© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide Accounting Information for Business Decisions

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-2 Communication News Facts Access Commentary Living in the Information Age Data

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-3 Timeliness Independence Freedom-of- Expression Living in the Information Age Communication News Facts Access Commentary Data

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-4 Identifies Records Communicates Relevant Reliable Comparable Influence of Accounting Accounting is a system that information that is to help users make better decisions.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-5 Amounts earned from selling products or services Business Profit Costs incurred with sales Amounts earned from sales less expenses incurred

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-6 Nike’s Profit Breakdown Exh. 1.1

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-7 Return $ Risk ? Profit  Investment Amount of uncertainty about the return we expect to earn Return and Risk The lower the risk of our investment, the lower is our expected return.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-8 Returns for Bonds with Different Risks Source: The Wall Street Journal Bonds are written promises by organizations to repay amounts loaned to them with interest.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-9  Identifying & Measuring  Recording  Reporting & Analyzing Focus of Accounting Exh. 1.3

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-10 All Provide input to Generally Accepted Accounting Principles Help set Securities and Exchange Commission Unions Investors Accountants Politicians Lenders Others AICPA Setting Accounting Rules Financial Accounting Standards Board

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-11 Reduces time, effort and cost of recordkeeping. Improves clerical accuracy. Changes the way we store, process and summarize large masses of data. Technology Accounting and Technology

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-12 Corporation Law Offices Partnership Proprietorship Sally’s Grocery Business Forms of Organization

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-13 Private Nonprofit Government Nonbusiness Forms of Organization

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-14 * * Proprietorships and partnerships set up as LLC’s can limit their liability. Characteristics of Business Organizations Exh. 1.4

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-15 Owners of a corporation are called shareholders (or stockholders). When a corporation issues only one class of stock, we call it common stock (or capital stock). Corporation

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-16 Financing Financing Activities Owner financing (equity) Nonowner financing (liabilities) Financing Activities Owner financing (equity) Nonowner financing (liabilities) Activities in Organizations Exh. 1.5

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-17 Financing Activities in Organizations Investing Investing Activities Buying resources (assets) Selling resources (assets) Investing Activities Buying resources (assets) Selling resources (assets) Exh. 1.5

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-18 Financing Activities in Organizations Operating Investing Operating activities Aimed at selling products and services Result in sales and expenses Operating activities Aimed at selling products and services Result in sales and expenses Exh. 1.5

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-19 Balance Sheet A balance sheet reports on investing and financing activities. It lists amounts for assets, liabilities, and equity at a point in time. The relationship is reflected in the Balance Sheet equation: Assets = Liabilities + Equity A balance sheet reports on investing and financing activities. It lists amounts for assets, liabilities, and equity at a point in time. The relationship is reflected in the Balance Sheet equation: Assets = Liabilities + Equity Exh. 1.7

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-20 Income Statement An income statement reports on operating activities. It lists sales (revenues), costs, and expenses over a period of time. The relationship is expressed: Net Income = Revenues - Expenses An income statement reports on operating activities. It lists sales (revenues), costs, and expenses over a period of time. The relationship is expressed: Net Income = Revenues - Expenses Exh. 1.7

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-21 Statement of Retained Earnings This statement reports changes in the retained earnings of the business over a period of time. It includes changes due to net income and any dividends paid to shareholders. Exh. 1.7

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-22 Statement of Cash Flows The statement of cash flows reports on cash flows for operating, investing, and financing activities over a period of time. Exh. 1.7

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-23 Managerial Accounting is aimed at Internal Users Financial Accounting is aimed at External Users Managers Officers Internal Auditors Sales Staff Budget Officers Controllers Lenders Shareholders Governments Labor Unions External Auditors Customers Users of Accounting Information Exh. 1.8

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-24 Research & Development Accounting Services Internal Operating Functions Purchasing Human Resources Production Marketing Distribution Servicing Exh. 1.9

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-25 Beliefs that separate right from wrong Accepted standards of good and bad behavior Often coincide with laws Ethics Ethics and Social Responsibility

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-26 Identify Ethical Concerns Analyze Options Make Ethical Decision Use personal ethics to recognize an ethical concern. Consider all good and bad consequences. Choose the best option after weighing all consequences. Guidelines for Ethical Decision Making Exh. 1.10

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-27 Social Responsibility Donations to nonprofit organizations Programs to reduce pollution Programs to improve worker and consumer safety Paid time off for workers

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-28 Financial Managerial Taxation Accounting- related Selected Opportunities in Accounting Exh Preparation Statement Analysis Auditing Regulatory Consulting Planning Criminal Investigation General Accounting Cost Accounting Budgeting Consulting Controller Treasurer Strategy Preparation Planning Regulatory Investigations Consulting Lenders Consultants Analysts Traders Managers Directors Underwriters Planners Appraisers FBI Investigations

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-29 Accounting Specializations Certified Public Accountant (CPA) Certified Management Accountant (CMA) Certified Internal Auditor (CIA) Chartered Financial Analyst (CFA)

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-30 = Net income ÷ Avg. total assets ROI is viewed as an indicator of operating efficiency. Return on Investment (ROI)

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-31 Liquidity & Efficiency Solvency Profitability Market Prospects Typical Ratios Used in Decision Analysis Current ratio Acid-test ratio A/R turnover Inventory turnover Days’ sales uncollected Days’ sales in inventory Total asset turnover Debt ratio Equity ratio Pledged assets to secured liabilities Total asset turnover Profit margin ratio Gross margin ratio Return on total assets Return on common stockholders’ equity Book value per common share Basic earnings per share Price-earnings ratio Dividends yield

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 1-32 End of Chapter 1