WEEK 12: ACCOUNTING CONCEPTS BUSN 102 – Özge Can

Understanding Accounting  Accounting  Measuring, interpreting, and communicating financial information to support internal and external decision-making  Cost accounting, tax accounting, financial analysis, forensic accounting 17-2

Understanding Accounting  Financial Accounting:  The area of accounting concerned with preparing financial information for users outside the organization  Management Accounting:  The area of accounting concerned with preparing data for use by managers within the organization 17-3

What Accountants Do?  Record economic activities (bookkeeping)  Prepare financial statements  Analyze and interpret financial information  Prpepare financial forecasts and budgets  Prepare tax returns 4

Private Accountants  Private Accountants  In-house accountants employed by organizations and businesses other than a public accounting firm (corporate accountants)  Certified Public Accountants (CPAs)  Professionally licensed accountants who meet certain requirements for education and experience and who pass a comprehensive examination 17-5

Public Accountants  Public Accountants  Professionals who provide accounting services to other businesses and individuals for a fee  Audit  Formal evaluation of the fairness and reliability of a client’s financial statements 17-6

Typical Finance Department: 17-7

The Rules of Accounting  GAAP (Generally Accepted Accounting Practices)  Standards and practices used by publicly held corporations in the United States and a few other countries in the preparation of financial statements; on course to converge with IFRS 17-8

The Rules of Accounting  External Auditors  Independent accounting firms that provide auditing services for public companies  International Financial Reporting Standards (IFRS)  Accounting standards and practices used in many countries outside the United States 17-9

Fundamental Accounting Concepts  Assets:  Any things of value owned or leased by a business  Liabilities:  Claims against a firm’s assets by creditors  Owners’ Equity:  The portion of a company’s assets that belongs to the owners after obligations to all creditors have been met 17-10

Fundamental Accounting Concepts  Accounting Equation  The basic accounting equation, stating that assets equal liabilities plus owners’ equity 17-11

Example:  A company has the following assets: (1) Fixed assets worth $30,000 and (2) investments worth $6,000. The company's total liabilities amount to $25,000.  What is the owner's equity of this company? 12

Fundamental Accounting Concepts  Double-Entry Bookkeeping  A method of recording financial transactions that requires a debit entry and credit entry for each transaction to ensure that the accounting equation is always kept in balance 17-13

Fundamental Accounting Concepts  Matching Principle  The fundamental principle requiring that expenses incurred in producing revenue be deducted from the revenues they generate during an accounting period 17-14

Two Bases of Accounting:  Accrual Basis  An accounting method in which revenue is recorded when a sale is made and an expense is recorded when it is incurred  Cash Basis  An accounting method in which revenue is recorded when payment is received and an expense is recorded when cash is paid 17-15

 Depreciation  An accounting procedure for systematically spreading the cost of a tangible asset over its estimated useful life 17-16

The Accounting Cycle: 1. Perform transactions 2. Analyze and record transactions in a journal 3. Post journal entries to the ledger 4. Prepare a trial balance 5. Make adjusting entries, as needed 6. Prepare an adjusted trial balance 7. Prepare financial statements 8. Close the books for the accounting period 17-17

Three Financial Statements:  Balance Sheet  Income Statement  Statement of Cash Flows 17-18

Balance Sheet  Balance Sheet  A statement of a firm’s financial position on a particular date; also known as a statement of financial position 17-19

Balance Sheet  Current Assets  Cash and items that can be turned into cash within one year  Fixed Assets  Assets retained for long-term use, such as land, buildings, machinery, and equipment  Property, plant, and equipment 17-20

Balance Sheet  Current Liabilities  Obligations that must be met within a year  Long-Term Liabilities  Obligations that fall due more than a year from the date of the balance sheet 17-21

Balance Sheet  Retained Earnings  The portion of shareholders’ equity earned by the company but not distributed to its owners in the form of dividends 17-22

Income Statement  Income Statement  A financial record of a company’s revenues, expenses, and profits over a given period of time  Profit and loss statement 17-23

Income Statement  Expenses  Costs created in the process of generating revenues  Net Income  Profit earned or loss incurred by a firm, determined by subtracting expenses from revenues 17-24

Income Statement  Cost of Goods Sold  The cost of producing or acquiring a company’s products for sale during a given period  Gross Profit (Gross Margin)  The amount remaining when the cost of goods sold is deducted from net sales 17-25

Income Statement  Operating Expenses  All costs of operation that are not included under cost of goods sold  General expenses - selling expenses  EBITDA  Earnings before interest, taxes, depreciation, and amortization 17-26

Statement of Cash Flows  Statement of Cash Flows  A statement of a firm’s cash receipts and cash payments that presents information on its sources and uses of cash 17-27

Analyzing Financial Staments  Trend analysis  Ratio analysis  Types of financial ratios:  Profitability ratios  Liquidity ratios  Activity ratios  Leverage (debt) ratios 28

Profitability Ratios  Return on Sales  The ratio between net income after taxes and net sales  Profit margin  Return on Equity  The ratio between net income after taxes and total owners’ equity 17-29

Profitability Ratios  Earnings per Share  A measure of a firm’s profitability for each share of outstanding stock, calculated by dividing net income after taxes by the average number of shares of common stock outstanding 17-30

Liquidity Ratios  Working Capital  Current assets minus current liabilities  Current Ratio  A measure of a firm’s short-term liquidity, calculated by dividing current assets by current liabilities 17-31

Liquidity Ratios  Quick Ratio  A measure of a firm’s short-term liquidity, calculated by adding cash, marketable securities, and receivables, then dividing that sum by current liabilities  Acid-test ratio 17-32

Activity Ratios  Inventory Turnover Ratio  A measure of the time a company takes to turn its inventory into sales, calculated by dividing cost of goods sold by the average value of inventory for a period 17-33

Activity Ratios  Accounts Receivable Turnover Ratio  A measure of the time a company takes to turn its accounts receivable into cash, calculated by dividing sales by the average value of accounts receivable for a period 17-34

Leverage (Debt) Ratios  Debt-to-Equity Ratio  A measure of the extent to which a business is financed by debt as opposed to invested capital, calculated by dividing the company’s total liabilities by owners’ equity  Debt-to-Assets Ratio  A measure of a firm’s ability to carry long-term debt, calculated by dividing total liabilities by total assets 17-35

Assignment #3 (Due: Next Week)  Written Group Assignment  Research online and find 1) the balance sheet (“bilanço”) and 2) income statement (“gelir tablosu”) of a Turkish or foreign/international company for the year  Examine these two statements carefully in order to understand the financial situation of the company. ==== > 36

Assignment #3 (Due: Next Week)  After providing a copy of the two financial statements in the paper, answer the following questions: 1. What are the amount of assets, liabilities and stockholders’ equity of the company? 2. Did the company show a profit in 2012? What is the sales revenue? What are their largest cost and expense items? 3. Overall, do you think this company financialy doing good? How do you understand this? 37