©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8 Accounting: Decision Making by the Numbers Define accounting and describe how accounting information is used by a variety of stakeholders Identify the purposes and goals of generally accepted accounting principles Describe the key elements of the major financial statements

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8 Accounting: Decision Making by the Numbers Describe several methods stakeholders can use to obtain useful insights from a company’s financial statements Explain how the budget process can help managers plan, motivate, and evaluate their organization’s performance Explain the role of managerial accounting and the various cost concepts identified by managerial accountants

Accounting 4 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. System for recognizing, organizing, analyzing, and reporting information about the financial transactions that affect an organization

Accounting: How it’s Used 5 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Used by:  Managers  Stockholders  Employees  Creditors  Suppliers  Government agencies  Done by:  Public accountants  Management accountants Internal auditors  Government accountants

Financial Accounting ￭ Addresses external stakeholders’ needs ￭ Generally accepted accounting principles (GAAP): Guide the practice of financial accounting ￭ Financial Accounting Standards Board (FASB): Organization that the Securities Exchange Commission has delegated authority to develop rules 6 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Accounting Principles: Objectives ￭ Ensures financial statements are:  Relevant  Reliable  Consistent  Comparable 7 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Financial Statements 8 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Balance sheet Income statement Statement of cash flows

Balance Sheet ￭ Summarizes a firm’s financial position at a specific point in time  Accounting equation Assets = Liabilities + Owners’ Equity ￭ Assets: Things of value a firm owns ￭ Liabilities: Indicate what the firm owes to non-owners ￭ Owners’ equity: Claims the owners have 9 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Income Statement or Profit and Loss Statement ￭ Summarizes the financial results of a firm’s operations over a given period of time  Revenue − Expenses = Net Income ￭ Revenue: Increase in the amount of cash and other assets the firm earns in a given time period 10 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Income Statement or Profit and Loss Statement  Accrual-basis accounting: Revenues are recorded when they are earned ￭ Expenses: Assets a firm uses, to carry out the business activities necessary to generate its revenue ￭ Net income: Profit or loss the firm earns in the time period covered by the income statement 11 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Statement of Cash Flows ￭ Identifies amount of cash that flowed into and out of the firm from three types of activities  Operating activities  Investing activities  Financing activities 12 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Web-link: Volkswagen’s Cash Flow Statement ￭ The link provides Volkswagen’s cash flow statement for the year financialstatements/cashflowstatement.html 13

Other Statements 14 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Shows how retained earnings have changed from one accounting period to the next Statement of Retained Earnings Shows how net income and dividends affect retained earnings Stockholders’ Equity Statement

Reality TV Video Slide 15 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ntent/ _kelly/videos/08bobbyg. html

© iStockphoto.com / DNY59 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ￭ BG Capital and D& B Specialty Foods have very different assessments of the capital requirements of D & B (i.e., $13.5 million versus $2-3 million). Is this this disparity an ethical red flag? ￭ Why is cash flow relevant to BG capital’s investment decision? 16

© iStockphoto.com / DNY59 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ￭ Given the disparity in the assessments of D & B’s capital requirements (i.e., $13.5 million by BG Capital versus $2-3 million by D & B Specialty Foods), what concerns might this raise about D & B’s budgeting process? 17

Financial Statements and their Benefits ￭ Independent auditor’s report - Results of an audit included in the annual report the firm sends to its stockholders  Unqualified, qualified, and adverse opinion ￭ Checking the notes - Additional information that clarify and supplement the numbers on the financial statements 18 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Trends in Financial Statements ￭ Comparative financial statements  Financial statements must list two or more years of figures side by side to observe account value change over a time span ￭ Horizontal analysis: Using comparative statements to identify changes in key account values over time 19 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Purposes of Budgeting ￭ Shows how a firm will acquire and allocate resources to achieve its goals over a time period  Helps specify how the goals are to be achieved  Encourages coordination among managers and employees  Serves as a motivational tool  Helps evaluate progress and performance 20 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Preparing the Budget 21 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Top management prepares the budget with little or no input from middle and supervisory managers Top-down budgeting Middle and supervisory managers participate actively in the creation of the budget Budgetary slack – Occurs when middle managers set low budget goals to make their jobs easier Bottom-up (or participatory) budgeting

Budget Components 22 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Identify projected sales and production goals and the various costs the firm will incur to meet these goals Operating budgets Focus on the firm’s financial goals and identify the resources needed to achieve these goals Cash budget Capital expenditure budget Budgeted balance sheet Financial budgets Represent the firm’s overall plan of action for a specified time period Master budget

Exhibit Development of the Master Budget 23 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Static Budget ￭ Based on a single assumed level of sales ￭ Real-world sales can vary considerably from their forecasted value  Problem avoided by developing a flexible budget ￭ Flexible budget - Shows appropriate budgeted level of costs for different level of sales 24 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Comparison of Financial and Managerial Accounting 25 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financial AccountingManagerial Accounting Purpose Provide information to external stakeholders Information provided is available to the general public Provide information to internal stakeholders Information provided is proprietary Type of information presented Focuses almost exclusively on financial information Provides both financial and nonfinancial information Nature of reports Prepares a standard set of financial statements Prepares customized reports to deal with specific problems or issues

Comparison of Financial and Managerial Accounting 26 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financial AccountingManagerial Accounting Timing of reports Presents financial statements on a predetermined schedule Quarterly or annually Creates reports upon request by management Adherence to accounting standards Governed by a set of accepted accounting principles Uses procedures developed internally Time period focus Summarizes past performance and its impact on the firm’s present conditions Provides reports dealing with past performance Involves making projections about the future when dealing with planning issues

Managerial Accounting and Accountants Concepts 27 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Involve actual expenditures of money or other resources Out-of-pocket costs Costs incurred when the opportunity to use an asset in an alternative way is given up Implicit costs Do not change when the firm changes its level of production Fixed costs Vary when the firm produces more of its goods and services Variable costs

Managerial Accounting and Accountants Concepts ￭ Direct costs: Can be directly traced to the production of the product ￭ Indirect costs: Result of a firm’s general operation ￭ Activity-based costing (ABC)  Identifies activities that create and factors that drive indirect costs  Ties cost drivers to the production of goods 28 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

29 Define accounting and describe how accounting information is used by a variety of stakeholders Identify the purposes and goals of generally accepted accounting principles Describe the key elements of the major financial statements

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30 Describe several methods stakeholders can use to obtain useful insights from a company’s financial statement Explain how the budget process can help managers plan, motivate, and evaluate their organization’s performance Explain the role of managerial accounting and the various cost concepts identified by managerial accountants