Analyzing and Using Financial Information © Prentice Hall, 2005 Business In Action 3e

What Is Accounting? Financial accounting Management accounting © Prentice Hall, 2005 Business In Action 3e

What Accountants Do Bookkeeping Cost accounting Tax accounting Financial analysis © Prentice Hall, 2005 Business In Action 3e

Ten Most Important Accounting Skills Analytical Problem solving Interpersonal Listening Communication Leadership Decision making Time management Teamwork Computer © Prentice Hall, 2005 Business In Action 3e

Types of Accountants Private Public CMA or CPA Internal audit CPA External audit © Prentice Hall, 2005 Business In Action 3e

Typical Finance Department Board of Directors President Vice President Sales Vice President Finance Vice President Manufacturing Treasurer Controller Credit Manager Inventory Manager Director of Capital Budgeting Cost Accounting Financial Accounting Tax Department © Prentice Hall, 2005 Business In Action 3e

Accounting Rules Generally Accepted Accounting Principles (GAAP) Financial Accounting Standards Board (FASB) International Accounting Standards (IAS) Securities and Exchange Commission (SEC) © Prentice Hall, 2005 Business In Action 3e

Problems in Public Accounting Deliberate deception Auditing shortcuts Conflicts of interest Aggressive business tactics © Prentice Hall, 2005 Business In Action 3e

Sarbanes-Oxley Act Advantages Disadvantages Auditor authority Conflict of interest Investor protection Accountability Disadvantages Implementation Compliance cost Enforcement Reporting © Prentice Hall, 2005 Business In Action 3e

Accounting Concepts The accounting equation Double-entry bookkeeping The matching principle © Prentice Hall, 2005 Business In Action 3e

The Accounting Equation Owner’s Equity: Assets – Liabilities = Owner’s Equity Accounting Equation: Assets = Liabilities + Owner’s Equity © Prentice Hall, 2005 Business In Action 3e

Maintaining a Balance Double-entry bookkeeping Matching principle Credit purchase Cash purchase Matching principle Accrual basis Cash basis © Prentice Hall, 2005 Business In Action 3e

How Are Financial Statements Used? A transaction takes place The transaction is measured and recorded Journal entries are analyzed and posted to a ledger Account data are summarized and used to prepare budgets, reports, and financial statements © Prentice Hall, 2005 Business In Action 3e

Understanding Financial Statements Balance sheet Income statement Cash-flow statement © Prentice Hall, 2005 Business In Action 3e

The Balance Sheet Assets Liabilities and shareholder’s equity Current Fixed Liabilities and shareholder’s equity Current liabilities Long-term liabilities Shareholder’s equity © Prentice Hall, 2005 Business In Action 3e

The Income Statement Revenues Gross Sales Less Sales Returns and Allowances Cost of Goods Sold Beginning Inventory + Net Purchases – Ending Inventory Operating Expenses Selling Expenses General Expenses Income Taxes Net Income After Taxes Net Income Before Taxes – Income Taxes © Prentice Hall, 2005 Business In Action 3e

The Cash-Flow Statement Operations Investments Financing © Prentice Hall, 2005 Business In Action 3e

Analyzing Financial Statements Trend Analysis Ratio Analysis Consider More Than One Ratio Uncover Business Shifts Consider Extraordinary Circumstances Check Specific Data © Prentice Hall, 2005 Business In Action 3e

Types of Financial Ratios Profitability Liquidity Activity Leverage © Prentice Hall, 2005 Business In Action 3e

Profitability Ratios Return on Sales Net Income/Net Sales Return on Equity Net Income/Total Owner’s Equity Earnings per Share Net Income/Average Shares Outstanding © Prentice Hall, 2005 Business In Action 3e

Liquidity Ratios Current Ratio Current Assets/Current Liabilities Quick Ratio Current Assets – Inventory/Current Liabilities © Prentice Hall, 2005 Business In Action 3e

Activity Ratios Inventory Turnover Cost of Goods Sold/Average Inventory Accounts Receivable Turnover Sales/Average Accounts Receivable © Prentice Hall, 2005 Business In Action 3e

Leverage Ratios Debt to Equity Total Liabilities/Total Equity Debt to Total Assets Total Liabilities/Total Assets © Prentice Hall, 2005 Business In Action 3e

Developing and Implementing Financial Management Developing and Implementing a Financial Plan Amount of funds Sources of funds Uses of funds Monitoring Cash Flow Cash Inventory Receivables and payables Developing a Budget Financial control Capital investments Capital budgeting © Prentice Hall, 2005 Business In Action 3e