1. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 1 Using Accounting Information Chapter15

2. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 2  What is an audit? An examination of a company’s financial statements and accounting practices Generally accepted accounting principles (GAAPs)— an accepted set of guidelines and practices for U.S. companies reporting financial information and the accounting profession  The Sarbanes-Oxley Act of 2002 Top executives must certify periodic financial reports and are liable for intentional violations of reporting requirements. Auditors must maintain financial documents and audit work papers for five years. Why Accounting Information Is Important

3. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 3  The Sarbanes-Oxley Act of 2002 (cont.) Auditors and accountants can be imprisoned for up to twenty years and subject to fines for destroying documents and violating securities laws. A public corporation must change its lead auditing firm every five years. There is protection for whistle-blowers who report violations of the Sarbanes-Oxley Act but only for violations of securities fraud (deception related to stock values). Why Accounting Information Is Important (cont.)

4. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 4  Managers use the information the most!  Lenders, suppliers, stockholders, potential investors, and government agencies are other users Who Uses Accounting Information

5. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 5  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) The Accounting Equation Double-entry bookkeeping system : each financial transaction is recorded as two separate accounting entries to maintain the balance of the accounting equation. For example, if a business buys a computer for an employee to use, the column that shows what the business owns goes up, but the cash column goes down.

6. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 6  The accounting cycle Done on a regular basis 1. Analyze source documents 2. Record transactions as they occur in the general journal 3. Post transactions to accounts in the general ledger  Done at the end of the period Prepare the trial balance of all general ledger accounts Prepare financial statements and close the books The Accounting Cycle

7. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 7 The Accounting Cycle 1. Analyze source documents 2. Record transactions 3. Post transactions 4. Prepare the trial balance 5. Prepare the financial statements and Close the Books

8. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 8  A summary of the dollar amounts of a firm’s assets, liabilities, and owners’ equity accounts at the end of a specific accounting period  What’s on the Balance Sheet? Assets Liabilities Owners’ Equity The Balance Sheet

9. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 9  Assets- Listed in order of liquidity (ease with which an asset can be sold for cash) Current assets—can quickly be converted into cash or that will be used in one year or less – Cash, marketable securities (stocks), accounts receivable, notes receivable, inventory, and prepaid expenses 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, ie, goodwill, patents – Patents, copyrights, trademarks, and goodwill Assets

10. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 10 Balance Sheet Assets Listed Most Liquid Least Liquid

11. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 11  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 – Example: Electric bill, purchases from suppliers, etc. – Notes payable—people or other companies who owe you money Long-term liabilities—debts that need not be repaid for at least one year – Mortgages, bonds, and long-term loans Liabilities

12. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 12  Owners’ 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— – Equals stockholders’ equity – Retained earnings—profits not distributed to stockholders Owners’ Equity

13. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 13 Personal Balance Sheet

14. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 14 Business Balance Sheet- see pg 450 in book

15. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 15  A summary of a firm’s revenues and expenses during a specified accounting period Shows Profit or Loss  Revenues (Sales) What are revenues (sales)? The dollar amounts earned by a firm from selling goods, providing services, or performing business activities – Gross sales (also called total revenues)—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 subtracting out returns, allowances, discounts Gross sales and gross profit are not the same thing! The Income Statement

16. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 16  What is Gross Profit?  Gross profit = Net sales - Cost of Goods Sold  What is Cost of goods sold (COGS)?  What does that mean? A simple explanation is that COGS tells us how much it cost us to sell what we sold. The Income Statement (cont.) Cost of goods sold Beginning inventory Net purchases Ending inventory =+ –

17. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 17  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  The Income Statement will show net income (if positive) or net loss (if negative) The Income Statement (cont.)

18. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 18 Personal Income Statement

19. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 19  Business Income Statement-see pg 454.

20. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 20  For each of the following accounts, indicate whether it belongs on a balance sheet or an income statement. Rent Cash Patent Mortgage payment Net income Salaries payable Delivery equipment Sales Cost of goods sold Common stock Team Exercise

21. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 21  Illustrates how the operating, investing, and financing activities of a company affect cash during an accounting period Cash flows from operating activities (providing goods and services) Cash flows from investing activities (purchase and sale of land, equipment, and other assets and investments) Cash flows from financing activities (changes in debt obligation and owners’ equity accounts) Cash Flow Statement

22. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 22 Cash Flow Statement- see pg 456.

23. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 23 Comparison of Financial Statements

24. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 24  Using accounting information to evaluate a potential investment Use common sense to interpret the numbers. Financial statements should be audited by an outside source and be current. Look for use of new strategies to reduce costs. Determine the firm’s ability to pay its debts and borrow money in the future. Look at how the numbers relate to each other. Understand the financial ratios. Evaluating Financial Statements

25. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 25  Comparisons are possible because of GAAP.  Managers can get a general idea of a firm’s relative effectiveness and its standing within the industry.  Data are available from annual reports of public corporations.  Industry averages are available from Dun & Bradstreet, Standard & Poor’s, and industry trade associations. Comparing Data with Other Firms’ Data

26. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 26  Numbers that show the relationship between two elements of a firm’s financial statements  Can be compared with: The firm’s own past ratios Ratios of competitors Industry averages  Information to calculate ratios is found on a firm’s balance sheet, income statement, and statement of cash flows Financial Ratios

27. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 27 Financial Ratios (cont.)

28. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 28  There are many online sources for obtaining company information and annual reports. Here are just two. http://www.hoovers.com/free/ http://www.annualreportservice.com/ Using the Internet

29. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 29 Chapter Quiz 1. The __________ is designed to improve accounting standards. A. Ethics in Accounting Act B. Graham-Rudman Reform Act C. Sarbanes-Oxley Act D. Securities and Exchange Accounting Act E. Accounting Standards Establishment Act

30. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 30 Chapter Quiz 2. The first step in the accounting cycle is to A. analyze source documents. B. record individual transactions. C. post individual transactions. D. construct a beginning financial statement. E. prepare a list of employees.

31. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 15 | Slide 31 Chapter Quiz 3. Assets, liabilities, and owners’ equity would be listed on a firm’s A. balance sheet. B. income statement. C. statement of earnings. D. statement of retained earnings. E. statement of capital.