Wednesday morning Accounting

Accounting Accounting -- Recording, classifying, summarizing and interpreting of financial events and transactions in an organization to provide interested parties needed financial information. Outside parties - like employees, owners, creditors, unions, investors and the government - make use of a firm’s accounting information

The Accounting System

Financial Accounting Financial Accounting -- Financial information and analyses are generated for people primarily outside the organization. Outside users are interested in these questions: Is the organization profitable? Is it able to pay its bills? How much debt does it owe? Annual Report -- A yearly statement of the financial condition, progress, and expectations of the firm. American Eagle, Disney

HOW to READ an ANNUAL REPORT Key things to watch for and read: Management’s discussion and analysis of operations Balance sheet Income statement Statement of cash flows Auditor’s opinion

Managerial Accounting Managerial Accounting -- Provides information and analysis to managers inside the organization to assist them in decision making. Managerial accounting is involved with: Costs of production Costs of marketing Preparation and control of budgets Minimizing tax liabilities

Public vs. Private Accountants Private Accountants -- Work in a single firm, government agency, or nonprofit organization. Public Accountants -- Provide accounting services to individuals or businesses. Certified Public Accountants (CPAs) -- Accountants who have passed a series of examinations established by the American Institute of Certified Public Accountants (AICPA) and met a states requirements for education and experience.

Auditing Auditing -- Reviewing and evaluating the information used to prepare a company’s financial statements. Independent Audit -- An evaluation and unbiased opinion about the accuracy of a company’s financial statements. Certified Internal Auditors (CIAs) -- Accountants who have a bachelor’s degree and two years of experience in internal auditing and pass an exam administered by the Institute of Internal Auditors.

Specialized Accountants Tax Accountants -- Accountants trained in tax law and are responsible for preparing tax returns or developing tax strategies. Forensic Accountants -- When a company is suspected of fraud or other accounting wrongdoings a court will commission a forensic accountant to search for foul play. Forensic accountants look for proof a company is “cooking the books.” Please note that this is not the role of the public accountants.

The Accounting Cycle Accounting Cycle -- A six-step procedure that results in the preparation and analysis of the major financial statements.

GAAP Generally Accepted Accounting Principles the standard framework of guidelines for financial accounting used in any given jurisdiction; GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements.

Bookkeeping Bookkeeping -- The recording of business transactions. Bookkeepers divide a firm’s transactions into meaningful categories and post them into a record book or computer program called a journal. Use of double entry bookeeping Ledger -- A specialized accounting book or program where all information is in one place. Trial Balance -- A summary of all the information in the account ledgers.

Cash vs. Accrual Accounting Revenue Recognition An exchange of goods or services at an agreed upon price with payment or promise of payment Accounts receivable, unearned revenue Matching Matching expenses with the revenue it helped to generate; matching expenses to the time period when they are incurred inventory/cost of goods sold, accounts payable, prepaid expenses

Financial Statements Financial Statement -- A summary of all the financial transactions that have occurred over a particular period. Key financial statements of business are: Balance sheet Income statement Statement of cash flows

The Fundamental Accounting Equation Fundamental Accounting Equation -- The basis for the balance sheet. The equation must always be balanced and includes the formula: Assets = Liabilities + Owners Equity

Assets Assets -- Economic resources owned by a firm. Items can be tangible or intangible. Liquidity -- Ease with which assets can be converted into cash.

Classifying Assets Current Assets -- Items that can or will be converted to cash within one year. Fixed Assets -- Long-term assets that are relatively permanent such as land, buildings, or equipment. Intangible Assets -- Long-term assets that have no physical form but do have value such as patents, trademarks, and goodwill.

Classifying Liabilities Liabilities -- What the business owes to others - its debts. Accounts Payable -- Current liabilities a firm owes for merchandise or services purchased on credit. Notes Payable -- Short or long-term liabilities a business promises to pay by a certain date. Bonds Payable -- Long-term liabilities that the firm must pay back.

Owners’ Equity Owners’ Equity -- The owners’ share of the business: assets (what they own) minus liabilities (what they owe). Consists of: Paid-in Capital – amount of funds directly invested in the business by its owners Retained Earnings -- Accumulated earnings from the firm’s profitable operations that are reinvested in the business.

The Income Statement Income Statement -- The financial statement that shows a firm’s bottom line - that is, its profit after costs, expenses, and taxes. Net Income/Net Loss -- The revenue left over or depleted.

The Multi-Step Income Statement The formula for the multi-step income statement: Revenue Minus Cost of Goods Sold Equals Gross Profit Minus Operating Expenses Equals Net Income before Taxes (Operating Income) Minus Taxes Equals Net Income or Net Loss

Income Statement Accounts Revenues is the monetary value a firm received for goods sold, services rendered or other payments. Recall revenue recognition Cost of Goods Sold (or Manufactured) -- Measures the cost of merchandise the firms sells or the cost of raw materials and supplies it used in producing items for resale. Recall matching Gross Profit -- How much a firm earned by buying (or making) and selling merchandise.

Income Statement Accounts, cont’d Operating Expenses -- Expenses a firm incurs in selling goods and services such as rent, salaries and supplies. Depreciation -- The systematic write-off of the cost of a tangible asset over its estimated useful life.

Statement of Cash Flows The purpose is to provide info about the sources and uses of cash during a particular time period content and organization operating activities: generally, any activities that enter into the determination of net income investing activities: transactions involved in the acquisition or disposition of non-current assets (sale or purchase of non-current assets, sales or purchases of other company’s securities, collecting or giving a loan to a third party) financing activities: transactions involving the company’s debt or equity (selling or acquiring company’s own stock, issuing or repaying long-term debt, payment of dividends) There are two different ways to prepare the operating section of the SCF, the direct and indirect method;

Understanding Cash Flow Cash is the lifeblood of any business Managing cash flow is a key consideration of a business and can be particularly challenging for small and seasonal businesses.

Example of the Accounting Cycle Glorian Portrait Transaction worksheet Income Statement Retained Earnings Balance Sheet Statement of Cash Flows

Financial Statement Analysis FSA - The assessment of a firm’s financial condition using calculations and financial ratios developed from the firm’s financial statements. Sometimes referred to as ratio analysis The ratios do not exist in a vacuum By themselves, they do not provide much meaning They need to be compared to something: Trends over time Key competitors Industry averages

FSA, cont’d The ratios can be broken down into Profitability Short-term financial position (liquidity) Long-term financial position (leverage/financial structure) Efficiency/effectiveness Yahoo Finance and WSJ as sources of ratio analysis American Eagle (Yahoo), American Eagle (WSJ)

International Accounting Issues Multinational companies must adapt their accounting reporting to the rules of multiple countries. Many countries have adopted International Financial Reporting Standards (IFRS) and are pushing to make them standard. The U.S. Securities & Exchange Commission believes there should be such a standard.

Timeline for the US move to IFRS 2008: SEC offers proposed timeline 2009: 110 large companies have the option of using IFRS 2011: SEC assesses progress of IFRS 2013: Final decision on the move to IFRS 2014: Large public companies will be required to report in IFRS (pending SEC decision) 2016: All companies will be required to report in IFRS (pending SEC decision)