Part 6 Financing the Enterprise © 2015 McGraw-Hill Education.

CHAPTER 14 Accounting and Financial Statements CHAPTER 15 Money and the Financial System CHAPTER 16 Financial Management and Securities Markets 14-2

Learning Objectives LO 14-1Define accounting and describe the different uses of accounting information. LO 14-2Demonstrate the accounting process. LO 14-3Examine the various components of an income statement to evaluate a firm’s bottom line. LO 14-4Interpret a company’s balance sheet to determine its current financial position. LO 14-5Analyze the statement of cash flows to evaluate the increase and decrease in a company’s cash balance. 14-3

The Nature of Accounting 14-4 Accounting The recording, measurement and interpretation of financial information Certified Public Accountant (CPA) An individual who has been state certified to provide accounting services ranging from the preparation of financial records and the filing of tax returns to complex audits of corporate financial records Private Accountants Employed by large corporations, government agencies, and other organizations to prepare and analyze their financial statements Deeply involved in most of the most important financial decisions of the organization Certified Management Accountants (CMAs) Private accountants who, after rigorous examination, are certified by the National Association of Accountants and who have some managerial responsibility

Uses of Accounting Information 14-5 Managerial Accounting The internal use of accounting statements by managers in planning and directing the organization’s activities The movement of money through an organization over a daily, weekly, monthly or yearly basis Cash Flow An internal financial plan that forecasts expenses and income over a set period of time Budget Annual Report A summary of a firm’s financial information, products, and growth plans for owners and potential investors

14-6 Balance To keep the accounting equation in balance, each transaction must be recorded in two separate accounts Classification All business transactions are classified as either assets, liabilities, or owner’s equity Break Down Most organizations further break down these accounts, such as assets may be broken down into cash, inventory and equipment Double-Entry Bookkeeping A system of recording and classifying business transactions that maintains the balance of the accounting equation A firm’s economic resources, or items of value that it owns, such as cash, inventory, land, equipment, buildings, and other tangible and intangible things Assets Debts that a firm owes to others Liabilities Equals assets minus liabilities and reflects historical values Owners’ Equity

Accounting Cycle 14-7 Accounting Cycle The four-step procedure of an accounting system: examining source documents, recording transactions in an accounting journal, posting recorded transactions, and preparing financial statements A time-ordered list of account transactions Journal A book or computer file with separate sections for each account Ledger

Income Statement 14-8 Income Statement A financial report that shows an organization’s profitability over a period of time – month, quarter, or year Revenue The total amount of money received from the sale of goods or services, as well as from related business activities Cost of Goods Sold The amount of money a firm spent to buy or produce the products it sold during the period to which the income statement applies Gross Income (or Profit) Revenues minus the cost of goods sold required to generate the revenues Expenses The costs incurred in the day-to-day operations of an organization

Income Statement 14-9 Depreciation The process of spreading the costs of long-lived assets such as building and equipment over the total number of accounting periods in which they are expected to be used Net Income The total profit (or loss) after all expenses, including taxes, have been deducted from revenue; also called net earnings Balance Sheet A “snapshot” of an organization’s financial position at a given moment

Balance Sheet Current Liabilities A firm’s financial obligation to short-term creditors, which must be repaid within one year Accounts Payable The amount a company owes to suppliers for goods and services purchased with credit Accrued Expenses An account representing all unpaid financial obligations incurred by the organization Current Assets Assets used or converted into cash within the course of a calendar year Cash, temporary investments, accounts receivable and inventory Accounts Receivable Money owed a company by its clients or customers who have promised to pay for the products at a later date

Statement of Cash Flows Calculated by combining the changes in the revenue, expense, current assets and current liability accounts Cash From Operating Activities Calculated from changes in the long-term or fixed asset accounts Cash From Investing Activities Calculated from changes in the long-term liability accounts and the contributed capital accounts in owners’ equity Cash From Financing Activities Statement of Cash Flows Explains how the company’s cash changed from the beginning of the accounting period to the end

Ratio Analysis Ratio Analysis Calculations that measure an organization’s financial health Profitability Ratios Ratios measuring the amount of operating income or net income an organization is able to generate relative to its assets, owners’ equity, and sales Profit Margin Net income divided by sales Return on Assets Net income divided by assets Return on Equity Net income divided by owners’ equity; also called return on investment (ROI)

14-13 Liquidity Ratios Ratios that measure the speed with which a company can turn its assets into cash to meet short-term debt Ratio Analysis Total Asset Turnover Sales divided by total assets Inventory Turnover Sales divided by total inventory Receivables Turnover Sales divided by accounts receivable Asset Utilization Ratios Ratios that measure how well a firm uses its assets to generate each $1 of sales

14-14 Debt to Total Assets Ratio A ratio indicating how much of the firm is financed by debt and how much by owners’ equity Ratio Analysis Debt Utilization Ratios Ratios that measure how much debt an organization is using relative to other sources of capital, such as owners’ equity Quick Ratio (Acid Test) A stringent measure of liquidity that eliminates inventory Current Ratio Current assets divided by current liabilities

14-15 Per Share Data Data used by investors to compare the performance of one company with another on a equal, per share basis Earnings Per Share Net income or profit divided by the number of stock shares outstanding Dividends Per Share The actual cash received for each share owned Ratio Analysis Times Interest Earned Ratio Operating income divided by interest expense