Accounting and Financial Management Chapters 17 and 18 BCEN 1400

Why Do We Need Accounting? Accounting: –Recording, classifying, summarizing, and interpreting financial data –Helps us to gauge how well the firm is performing and to report this

Types of Accounting Managerial –Measures cost and budget information Financial –Preparation for external users –FASB Financial Accounting Standards Board GAAP Auditing Tax Government

Becoming an Accountant Bachelor’s in Accounting CPA, CIA, CMA Forensic accounting Faster than average job growth –Sarbanes-Oxley Act Public Company Accounting Oversight Board Median salary: $51,000

The Accounting Cycle Enter transactions into journals Transfer transactions to ledger Prepare a trial balance Create financial statements Read and analyze financials

The Financial Statements Balance Sheet –Snapshot of what the firm owns Income Statement –Revenue versus costs over a period of time Statement of Cash Flows –Inflow and outflow of cash over period of time

The Most Important Equation You Will Need in Accounting

The Balance Sheet Assets: –Current Assets –Fixed Assets –Intangible Assets Liabilities –Accounts payable, notes payable, bonds payable Owners’ Equity

The Income Statement Revenue –Monies earned by the firm Cost of Goods Sold –Production, raw materials, storage, piecerate labor –FIFO versus LIFO Operating Expenses Net Profit – Retained Earnings

Statement of Cash Flows Separated into Cash Flows from Operations, Investing, and Financing Operations –Sales, COGS, expenses, purchases, bills, taxes, interest paid and received Investing –New equity, equipment The Importance of Cash

Ratios Help to compare year to year and compare your firm to others of different sizes Liquidity – how fast could you cover your debt? –Current ratio Can also do working capital (CA-CL) –Quick ratio Current Assets Current Liabilities Current Assets - Inventory Current Liabilities

Ratios Leverage –Debt-to-equity –Why it’s important to keep this level Profitability –Profit margin –Earnings per share –Return on equity Long-Term Debt Owners Equity Net Profit Sales Net Profit # Shares Outstanding Net Profit Owners Equity

Ratios Activity ratios –Inventory turnover Cost of Goods Sold Average Inventory