Using Accounting Information Why Accounting Information is Important: Accounting information is management information Managers, employees, lenders, suppliers, stockholders, and government agencies all rely on the information contained in three financial statements: The Balance Sheet The Income Statement The Statement of Cash Flows

Who Uses Accounting Info? Managers, and selected employees, are the primary users of information to plan and set goals, organize, lead, motivate and control. Much of the accounting information is ‘proprietary’ – not given to anyone outside the company.

Who Uses Accounting Info? Certain information has to be provided to people outside the organization. Lenders and Suppliers – evaluate a company’s credit risk before giving short- or long-term loans Stockholders and Potential Investors – evaluate a company’s financial health before purchasing stocks or bonds Government Agencies – in country’s collecting taxes, confirm tax liabilities for the company and its employees and approve new issues of stocks and bonds. [See Table 18.1, pg 537]

Careers in Accounting Private Accountant – employed by a specific organization. Duties usually include: General accounting – recording business transactions and preparing financial statements Budgeting – helping managers develop budgets for sales and operating expenses Cost accounting – determining the cost of producing specific products or services Internal auditing – reviewing the company's finances and operations to determine whether goals and objectives are being achieved Tax accounting – planning tax strategy and preparing tax returns for the company

Careers in Accounting Public Accountant – provides services to clients, who can’t afford or do not need a full-time accountant, on a fee basis.

Careers in Accounting Certified Public Accountant [CPA] – an individual who has met international requirements for accounting education and experience and has passed a difficult two-day accounting examination prepared by a professional examining body.

The Accounting Process Accounting is a system of transforming raw financial data into useful financial information.

The Accounting Process The Accounting Equation: Assets = Liabilities + Owners’ Equity

The Accounting Process Assets – resources a business owns – cash, inventory, equipment and real estate (land) Liabilities – the firm’s debts – what it owes to others Owners’ Equity – the difference between total assets and total liabilities – what would be left for the owner if the firm’s assets were sold and the money used to pay off its liabilities

Double-Entry Bookkeeping Double-Entry Bookkeeping is a system in which each financial transaction is recorded as two separate accounting entries to maintain the balance shown on each side of the accounting equation. Example: Original investment of BD50,000 by owner: Assets = Liabilities + Owners’ Equity BD50,000 = BD0 + BD50,000

The Accounting Cycle Five (5) Steps in the Accounting Cycle: Analyzing Source Documents – receipts, invoices, sales slips and any other documents that show the dinar amounts for day-to-day business transactions. Recording Transactions – transactions are recorded in general or specialized journals A General Journal is a book of original entry in which typical transactions are recorded in order of their occurrence. A Special Journal may be used for Cash Receipts, Cash Payments, Purchases, Sales, etc.

The Accounting Cycle Posting Transactions – information is transferred to a General Ledger which contains a separate sheet or section for each account. Preparing the Trial Balance – a summary of the balances of all general ledger accounts is prepared at the end of the accounting period. If Assets = Liabilities + Owners’ Equity, then the accountant can prepare the three financial statements.

The Accounting Cycle Preparing Financial Statements and Closing the Books – the firm’s 3 financial statements are prepared from the Trial Balance information. Statements may be prepared monthly, quarterly semi-annually or annually. Once the statements have been prepared and checked, the firm’s books are ‘closed’ for the accounting period A Post-Closing Trial Balance is prepared and if the accounting equation is still in balance, a new accounting cycle begins for the next accounting period. NOTE: Steps 1-3 are done on a regular basis, Steps 4-5 are done at the end of the accounting cycle.

The Balance Sheet A Balance Sheet [sometimes referred to as a statement of financial position] is a summary of the dinar amounts of a firm’s assets, liabilities and owners’ equity accounts at the end of a specific accounting period. [See Figure 18.2, pg 543]

The Balance Sheet Information is reported in the same order on all Balance Sheets – the Assets Section: Assets are listed in order – from most liquid to least liquid Liquidity is the ease with which an asset can be converted into cash Current Assets are those which can be quickly converted into cash or that will be used in one year or less Prepaid Expenses – assets that have been paid far in advance but have not yet been used [e.g. insurance premiums] Fixed Assets – assets that will be held for a period longer than one year [land, buildings, equipment. etc.]

The Balance Sheet Depreciation is the process of apportioning the cost of a fixed asset over its useful life. Intangible Assets – assets that do not exist physically but that have a value based on the rights or privileges they confer on a firm. [patents, copyrights, trademarks, franchises, etc] Goodwill – the value of a firm’s reputation, location, earning capacity, and other intangibles that make the business a profitable concern.

The Balance Sheet Information is reported in the same order on all Balance Sheets – the Liabilities Section: Current Liabilities – debts that will be repaid in one year or less. Accounts Payable – short-term obligations that arise as a result of making credit purchases Notes Payable – obligations that have been secured with a promissory note

The Balance Sheet Information is reported in the same order on all Balance Sheets – the Liabilities Section: Long-Term Liabilities – debts that need not be repaid for at least one year

The Balance Sheet Information is reported in the same order on all Balance Sheets – the Owners’ or Stockholders’ Equity Section: For a Sole Proprietorship or Partnership – shown as the difference between assets and liabilities For a Corporation – owners’ equity is referred to as stockholders’ equity and is the total value of stock + retained earnings that have accumulated to date Retained Earnings are the portion of a business’s profit not distributed to stockholders.

The Income Statement An Income Statement is a summary of a firm’s revenues and expenses during a specified accounting period. Sometimes called the Earnings Statement or the Statement of Income and Expenses [See Figure 18.4, pg 547]

The Income Statement Revenues are the dinar amounts earned by a firm from selling goods, providing services or performing business activities.

The Income Statement Gross Sales are the total dinar amount of all goods and services sold during the accounting period. From this amount are deducted the dinar amounts for the following: Sales Returns – merchandise returned by customers Sales Allowances – price reductions offered to customers who accept slightly damaged or soiled merchandise Sales Discounts – price reductions offered to customers who pay their bills promptly.

The Income Statement Cost of Goods Sold [CoGS] Formula: CoGS = Beginning Inventory + Net Purchases – Ending Inventory Manufacturers include Raw Materials Inventories, Work in Progress and Direct Manufacturing Costs in their calculation. Gross Profit – a firm’s net sales less the Cost of Goods Sold

The Income Statement Operating Expenses include all business costs other than the Cost of Goods Sold Net Income – when revenues are greater than expenses Net Loss – when expenses are greater than revenue.

Statement of Cash Flows A Statement of Cash Flows illustrates how the operating, investing and financing activities of a company affect cash during a specified accounting period. [See Figure 18.5, pg 550]

Statement of Cash Flows Different Cash Flows Activities: Cash Flows from Operating Activities – primary revenue sources of providing goods and services Cash Flows from Investing Activities – purchase and sale of land, equipment and other long-term assets and investments. Cash Flows from Financing Activities – reports changes in debt obligation and owners’ equity accounts [loans and repayments, sale and repurchase of company stock, cash dividends, etc.]

Importance of Financial Statements Together the Cash Flows Statement, Balance Sheet and Income Statement show the results of past business decisions and reflect the firm’s ability to pay debts and dividends and to finance new growth.