McGraw-Hill/Irwin© 2008 The McGraw-Hill Companies, Inc. All rights reserved. Accounting and Financial Statements 14

14-2

14-3 The Nature of Accounting The recording, measurement, and interpretation of financial information, often used in making business decisions. Did You Know? Corporate fraud costs are estimated at $600 billion annually.

14-4 Types of Accountants Public Accountant –An independent professional who provides accounting services to the public (individuals or firms) for a fee CPA (Certified Public Accountant) Private Accountant –An accountant employed by a corporation, government agency, or other organization CPA or a CMA (Certified Management Accountant)

14-5 Leading Accounting Firms

14-6 Is it Accounting or Bookkeeping? Bookkeepers are responsible for obtaining and recording the information that accountants require to analyze a firm’s financial position. Accountants are not only trained to record financial information, but to understand, interpret, and even develop the sophisticated accounting systems necessary to classify and analyze complex financial information.

14-7 The Users of Accounting Information

14-8 Uses of Accounting Information Internal uses: –Managerial accounting –Cash flow –Budget External uses: –Reporting financial performance to outsiders –Filing income taxes –Obtaining credit –Reporting to stockholders

14-9 Internal Accounting Information Management –Plan and set goals –Organize –Lead and motivate –Control Lenders & suppliers –Evaluate credit risks

14-10 External Accounting Information Stockholders and Potential Investors –Evaluate soundness of investments Government Agencies –Confirm tax liabilities –Confirm payroll –Deductions –Approve new issues of stocks and bonds

14-11 The Accounting Process The accounting equation Double-entry bookkeeping

14-12 The Accounting Equation The relationship between assets, liabilities, and owners’ equity Assets Things of value that a firm owns Liabilities A firm’s debts and obligations Owners’ Equity The difference between a firm’s assets and its liabilities =+

14-13 Double-Entry Bookkeeping A system of recording and classifying business transactions in separate accounts in order to maintain the balance of the accounting equation. Assets =Liabilities+ Owners’ Equity $325 = $325

14-14 The Accounting Equation and Double- Entry Bookkeeping for Anna’s Flowers

14-15 The Accounting Cycle 1.Examining source documents 2.Recording transactions 3.Posting transactions 4.Preparing financial statements

14-16 Financial Statements The end results of the accounting process are a series of financial statements. –Income statement –Balance sheet –Statement of cash flows Financial statements are provided to: –Stockholders and potential investors –Creditors –Government agencies –Internal Revenue Service

14-17 GAAP Generally Accepted Accounting Principles (GAAP) –Manufacturing firms, service providers, and nonprofit organizations each use a different set of accounting principles or rules upon which the accounting profession has agreed.

14-18 Equivalent Terms in Accounting

14-19 The Income Statement A financial report that shows an organization’s profitability over a period of time: –Month –Quarter –Year

14-20 Key Income Statement Terms Revenue –Cost of goods sold –Gross income Expenses –Selling, general & administrative –R&D, engineering –Interest –Depreciation Net income

14-21 Anna’s Flowers Income Statement December 31, 2007 Revenues: Net Sales:$123,850 Consulting:73,850 Total Revenues$197,700 Expenses: Cost of Goods Sold$ 72,600 Selling Expenses:37,700 General & Admin.18,400 Other expenses5,600 Total Expenses$134,300 Net Income$ 63,400

14-22 Anna’s Flowers Balance Sheet December 31, 2007 Assets: Current Assets: Cash:$17,850 Accounts Receivable10,200 Merchandise Inventory8,750 Total Assets:$36,800 Property & Equipment Equipment11,050 Office Building73,850 Total Prop. & Equip.84,900 Total Assets:$121,700 Liabilities & Owner’s Equity Current Liabilities Acct’s Payable$12,600 Total Current Liabilities12,600 Long-term Liabilities Mortgage Payable23,600 Total Liabilities36,200 Owner’s Equity: Anna Rodriguez, Capital85,500 Total Liabilities & Owner’s Equity$121,700

14-23 Anna’s Flowers Annual Budget for 2007 SalesConsulting Total January6,500 5,00011,500 February6,000 6,00012,000 March5,800 6,20012,000 April6,100 6,50012,600 May7,000 6,80013,800 June8,100 7,60015,700 July8,600 7,80016,400 August6,900 8,00014,900 September6,700 8,70015,400 October5,900 9,00014,900 November5,000 8,50013,500 December4,500 8,00012,500 Annual $123,850 $73,850 $197,700

14-24 The Balance Sheet A “snapshot” of an organization’s financial position at a given moment –Presents an accumulation of all the company’s transactions since it began

14-25 Key Balance Sheet Terms Assets –Current assets –Accounts receivable Liabilities –Accounts payable –Accrued expenses Owner’s equity

14-26 The Statement of Cash Flow Explains how the company’s cash changed from the beginning of the accounting period to the end Three categories: 1.Cash from (used for) operating activities 2.Cash from (used for) investing activities 3.Cash from (used for) financing activities

14-27 Analyzing Financial Statements with Ratio Analysis Profitability ratios Asset utilization ratios Liquidity ratios Debt utilization ratios Per share data

14-28 Profitability Ratios Profit margin=Net income Sales Return on assets =Net income Assets Return on equity =Net income Equity

14-29 Asset Utilization Ratios Receivables turnover =Sales Receivables Inventory turnover=Sales Inventory Total asset turnover=Sales Total assets

14-30 Liquidity Ratios Current ratio=Current assets Current liabilities Quick ratio=Current assets - inventory Current liabilities

14-31 Debt Utilization Ratios Debt to total assets=Total debt Total assets Times interest earned =Income before interest & taxes Interest expense

14-32 Per Share Data Earnings per share =Net income Number of shares outstanding Dividends per share =Total dividends paid Number of shares outstanding

14-33 Industry Analysis

14-34 Solve the Dilemma 1.Describe the three basic accounting statements. What type of information does each provide that can help you evaluate the situation? 2.Which of the financial ratios are likely to prove to be of greatest value in identifying problem areas in the company? Why? –Which of your company’s financial ratios might you expect to be especially poor? 3.Discuss the limitations of ratio analysis.

14-35 Explore Your Career Options What contributions do accountants make to organizations?

14-36 Additional Discussion Questions and Exercises 1.What is the accounting equation? –Which financial statement (income statement or balance sheet) is most similar to the accounting equation? 2.What is meant by the liquidity of assets? 3.In measuring a firm’s performance, many investors and managers prefer industry analysis or industry ratios. –What is the advantage in using industry ratios?

14-37 Additional Discussion Questions and Exercises 4.How do public accounts, private accountants, and certified public accountants differ? 5.What are some different types of liabilities?

14-38 Chapter 15 Quiz 1.Which generally appears on an income statement? a.Assets = Liability + Owners’ equity b.Revenue - Expenses = Profit or loss c.Assets - Expenses = revenue d.Current assets/Current liabilities 2.An accountant who provides accounting services to individuals and/or businesses for a fee is considered a: a.certified public accountant (CPA) b.public accountant c.private accountant d.local accountant

14-39 Chapter 15 Quiz 3.Assume a firm’s inventory turnover was 25. That means: a.the firm made a 25 percent profit on its sales. b.the firm has sold and replaced its inventory 25 times in a year. c.the firm has 25 items in inventory. d.the firm needs to sell 25 items in inventory to make a profit. 4.The internal financial statement that forecasts expenditures and revenues for a period is known as: a.a balance sheet b.an income statement c.a budget d.an annual report

14-40 Multiple Choice Questions about the Video 1.Aon is a Gaelic word that means: a.harmony b.unity c.oneness d.accounting 2.Aon has offices in more than ____ countries. a.12 b.60 c.120 d.190