1. CHAPTER 14 Analyzing and Using Financial Information,

2. What Is Accounting? Managers use financial information to control a company’s operations Accounting: Measuring, interpreting, and communicating financial information to internal and external users Financial Accounting: Preparing financial information for users outside the organization Management Accounting: Preparing financial data for internal users

3. The Rules of Accounting GAAP - Generally Accepted Accounting Principles Professionally approved U.S. standards and practices used by accountants in the preparation of financial statements FASB – Financial Accounting Standards Board United States IAS – International Standards Board International – may be different (inferior) to GAAP

4. What Accountants Do Accountants: l Design accounting systems l Prepare financial statements l Analyze and interpret financial information l Prepare financial forecasts and budgets l Prepare tax returns l Interpret tax law l Provide business expertise and consulting services l Assist clients with personal financial planning Bookkeeping: l Record ‑ keeping l Clerical aspect of accounting Bookkeeping: l Record ‑ keeping l Clerical aspect of accounting

5. Certified Public Accountants (CPAs): Professionally licensed accountants who meet certain requirements for education and experience and who pass a comprehensive examination What Accountants Do

6. Public Accountants Public Accountants: Professionals who provide accounting services to other businesses and individuals on a fee basis Audit: Formal evaluation of the fairness and reliability of a client's financial statements Internal Auditors: Employees who analyze and evaluate a company's operations and data to determine their accuracy

7. Private Accountants Private Accountants: In-house accountants employed by organizations and businesses other than a public accounting firm: also called corporate accountants Certified Management Accountants (CMAs): Accountants who have fulfilled the requirements for certification as specialists in management accounting Controller: Highest-ranking accountant in a company, responsible for overseeing all accounting functions

8. Private Accountants Cost Accounting: Area of accounting focusing on the calculation of manufacturing and storage costs of products for use or sale in a business Tax Accounting: Area of accounting focusing on tax preparation and tax planning Financial Analysis: Process of evaluating a company's performance and analyzing tile costs and benefits of a strategic action

9. The Accounting Equation Assets: All valuable items owned or leased by a business Liabilities: Claims against a firm's assets by creditors Owner’s Equity: Portion of a company's assets that belongs to the owners after obligations to all creditors have been met Assets – Liabilities = Owner’s Equity Owner’s Equity: Portion of a company's assets that belongs to the owners after obligations to all creditors have been met Assets – Liabilities = Owner’s Equity Accounting Equation: Basic accounting equation that assets equals liabilities plus owners' equity Assets = Liabilities + Owner’s Equity Accounting Equation: Basic accounting equation that assets equals liabilities plus owners' equity Assets = Liabilities + Owner’s Equity

10. How Are Financial Statements Used? l During the accounting process, sales, purchases, and other transactions are recorded and classified into individual accounts. l All of a company’s financial data is put into standardized formats that can be used to make decisions, analyze operations, and plan future operations. l To make sense of these individual transactions, accountants summarize them by preparing financial statements.

11. Understanding Financial Statements l Financial statements consist of three separate interrelated reports: l Balance Sheets l Income Statements l Cash Flow Statements l Companies and stakeholders use these reports to evaluate an company’s past performance and present condition, and to spot opportunities and potential problems.

12. The Value of Ratio Analysis Ratio Analysis: Quantitative measures to evaluate a firm's financial performance Financial ratios provide information for analyzing the health and future prospects of a business while allowing for the comparison of different-sized companies.

13. What Does Financial Management Involve? Financial Management: Effective acquisition and use of money Financial Plan: A forecast of financial requirements and the financing sources to be used

14. Developing a Financial Plan Four main activities of the financial planning process: ¶ Estimate the flow of money into and out of the business · Determine whether the cash flow is negative or positive and how to use or create excess funds ¸ Decide whether to invest in major assets now and how to finance such investments ¹ Compare actual results to projects to discover variances and take corrective action

15. Developing a Budget Budget: Planning and control tool that reflects expected revenues, operating expenses, and cash receipts and outlays financial blueprint