1 PowerPointPresentation by PowerPoint Presentation by Gail B. Wright Professor of Accounting Bryant University © Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license. FINANCIAL ACCOUNTING 2 ND EDITION BY DUCHAC, REEVE, & WARREN 1 Role of Accounting in Business

2 LEARNING GOALS 1 Describe types, forms of business; business stakeholders.

3 What forms do businesses take and how do they differ? LG 1

4 3 forms of business are Sole proprietor Partnership Corporation Limited liability corporation LG 1 3 FORMS OF BUSINESS

5 5 differences are Ease of formation Legal liability Taxation Limited life Capital access 5 DIFFERENCES LG 1

6 DIFFERENCES IN FORMS OF BUSINESS FormEase Legal Liability Taxation Limited Life Capital Access ProprietorshipSimpleNo limitNon-taxableYesLimited PartnershipSimpleNo limitNon-taxableYesAverage CorporationComplexLimitedTaxableNoExtensive Limited Liability Co. ModerateLimitedNon-taxableYesAverage LG 1

7 HOW DO BUSINESSES MAKE MONEY? Businesses –Provide goods and services Businesses maximize profits –Must gain advantage over competitors to maximize profits LG 1

8 PROFITS - = LG 1 REVENUES COSTSPROFITS

9 STAKEHOLDERS Stakeholders are Employees/Managers Customers Suppliers Bank, owners Government LG 1 Continued

10 Business StakeholderInterestExamples Capital markets stakeholder Provides financingBanks, owners, stockholders Product/service market stakeholders Buyers of products, services and vendors Customers, suppliers Government stakeholders Collects taxes, fees from business, employees Federal, state, city government Internal stakeholdersPeople employed by business Employees, managers LG 1 EXHIBIT 2

11 LEARNING GOALS 2 Describe 3 business activities.

12 BUSINESS ACTIVITIES LG 2

13 FINANCING ACTIVITIES LG 2 Financing activities Borrowing creates a liability Issuing ownership shares creates capital stock Financing activities Borrowing creates a liability Issuing ownership shares creates capital stock

14 INVESTING ACTIVITIES Investing activities Obtaining assets to operate business Investing activities Obtaining assets to operate business LG 2

15 OPERATING ACTIVITIES Operating activities Offer product, service Operating activities Offer product, service LG 2

16 LEARNING GOALS 3 Define accounting, its role LG 3

17 ROLE OF ACCOUNTING LG 3 Accounting is “an information system that provides reports to stakeholders about the economic activities and condition of a business.”

18 LG 3 EXHIBIT 3

19 LEARNING GOALS 4 Describe, illustrate basic financial statements LG 4

20 4 financial statements are Income statement Retained earnings Balance sheet Statement cash flows 4 financial statements are Income statement Retained earnings Balance sheet Statement cash flows 4 FINANCIAL STATEMENTS LG 4

21 FINANCIAL STATEMENTS Financial StatementReporting Objective Income statementChange in financial condition Retained earningsChange in financial condition Balance sheetFinancial condition Cash flowsChange in financial condition LG 4

22 INCOME STATEMENT (Slide 1 of 3) Reports change in financial condition due to operations Revenues and expenses for a period of time Month, quarter, year LG 4

23 INCOME STATEMENT (Slide 2 of 3) The income statement uses the Matching Concept Expenses for period are Matched against revenues for same period Revenue – Expenses = Net Income LG 4

24 LG 4 EXHIBIT 4

25 RETAINED EARNINGS (Slide 1 of 2) Reports changes in financial condition due to changes in retained earnings during a period. Retained earnings is the portion of net income retained by the business. LG 4

26 LG 4 EXHIBIT 5

27 BALANCE SHEET (Slide 1 of 2) Reports financial condition as of a point in time Accounting equation Assets = Liabilities + Stockholders’ Equity LG 4

28 LG 4 EXHIBIT 6

29 STATEMENT OF CASH FLOWS (Slide 1 of 2) Reports change in financial condition from changes in cash during a period that occur due to a)Cash flows from operating activities b)Cash flows from investing activities c)Cash flows from financing activities LG 4

30 LG 4 EXHIBIT 7

31 Statement of cash flows linked to cash on balance sheet Net income from income statement linked to retained earnings statement Retained earnings linked to balance sheet in stockholders’ equity INTEGRATED FINANCIAL STATEMENTS LG 4

32 Hershey Foods Corp Balance Sheet12/31/2004 Assets (Cash 55) = Liabilities + Equity (RE 3,469) $3,797=$2,708+$1,089 CASH FLOWS Operations $797 Investing Financing Decrease Cash 1/1 115 Cash 12/31 55 INCOME STATEMENT Revenues $4, 429 Expenses 3,838 Net Income $ 591 RETAINED EARNINGS 1/1 $3,469 +NI 591 -Div /31 $3,469 LG 4 EXHIBIT 8

33 LEARNING GOALS 6 Describe, illustrate horizontal analysis.

34 HORIZONTAL ANALYSIS Uses comparative financial statements to Compute percentage increases & decreases Examine trends year to year LG 6

35 HERSHEY FOODS HORIZONTAL ANALYSIS AMOUNT % SALES$4,429$4,173$2566.1% CGS2,6792, GP1,7501, S & A EXP OP INCOME BEFORE TAX $ % LG 6

First Quote “Confidence comes not from always being right, but from not fearing to be wrong.”