1. FHF Ferrell Hirt Ferrell M: Business 2 nd Edition

2. FHF 14 Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Accounting and Financial Statements

3. FHF The recording, measurement, and interpretation of financial information, often used in making business decisions After the 2008-2009 financial crisis and recession, international accounting boards reexamined fair value accounting rules A difficult and contentious science Accounting 14-3

4. FHF GAAP Generally accepted accounting principles. SEC Securities & Exchange Commission provides oversight Accounting Terms 14-4

5. FHF Public Accountant An independent professional who provides accounting services to the public (individuals or firms) for a fee CPA (Certified Public Accountant) Private Accountant An accountant employed by a corporation, government agency, or other organization Can be CPAs or CMAs (Certified Management Accountant) Types of Accounting 14-5

6. FHF Analyzing financial data in search of fraudulent entries or financial misconduct Can help uncover money laundering, terrorist activity Marital and family law A growth area for public accountants Forensic Accounting 14-6

7. FHF Bookkeeping Often (mistakenly) used interchangeably with accounting The routine day-to-day recording of business transactions Accounting or Bookkeeping? 14-7

8. FHF Much more than number crunching Requires an in-depth understanding of the industries in which your clients are involved Transparency and open communication are essential ✴ Ernst & Young is a global accounting and financial advisory firm Ernst & Young ✴ 144,000 employees ✴ Concern for ethics, social responsibility and the environment What Does a Job in Accounting Involve? 14-8

9. FHF Internal Managerial accounting: internal use of accounting statements by managers in planning and directing activities Cash flow is management’s greatest concern Accounting helps management prepare a budget External The annual report for owners and potential investors Obtaining credit Filing taxes As a gauge of performance Uses of Accounting 14-9

10. Uses of Accounting Information FHF 14-10

11. FHF The Accounting Equation The relationship between assets, liabilities, and owners’ equity 14-11 ASSETS=LIABILITIES+OWNER’S EQUITY Things of value that a firm owns A firm’s debts and obligations The difference between a firm’s assets and its liabilities

12. FHF Double-Entry Bookkeeping $325 = $-700+$1,025 A system of recording and classifying business transactions in separate accounts in order to maintain the balance of accounting equation 14-12 ASSETS=LIABILITIES+OWNER’S EQUITY

13. The Accounting Cycle FHF Examine source documents Record transactions Post transactions Prepare financial statements 14-13

14. FHF The end results of the accounting process are a series of financial statements Income statement Balance sheet Statement of cash flows Financial statements are provided to: Stockholders and potential investors Creditors Government agencies Internal Revenue Service The Accounting Cycle 14-14

15. FHF A financial report that shows an organization’s profitability over a period of time Month Quarter Year The Income Statement 14-15

16. FHF Revenue Cost of goods sold Gross income Expenses Selling, general & administrative R&D, engineering Interest Depreciation Net income Key Terms 14-16

17. FHF John’s Pizza Income Statement December 31, 2009 14-17

18. FHF A “snapshot” of an organization’s financial position at a given moment Presents an accumulation of all the company’s transactions since it began The Balance Sheet 14-18

19. FHF Assets Current assets Accounts receivable Liabilities Accounts payable Accrued expenses Owner’s equity Key Balance Sheet Terms 14-19

20. FHF John’s Pizza Balance Sheet December 31, 2009 14-20

21. FHF Explains how the company’s cash changed from the beginning of the accounting period to the end Three categories: ✴ Cash from (used for) operating activities ✴ Cash from (used for) investing activities ✴ Cash from (used for) financing activities Statement of Cash Flow 14-21

22. Ratio Analysis FHF Profitability ratios Asset utilization ratios Liquidity ratios Debt utilization ratios Per share data 14-22

23. FHF Profitability Ratios 14-23 Profit Margin=Net Income/ Sales Return on Assets=Net Income/ Assets Return on Equity=Net Income/ Equity

24. FHF Asset Utilization Ratios Current Turnover=Sales/ Receivables Inventory Turnover=Sales/ Inventory Total Asset Turnover=Sales/ Total Assets 14-24

25. FHF Liquidity Ratios Current Ratio=Current Assets/ Current Liabilities Quick Ratio=Current Assets - Inventory/ Current Liabilities 14-25

26. FHF Debt Utilization Ratios Debt to Total Assets=Total Debt/ Total Assets Times Interest Earned =Income Before Interest & Taxes/ Interest Expense 14-26

27. FHF Per Share Data 14-27 Earnings per Share= Net Income/ Number of Shares Outstanding Dividends per share= Total Dividends Paid/ Number Shares Outstanding

28. FHF Industry Analysis 14-28

29. FHF 14-29