NETA PowerPoint Presentations to accompany The Future of Business Fourth Edition Adapted by Norm Althouse, University of Calgary Copyright © 2014 by Nelson.

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NETA PowerPoint Presentations to accompany The Future of Business Fourth Edition Adapted by Norm Althouse, University of Calgary Copyright © 2014 by Nelson Education Ltd.

Accounting for Financial Success Chapter 16 Copyright © 2014 by Nelson Education Ltd.Chapter 16

Copyright © 2014 by Nelson Education Ltd. Making the Connection

Learning Outcomes 1. Explain the importance of financial reports and accounting information to the targeted users. 2. Show an understanding of the accounting profession. 3. Identify the six steps in the accounting cycle. 4. Understand how a balance sheet (statement of financial position) describes the financial condition of an organization. 5. Explain the purpose of the income statement (statement of comprehensive income). Copyright © 2014 by Nelson Education Ltd.4

Learning Outcomes (cont’d) 6. Describe the importance of the statement of cash flows. 7. Explain how ratio analysis is used to identify a company’s financial strengths and weaknesses. 8. List some of the major trends that are impacting the accounting industry. Copyright © 2014 by Nelson Education Ltd.5

Explain the importance of financial reports and accounting information to the targeted users. Copyright © 2014 by Nelson Education Ltd.6

Basic Terms Copyright © 2014 by Nelson Education Ltd.7 Accounting – Process of collecting, recording, classifying, summarizing, reporting, and analyzing financial activities. Managerial accounting – Provides financial information that managers inside the organization can use to evaluate and make decisions about current and future operations. Financial accounting – Focuses on preparing external financial reports that are used by outside stakeholders.

Exhibit 16.1: The Accounting System Copyright © 2014 by Nelson Education Ltd.8

Exhibit 16.2: Reports Provided by the Accounting System Copyright © 2014 by Nelson Education Ltd.9

Primary Financial Statements Copyright © 2014 by Nelson Education Ltd.10 Balance Sheet (Statement of Financial Position) Income Statement (Statement of Comprehensive Income) Statement of Cash Flows

Show an understanding of the accounting profession. Copyright © 2014 by Nelson Education Ltd.11

The Accounting Profession Copyright © 2014 by Nelson Education Ltd.12 Chartered Accountant (CA) Certified Management Accountant (CMA) Certified General Accountant (CGA) Chartered Professional Accountant (CPA) Accounting Designations

Identify the six steps in the accounting cycle. Copyright © 2014 by Nelson Education Ltd.13

Exhibit 16.3: The Accounting Cycle Copyright © 2014 by Nelson Education Ltd.14

Accounting Equation Copyright © 2014 by Nelson Education Ltd.15 What Is OwnedWhat Is OwedNet Worth AssetsLiabilities Owners’ Equity = +

Understand how a balance sheet (statement of financial position) describes the financial condition of an organization. Copyright © 2014 by Nelson Education Ltd.16

Balance Sheet Copyright © 2014 by Nelson Education Ltd.17 Resources Obligations Net Worth AssetsLiabilities Owners’ Equity = + Also known as the statement of financial position

Assets Copyright © 2014 by Nelson Education Ltd.18 Current Assets Will be converted into cash within the next 12 months. Fixed Assets (Capital Assets or PP&E) Will generate revenues for more than one year. Intangible Assets Assets of value, but have no physical existence.

Liabilities Copyright © 2014 by Nelson Education Ltd.19 Current Liabilities Will be paid off within the next 12 months. Long-Term Liabilities Will take longer than one year to pay off.

Owners’ Equity Copyright © 2014 by Nelson Education Ltd.20 Owners’ Net Worth (Assets – Liabilities = Owners’ Equity) Examples for a corporation: common shares, preferred shares, retained earnings. Examples for a proprietorship or partnership: paid-in capital, retained earnings.

Explain the purpose of the income statement (statement of comprehensive income). Copyright © 2014 by Nelson Education Ltd.21

Income Statement Copyright © 2014 by Nelson Education Ltd.22 Sales Costs to Generate Sales Profit RevenuesExpenses Net Profit (Loss) – = Also known as: the statement of comprehensive income statement of earnings profit and loss statement

Revenues Copyright © 2014 by Nelson Education Ltd.23 Also called sales or income Gross sales – Total dollar amount of company’s sales. Net sales – Gross sales less returns, allowances and discounts.

Expenses Copyright © 2014 by Nelson Education Ltd.24 Cost of Goods Sold (CGOS) Total expense of buying or producing the company’s goods or services. Operating Expenses Expenses of operating a business that is not directly related to producing or buying its products. Taxes are not an expense but an obligation.

Net Profit or Loss Copyright © 2014 by Nelson Education Ltd.25 Net Income Revenues less expenses (revenues are greater than expenses). Net Loss Revenues less expenses (revenues are less than expenses). Net losses are presented in brackets.

Describe the importance of the statement of cash flows. Copyright © 2014 by Nelson Education Ltd.26

Statement of Cash Flows Copyright © 2014 by Nelson Education Ltd.27 Cash Flows from … Investment Activities. Operating Activities. Financing Activities.

Explain how ratio analysis is used to identity a company’s financial strengths and weaknesses. Copyright © 2014 by Nelson Education Ltd.28

Ratio Analysis Copyright © 2014 by Nelson Education Ltd.29 RatioClassificationsRatioClassifications Liquidity Profitability Activity Debt

Liquidity Ratios Copyright © 2014 by Nelson Education Ltd.30 The ability for the company to pay its short-term obligations. Acid-Test (Quick) Ratio Net Working Capital Net Working Capital Ratio of total current assets excluding inventory to total current liabilities. The amount obtained by subtracting current liabilities from total current assets. Current Ratio Ratio of total current assets to total current liabilities.

Profitability Ratios Copyright © 2014 by Nelson Education Ltd.31 The measure of a company’s use of resources. Net Profit Margin Ratio of net profit to net sales. Return on Equity Ratio of net profit to owners’ equity. Earnings per Share (EPS) Ratio of net profit to the number of common shares outstanding.

Activity Ratios Copyright © 2014 by Nelson Education Ltd.32 Measures how well a company uses its assets. Inventory Turnover The speed inventory moves through the company and is turned into sales. FERNANDO VERGARA/AP PHOTO

Debt Ratios Copyright © 2014 by Nelson Education Ltd.33 Measures the degree and effect of a company’s use of borrowed funds to finance its operations. Debt to Equity Relationship between the amount of debt capital and equity capital.

List some of the major trends that are impacting the accounting industry. Copyright © 2014 by Nelson Education Ltd.34

The Future of Accounting Copyright © 2014 by Nelson Education Ltd.35  Accountants expand their role.  Valuing knowledge assets.  Green and social accounting.