use in financial analysis.

Corporate America’s Demand for Accounting Specialties Accounts Receivable – 21% Accounts Payable – 15% Payroll – 15% Cost Accounting – 9% General Ledger – 8% Tax – 5% Credit – 2%

Uses for Accounting Information Internal Uses: Managerial Accounting Cash Flow Budget External Uses: Reporting financial performance to outsiders Filing Income Taxes Obtaining Credit Reporting to Stockholders

Internal Accounting Information Management Plan and set goals Organize Lead and motivate Control Lenders & Suppliers Evaluate Credit Risks

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

Who Uses Accounting Information? Tax authorities Federal (IRS) State Municipal Other Regulatory Agencies SEC Stock exchanges ICC, FAA, etc. Other agencies Economic Planners Council of Economic Advisors Federal Reserve Board Government planners Other groups Employees and labor unions Financial advisors Customers and the general public Management Owners, partners Boards of directors Officers of the company Managers Department heads Supervisors Those with Direct Financial Interest Present or potential investors Present or potential creditors Those with Indirect Financial Interest Actions That Affect Business Activities Business Activities Accounting Source: Needles, Belverd E., Henry R. Anderson, and James C. Caldwell. Principles of Accounting, Fourth Edition. Copyright © 1990 by Houghton-Mifflin. Used with permission.

The Accounting Process: The Accounting Equation Assets = Liabilities + Owners’ Equity The difference between a firm’s assets and its liabilities Things of value that a firm owns A firm’s debts and obligations

The Accounting Process: Double-Entry Bookkeeping Assets = Liabilities + Owners’ Equity $325 = $325

The Accounting Cycle 1. Examining Source Documents 2. Recording Transactions 3. Posting Transactions 4. Preparing Financial Statements

Preparing Accounting Statements with GAAP Generally Accepted Accounting Principles (GAAP) The Best-known Financial Statements: Income Statement Balance Sheet

Equivalent Accounting Terms Term: Equivalent Term: Revenues Sales Gross Profit Gross Income / Gross Earnings Operating Income Operating Profit / Earnings Before Income & Taxes / Income Before Interest & Taxes Income Before Taxes Earnings Before Taxes / Profit Before Taxes Net Income Earnings After Taxes / Profit After Taxes Income Available to Earnings Available to Common Stockholders Stockholders

The Income Statement A financial report that shows an organization’s profitability over a period of time – month, quarter or year.

Key Income Statement Terms Revenue Cost of Goods Sold Gross Income Expenses Selling, general & administrative R&D, engineering Interest Depreciation Net Income

Anna’s Flowers Income Statement December 31, 2002 Revenues: Net Sales $123,850 Consulting: 73,850 Total Revenues $197,700 Expenses: Cost of Goods Sold $ 72,600 Selling Expenses 37,700 General & Admin. 18,400 Other expenses 5,600 Total Expenses $134,300 Net Income $ 63,400

The Balance Sheet A “snapshot” of an organization’s financial position at a given moment.

Key Balance Sheet Terms Assets Accounts Receivable Liabilities Accounts Payable Accrued Expenses Owner’s Equity

Anna’s Flowers Balance Sheet December 31, 2002 Assets: Current Assets: Cash: $17,850 Accounts Receivable 10,200 Merchandise Inventory 8,750 Total Assets: $36,800 Property & Equipment Equipment 11,050 Office Building 73,850 Total Prop. & Equip. 84,900 Total Assets: $121,700 Liabilities & Owner’s Equity Current Liabilities Acct’s Payable $12,600 Total Current Liabilities 12,600 Long-term Liabilities Mortgage Payable 23,600 Total Liabilities 36,200 Owner’s Equity: Anna Rodriguez, Capital 85,500 Total Liabilities & Owner’s Equity $121,700

Anna’s Flowers Annual Budget for 2002 Sales Consulting Total January 6,500 5,000 11,500 February 6,000 6,000 12,000 March 5,800 6,200 12,000 April 6,100 6,500 12,600 May 7,000 6,800 13,800 June 8,100 7,600 15,700 July 8,600 7,800 16,400 August 6,900 8,000 14,900 September 6,700 8,700 15,400 October 5,900 9,000 14,900 November 5,000 8,500 13,500 December 4,500 8,000 12,500 Annual $123,850 $73,850 $197,700

Analyzing Financial Statements with Ratio Analysis Profitability ratios Asset utilization ratios Liquidity ratios Debt utilization ratios Per share data

Profitability Ratios Profit Margin = Return on Assets = Return on equity =

Asset Utilization Ratios Receivables turnover = Inventory turnover = Return on equity =

Liquidity Ratios Current ratio = Quick ratio =

Debt Utilization Ratios Debt to total assets = Times interest = earned

Per Share Data Earnings per share = Dividends per = share

Solve the Dilemma 1. Describe the two basic accounting statements. What type of information does each provide that can help you evaluate the situation? 2. Which of the financial ratios are likely to prove to be of greatest value in identifying problem areas in the company? Why? Which of your company’s financial ratios might you expect to be especially poor? 3. Discuss the limitations of ratio analysis.

Explore Your Career Options What contributions do accountants make to organizations?

Additional Discussion Questions and Exercises 1. What is the accounting equation? Which financial statement (income statement or balance sheet) is most similar to the accounting equation? 2. What is meant by the liquidity of assets? 3. In measuring a firm’s performance, many investors and managers prefer industry analysis or industry ratios. What is the advantage in using industry ratios?

Additional Discussion Questions and Exercises 4. How do public accounts, private accountants, and certified public accountants differ? 5. What are some different types of liabilities?

Chapter 14 Quiz 1. Which generally appears on an income statement? a. Assets = Liability + Owners’ equity b. Revenue - Expenses = Profit or loss c. Assets - Expenses = revenue d. Current assets/Current liabilities 2. An accountant who provides accounting services to individuals and/or businesses for a fee is considered a a. certified public accountant (CPA). b. public accountant. c. private accountant. d. local accountant.

Chapter 14 Quiz 3. Assume a firm’s inventory turnover was 25. That means a. the firm made a 25 percent profit on its sales. b. the firm has sold and replaced its inventory 25 times in a year. c. the firm has 25 items in inventory. d. the firm needs to sell 25 items in inventory to make a profit. 4. The internal financial statement that forecasts expenditures and revenues for a period is known as a. a balance sheet. b. an income statement. c. a budget. d. an annual report.

Multiple Choice Questions about the Video 1. The financial position of a company at a given time is reflected on its a. balance sheet. b. income statement. c. owners’ equity statement. d. statement of cash flows. e. checkbook. 2. The most important of the firm’s financial statements is its a. balance sheet. b. income statement. c. owners’ equity statement. d. statement of cash flows. e. collateral loan.