Fourth Edition Copyright ©2003 Prentice Hall, Inc. PART Managing Information
Copyright ©2003 Prentice Hall, Inc Chapter 13 Understanding Principles of Accounting
Copyright ©2003 Prentice Hall, Inc “I am incredibly nervous that we will implode in a wave of accounting scandals” ~ Sherron Watkins, Enron Vice President, four months prior to Enron’s collapse
Copyright ©2003 Prentice Hall, Inc Key Topics The role of public and private accountants The CPA vision project The accounting equation and double-entry accounting Basic financial statements Key financial ratios Accounting in international businesses
Copyright ©2003 Prentice Hall, Inc What Is Accounting? Business managers Employees and unions Investors and creditors Tax authorities Government regulatory agencies A comprehensive system for collecting, analyzing and communicating financial information Users of accounting information:
Copyright ©2003 Prentice Hall, Inc Financial Accounting Managerial Accounting Accountants and Their Responsibilities Controller: Managers all of a firm’s accounting activities
Copyright ©2003 Prentice Hall, Inc Accountants and Their Responsibilities Certified public accountants (CPAs) Auditing and GAAP Tax services Management advisory services Non-certified public accountants Private accountants
Copyright ©2003 Prentice Hall, Inc The CPA Vision Project Identifying issues for the future Global forces as drivers of change Recommendations A new direction Core services Core competencies
Copyright ©2003 Prentice Hall, Inc Global Forces Impacting the New CPA Profession Technical Forces Economical Forces Political Forces Social Forces Human Resource Forces Regulatory Forces
Copyright ©2003 Prentice Hall, Inc Key Tools of the Accounting Trade Accounting Equation Double-Entry Accounting Every transaction affects two accounts Double-Entry Accounting Every transaction affects two accounts Assets = Liabilities + Owners’ Equity Assets – Liabilities = Owners’ Equity
Copyright ©2003 Prentice Hall, Inc Financial Statements Balance Sheets Income Statements Statements of Cash Flows
Copyright ©2003 Prentice Hall, Inc ASSETS Perfect Posters’ Balance Sheet Example
Copyright ©2003 Prentice Hall, Inc LIABILITIES & OWNER'S EQUITY Perfect Posters’ Balance Sheet Example
Copyright ©2003 Prentice Hall, Inc Perfect Posters’ Income Statement Example
Copyright ©2003 Prentice Hall, Inc Statements of Cash Flows Cash flows from: Operations Investing Financing
Copyright ©2003 Prentice Hall, Inc Perfect Posters’ Sales Budget Example
Copyright ©2003 Prentice Hall, Inc Reporting Standards and Practices Revenue Recognition Matching Full Disclosure
Copyright ©2003 Prentice Hall, Inc Solvency Ratios Profitability Ratios Activity Ratios Analyzing Financial Statements
Copyright ©2003 Prentice Hall, Inc Short Term Solvency Ratios Current Ratio: Current Assets – Current Liabilities Working Capital: Current Assets Current Liabilities
Copyright ©2003 Prentice Hall, Inc Long-term Solvency Ratios Debt to Owners’ Equity Ratio: Ability to finance an investment through borrowed funds Leverage:Debt Owners’ Equity
Copyright ©2003 Prentice Hall, Inc Profitability and Activity Ratios Return on Equity: Earnings Per Share: Net Income Total Owners' Equity Inventory Turnover Ratio: Net Income # of Shares Outstanding Cost of Goods Sold Average Inventory
Copyright ©2003 Prentice Hall, Inc International Accounting Standards International Transactions Foreign Currency Exchange International Accounting
Copyright ©2003 Prentice Hall, Inc Chapter Review Explain the role of accountants, public and private Discuss the CPA Vision Project Explain the accounting equation and double- entry accounting Describe the three basic financial statements
Copyright ©2003 Prentice Hall, Inc Chapter Review Explain how key financial ratios can help analyze the financial strength of a business Explain some of the special issues facing accountants at firms that do international business