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Why Accounting Information Is Important
ACCOUNTING: THE PROCESS OF SYSTEMATICALLY COLLECTING, ANALYZING, AND REPORTING FINANICAL INFORMATIONEXPLAIN ALCRE AND DR CR ARTHUR ANDERSON: MANIPULATED FINANCIAL DATA DENNIS KOZLOWSKI: LOOTED MORE THAN 600 MILLION FROM COMPANY (TYCO) Copyright © Cengage Learning. All rights reserved

What is an audit? An examination of a company’s financial statements and accounting practices Generally accepted accounting principles (GAAP)— An audit does not guarantee that a company has not “cooked” the books WHAT DOES COOKED THE BOOKS MEAN? MAKE PROFITS SEEM GREATER…WRITE OFF EXPENSES AS DEPRECIATION COMPANIES NEED TO ESTABLISH A CODE OF CONDUCT AND ETHICS Copyright © Cengage Learning. All rights reserved

The Sarbanes-Oxley Act of 2002
The SEC must establish an oversight board to police the accounting industry Top executives are required to certify periodic financial reports and are subject to criminal penalties for violations Accounting firms cannot provide many types of consulting services to the companies they audit Auditors must maintain financial documents and audit work papers for 5 years Auditors and accountants can be imprisoned for up to 20 years for destroying documents and violating securities laws A public corporation must change its auditing firm every 5 years There is protection for whistle-blowers who report violations of the Sarbanes-Oxley Act Copyright © Cengage Learning. All rights reserved

Who Uses Accounting Information
Managers are primary users Lenders require financial information before lending Stockholders want to know whether to invest or how well their investment is doing Government agencies require a variety of information Suppliers to ship merchandise. Copyright © Cengage Learning. All rights reserved

Private Accounting Employed by a specific organization Managerial and Financial Book-keeping (recording transactions and preparing statements) Budgeting (for sales and operating expenses) Cost accounting (determining costs of producing products and services) Tax accounting (planning strategy and preparing returns) Internal auditing (reviewing finances and operations against goals) Copyright © Cengage Learning. All rights reserved

Public Accounting Provides services to clients on a fee basis Self-employed or employee of an accounting firm Certified Public Accountant (CPA) Has met state requirements for accounting education and experience and has passed a rigorous two-day accounting examination prepared by the AICPA Participates in continuing-education programs to maintain certification Copyright © Cengage Learning. All rights reserved

Accounting Qualities Be responsible, honest, ethical Have a strong background in financial management Know how to use a computer and accounting software Be able to communicate with people who need accounting information Copyright © Cengage Learning. All rights reserved

The Accounting Process
The accounting equation Assets = Liabilities + Owners’ Equity Assets—the resources that a business owns (e.g., cash, inventory, equipment, and real estate) Liabilities—the firm’s debts Owners’ equity—the difference between assets and liabilities (what would be left for the owners if the firm’s assets were sold and the money used to pay off its liabilities) Double-entry bookkeeping system: Each financial transaction is recorded as two separate accounting entries to maintain the balance of the accounting equation Copyright © Cengage Learning. All rights reserved

The accounting cycle Done on a regular basis Analyzing source documents Recording transactions as they occur in the general journal Posting transactions to accounts in the general ledger Done at the end of the period Preparing the trial balance of all general ledger accounts Preparing financial statements and closing the books Copyright © Cengage Learning. All rights reserved

The Accounting Cycle 1. Analyzing source documents
2. Recording transactions 4. Preparing the trial balance 3. Posting transactions 5. Preparing financial statements The Accounting Cycle USED VIA JOURNAL ENTRIES.. SOFTWARE LIKE QUICKBOOKS MAKE IT EASIER TO ORDER ACCOUNTING ENTRIES AND FACILITATE WHAT GOES WHERE ON EACH SHEET Copyright © Cengage Learning. All rights reserved

The Balance Sheet A summary of the dollar amounts of a firm’s assets, liabilities, and owners’ equity accounts at the end of a specific accounting period (also called statement of financial position) Assets Listed in order of liquidity (ease with which an asset can be converted into cash) Current assets—can quickly be converted into cash Cash, marketable securities, accounts receivable, notes receivable, merchandise inventory, and prepaid expenses SNAPSHOT Copyright © Cengage Learning. All rights reserved

Assets Fixed assets—will be held or used for a period longer than one year Land, buildings, and equipment Depreciation—the process of apportioning the cost of a fixed asset over the period during which it will be used Intangible assets—do not exist physically but have a value based on the rights or privileges they confer on the firm Patents, copyrights, trademarks, franchise rights, and goodwill CURRENT ASSETS: WHAT A FIRM HOLDS FOR LESS THAN ONE YEAR Copyright © Cengage Learning. All rights reserved

Liabilities Current liabilities—debts to be repaid in one year or less Accounts payable—short-term obligations that arise as a result of making credit purchases Notes payable—obligations that have been secured with promissory notes Long-term liabilities—debts that need not be repaid for at least one year Mortgages, bonds, and long-term loans Copyright © Cengage Learning. All rights reserved

Owners’ or stockholders’ equity
For sole proprietorships— Assets – liabilities = owners’ equity For partnerships—each partner’s share of ownership is reported separately in each owner’s name For corporations—stockholders’ equity Retained earnings—profits not distributed to stockholders NET INCOME INCREASES RETAINED EARNINGS RETAINED EARNINGS CAN BE USED TO PAY OUT DIVIDENDS IF THE COMPANY WISHES TO DO SO (DIVIDENDS DECREASE RE) Copyright © Cengage Learning. All rights reserved

Personal Balance Sheet
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Business Balance Sheet

The Income Statement A summary of a firm’s revenues and expenses during a specified accounting period Profit (cash surplus) Loss (cash deficit) Revenues The dollar amounts earned by a firm from selling goods, providing services, or performing business activities Gross sales—the total dollar amount of all goods and services sold during the accounting period Net sales—the actual dollar amounts received by a firm for the goods and services it has sold, after adjustment for returns, allowances, discounts Copyright © Cengage Learning. All rights reserved

Cost of goods sold Cost of goods sold Beginning inventory Net purchases Ending inventory = + – Gross profit A firm’s net sales less the cost of goods sold Copyright © Cengage Learning. All rights reserved

Operating expenses All business costs other than the cost of goods sold Selling expenses—costs related to marketing activities General expenses—costs of managing the business Net income Revenues less expenses, when the difference is positive Net loss Revenues less expenses, when the difference is negative Copyright © Cengage Learning. All rights reserved

Personal Income Statement

Business Income Statement

The Statement of Cash Flows
Cash flows from operating activities (providing goods and services) Cash flows from investing activities (purchase and sale of land, equipment, and other long-term assets and investments) Cash flows from financing activities (changes in debt obligation and owners’ equity accounts) Copyright © Cengage Learning. All rights reserved

Evaluating Financial Statements

Comparing Data Across Time
STATISTICAL MODELS AND PROGRAMS SUCH AS SPSS WILL DO THIS FOR YOU Source: Adapted from the Microsoft Corporation 2007 Annual Report, September 25, 2008. Copyright © Cengage Learning. All rights reserved

Comparing Data across Firms
CREDIT AGENCIES THAT PROVIDE FINANCIAL DATA YOU CAN EVEN GO ON THE COMPANY’S WEBSITE AND PRINT THEIR 10K OR FULL FINANCIAL STATEMENT ANALYSIS Copyright © Cengage Learning. All rights reserved

Financial Ratios VERY IMPORTANT TO KNOW WHEN DEALING WITH FINANCE!!! ANALYSTS USE THESE RATIOS AND COMPARE THEM TO OTHER INDUSTRIES TO SEE THE FINANCIAL HEALTH OF THEIR COMPANY COMPARED TO OTHER FIRMS Copyright © Cengage Learning. All rights reserved

Copyright © Cengage Learning. All rights reserved

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