1. Accounting and Financial Statements
Chapter Fourteen
Accounting and Financial Statements

2. The Nature of Accounting
The recording, measurement, and interpretation of financial information, often used in making business decisions.

3. Types of Accountants Public Accountant
An independent professional who provides accounting services to the public (individuals or firms) for a fee. A Certified Public Account (CPA) is an individual who has been certified in the state in which he or she resides by meeting state requirements for accounting, education, and experience and by passing a 2 1/2 -day accounting examination.
Private Accountant
An accountant employed by a corporation, government agency, or other organization. Can be either a CPA or a CMA (Certified Management Accountant).

4. Is it Accounting or Bookkeeping?
Bookkeeping is much narrower and more mechanical than accounting.
Bookkeeping is typically limited to routine day-to-day business transactions and obtaining and recording information that accountants use in financial analysis.

5. Corporate America’s Demand for Accounting Specialties
Accounts Receivable – 21%
Accounts Payable – 15%
Payroll – 15%
Cost Accounting – 9%
General Ledger – 8%
Tax – 5%
Credit – 2%

6. Uses for Accounting Information
Internal Uses:
Managerial Accounting
Cash Flow
Budget
External Uses:
Reporting financial performance to outsiders
Filing Income Taxes
Obtaining Credit
Reporting to Stockholders

7. Internal Accounting Information
Management
Plan and set goals
Organize
Lead and motivate
Control
Lenders & Suppliers
Evaluate Credit Risks

8. 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

9. Who Uses Accounting Information?
Tax authorities
Federal (IRS)
State
Municipal
Other
Regulatory Agencies
SEC
Stock exchanges
ICC, FAA, etc.
Other agencies
Economic Planners
Council of Economic Advisors
Federal Reserve Board
Government planners
Other groups
Employees and labor unions
Financial advisors
Customers and the general public
Management
Owners, partners
Boards of directors
Officers of the company
Managers
Department heads
Supervisors
Those with Direct Financial Interest
Present or potential investors
Present or potential creditors
Those with Indirect Financial Interest
Actions That Affect Business Activities
Business Activities
Accounting
Source: Needles, Belverd E., Henry R. Anderson, and James C. Caldwell. Principles of Accounting, Fourth Edition. Copyright © 1990 by Houghton-Mifflin. Used with permission.

10. The Accounting Process: The Accounting Equation
Assets = Liabilities + Owners’ Equity
The difference between a firm’s assets and its liabilities
Things of value that a firm owns
A firm’s debts and obligations

11. The Accounting Process: Double-Entry Bookkeeping
Assets = Liabilities + Owners’ Equity
$325 =
$325

12. The Accounting Cycle 1. Examining Source Documents
2. Recording Transactions
3. Posting Transactions
4. Preparing Financial Statements

13. Preparing Accounting Statements with GAAP
Generally Accepted Accounting Principles (GAAP)
The Best-known Financial Statements:
Income Statement
Balance Sheet

14. Equivalent Accounting Terms
Term: Equivalent Term:
Revenues Sales
Gross Profit Gross Income / Gross Earnings
Operating Income Operating Profit / Earnings Before Income & Taxes / Income Before Interest & Taxes
Income Before Taxes Earnings Before Taxes / Profit Before Taxes
Net Income Earnings After Taxes / Profit After Taxes
Income Available to Earnings Available to Common Stockholders Stockholders

15. The Income Statement
A financial report that shows an organization’s profitability over a period of time – month, quarter or year.

16. Key Income Statement Terms
Revenue
Cost of Goods Sold
Gross Income
Expenses
Selling, general & administrative
R&D, engineering
Interest
Depreciation
Net Income

17. Anna’s Flowers Income Statement December 31, 2002
Revenues:
Net Sales $123,850
Consulting: ,850
Total Revenues $197,700
Expenses:
Cost of Goods Sold $ 72,600
Selling Expenses ,700
General & Admin ,400
Other expenses ,600
Total Expenses $134,300
Net Income $ 63,400

18. The Balance Sheet
A “snapshot” of an organization’s financial position at a given moment.

19. Key Balance Sheet Terms
Assets
Accounts Receivable
Liabilities
Accounts Payable
Accrued Expenses
Owner’s Equity

20. Anna’s Flowers Balance Sheet December 31, 2002
Assets:
Current Assets:
Cash: $17,850
Accounts Receivable 10,200
Merchandise Inventory 8,750
Total Assets: $36,800
Property & Equipment
Equipment 11,050
Office Building 73,850
Total Prop. & Equip ,900
Total Assets: $121,700
Liabilities & Owner’s Equity
Current Liabilities
Acct’s Payable $12,600
Total Current Liabilities ,600
Long-term Liabilities
Mortgage Payable ,600
Total Liabilities ,200
Owner’s Equity:
Anna Rodriguez, Capital ,500
Total Liabilities & Owner’s Equity $121,700

21. Anna’s Flowers Annual Budget for 2002
Sales Consulting Total
January 6, , ,500
February 6, , ,000
March 5, , ,000
April 6, , ,600
May 7, , ,800
June 8, , ,700
July 8, , ,400
August 6, , ,900
September 6, , ,400
October 5, , ,900
November 5, , ,500
December 4, , ,500
Annual $123, $73, $197,700

22. Analyzing Financial Statements with Ratio Analysis
Profitability ratios
Asset utilization ratios
Liquidity ratios
Debt utilization ratios
Per share data

23. Profitability Ratios Profit Margin = Return on Assets =
Return on equity =

24. Asset Utilization Ratios
Receivables turnover =
Inventory turnover =
Return on equity =

25. Liquidity Ratios
Current ratio =
Quick ratio =

26. Debt Utilization Ratios
Debt to total assets =
Times interest = earned

27. Per Share Data
Earnings per share =
Dividends per = share

28. Solve the Dilemma
1. Describe the two 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.

29. Explore Your Career Options
What contributions do accountants make to organizations?

30. 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?

31. 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?

32. Chapter 14 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.

33. Chapter 14 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.

34. Multiple Choice Questions about the Video
1. The financial position of a company at a given time is reflected on its
a. balance sheet. b. income statement. c. owners’ equity statement. d. statement of cash flows. e. checkbook.
2. The most important of the firm’s financial statements is its a. balance sheet. b. income statement. c. owners’ equity statement. d. statement of cash flows. e. collateral loan.