part Chapter © 2009 The McGraw-Hill Companies, Inc. All rights reserved. 1 McGraw-Hill Understanding Financial Information and Accounting 1 Chapter 12

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 2 McGraw-Hill 1.Described the importance of financial information and accounting. 2.Define and explain the different areas of accounting. 3.List the steps in the accounting cycle. 4.Explain how the major financial statements differ. 5.Explain the importance of ratio analysis in reporting financial information. Learning Objectives

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 3 McGraw-Hill What is Accounting? Definition Accounting system Reports financial info The Importance of Financial Information

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 4 McGraw-Hill Managerial and Financial Accounting Measuring and reporting Annual reports Certified management accountant (CMA) Certified public accountant (CPA) Private accountant Public accountant Financial Accounting Standards Board (FASB) Generally Accepted Accounting Principles (GAAP) Areas of Accounting

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 5 McGraw-Hill Budgetary Control: Weinstein Manufacturing Co. EXPENSE BUDGETED ACTUAL DIFFERENCE CATEGORYAMOUNTEXPENDITURE FROM BUDGET ____________________________________________________________________ Labor $162,500$195,000+32, % Raw materials 172, ,500-21, % Utilities 6,500 6, % Maintenance 9,750 8, % Other variable exp. 16,750 18,000+1, % Fixed overhead 25,000 25, % TOTAL EXPENSES$393,000$404,750+11, % ____________________________________________________________________

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 6 McGraw-Hill Independent Tax Accounting Tax law Government and Not-for-Profit Accounting Satisfy information users Government Accounting Standards Board (GASB) Not-for-profit Bookkeeping Auditing

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 7 McGraw-Hill Journal Double-entry bookkeeping Ledger Computerized tools Sarbanes-Oxley Act Higher standards Accounting Tools

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 8 McGraw-Hill The Six-Step Accounting Cycle

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 9 McGraw-Hill Financial Statements Key Statements: –Balance sheet –Income statement –Statement of cash flows The Accounting Equation Assets = Liabilities + Owner’s Equity

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 10 McGraw-Hill Three major accounts Assets –Liquidity –Accounts receivable –Current assets –Fixed assets –Intangible assets Liabilities –Current –Long-term Owner’s equity The Balance Sheet

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 11 McGraw-Hill The Income Statement Net income/loss Revenue –Gross sales –Net sales Cost of Goods Sold –Gross profit Operating Expenses and Net Profit or Loss –Selling expenses –General expenses –Cash flow

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 12 McGraw-Hill The Statement of Cash Flows Three activities –Operations –Investments –Financing Depreciation Companies can recapture costs

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 13 McGraw-Hill Analyzing Financial Statements: Ratio Analysis Accurate information May seem complicated Valuable information Liquidity Ratios Current ratio Quick ratio

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 14 McGraw-Hill Leverage (Debt) Ratios Debt to owners’ equity Identify trends Profitability (Performance) Ratios Basic EPS Earnings per share Return on sales Return on equity Activity Ratios Inventory turnover ratio