1. Using Accounting Information
Pride I Hughes I Kapoor 18
Chapter
Using Accounting Information
PowerPoint Presentation by Charlie Cook
Seventh Edition
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2. Why Accounting Information Is Important
The process of systematically collecting, analyzing, and reporting financial information.
Accounting’s three key financial statements that summarize the firm’s activities for a specific period:
The balance sheet.
The income statement.
The statement of cash flows.
The people who use accounting information
Managers are primary users of accounting information.
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 tax information.
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3. Users of Accounting Information
The primary users of accounting information are a company’s managers, but individuals and organizations outside the company also require information on its finances.
Table 18.1
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4. Careers in Accounting Private Accountant Public Accountant
An accountant employed by a specific organization.
Services performed for the employer:
General accounting
Budgeting
Cost accounting
Tax accounting
Internal auditing
Public Accountant
An accountant who provides services to clients on a fee basis.
Certified Public Accountant (CPA)
An individual who has met the state requirements for accounting education and experience and has passed a rigorous two-day accounting examination.
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5. The Accounting Process
The accounting equation
Assets—the resources that a business owns (e.g., cash, inventory, equipment, and real estate).
Liabilities—the firm’s debts that it owes to others.
Owners’ equity—what would be left if the firm’s assets were sold and the money used to pay off its liabilities.
Assets = liabilities + owners’ equity
The double-entry bookkeeping system
A system in which each financial transaction is recorded as two separate accounting entries to maintain the balance of the accounting equation.
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6. The Accounting Process (cont’d)
The accounting cycle
Analyzing source documents—analysis of documents showing day-to-day transactions to determine which accounts are affected and how they are affected.
Recording transactions—journalizing transactions in the general journal as they occur.
Posting transactions—transferring journal entries to accounts in the general ledger.
Preparing the trial balance—ascertaining the balances of all general ledger accounts at the end the accounting period.
Preparing financial statements and closing the books
Trial balance information is used to prepare the financial statements for closing an accounting period.
Post-closing trial balance is prepared.
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7. The Balance Sheet Balance sheet (or statement of financial position)
A summary of the dollar amounts of a firm’s assets, liabilities, and owners’ equity accounts at a particular time.
Assets
Assets—the resources a business owns (e.g., cash, inventory, equipment, and real estate).
Liquidity—the ease with which an asset can be converted into cash.
Current assets—assets that can quickly be converted to cash.
Cash, marketable securities, accounts receivable, merchandise inventory, and prepaid expenses.
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8. Personal Balance Sheet
Marty Campbell
Personal Balance Sheet
December 31, 20XX
ASSETS
Cash
Savings account
Automobile
Stereo
Television
Furniture
TOTAL ASSETS
LIABILITIES
Automobile loan
Credit card balance
TOTAL LIABILITIES
NET WORTH (Owner ’
s Equity)
TOTAL LIABILITIES AND NET WORTH
$ 9,500
500
$ 2,500
5,000
15,000
1,000
2,500
$26,500
$10,000
16,500
Even individuals can determine their net worth, or owner’s equity, by subtracting the value of their debts from the value of their assets.
Figure 18.1
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9. The Balance Sheet (cont’d)
Assets (cont’d)
Fixed assets—assets that 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—assets that do not exist physically but that have a value based on the rights or privileges they confer on the firm.
Patents, copyrights, trademarks, franchise rights, and goodwill.
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10. The Balance Sheet (cont’d)
Liabilities
Current liabilities—debts to be repaid within 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 to be repaid for at least a year.
Mortgages, bonds, and long-term loans.
Owners’ equity
For sole proprietorships—assets less liabilities equal equity.
For partnerships—a portion of profits or liabilities based on the partner’s investment in the firm.
Retained earnings—profits not distributed to the owners.
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11. Business Balance Sheet
December 31, 20XX
Current assets
Cash
Marketable securities
Accounts receivable
Less allowance for doubtful accounts
Notes receivable
Merchandise inventory
Prepaid expenses
Total current assets
Fixed assets
Delivery equipment
Less accumulated depreciation
Furniture and store equipment
Total fixed assets
ASSETS
$ 40,000
2,000
$182,000
137,000
21,000
$340,000
$ 59,000
10,000
38,000
32,000
41,000
$ 90,000
47,000
$110,000
20,000
62,000
15,000
Intangible assets
Patents
Goodwill
Total intangible assets
TOTAL ASSETS
$ 6,000
Northeast Art Supply, Inc.
$110,00
$230,000
Current liabilities
Accounts payable
Notes payable
Salaries payable
Taxes payable
Total current liabilities
Long-term liabilities
Mortgage payable on store equipment
Total long-term liabilities
TOTAL LIABILITIES
Stockholders’ equity
Common stock
Retailed earnings
TOTAL OWNERS’ EQUITY
TOTAL LIABILITIES AND OWNERS’ EQUITY
LIABILITIES AND STOCKHOLDERS’ EQUITY
$ 70,000
$ 35,000
25,675
4,000
5,325
$150,000
80,000
Assets = Liabilities + Owners’ Equity
Figure 18.2
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12. The Income Statement Income statement (earnings statement)
A summary of a firm’s revenues and expenses during a specified accounting period.
Profit (cash surplus) and loss (cash deficit).
Revenues—all of the dollar amounts earned by a firm from all sources (e.g., 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 adjusted dollar amount after subtracting sales returns, sales allowances, and sales discounts.
Cost of goods sold
Cost of goods sold—beginning inventory plus net purchases less ending inventory.
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13. The Income Statement (cont’d)
Operating expenses
All business costs other than the cost of goods sold.
Selling expenses—marketing-related activities costs
General expenses—costs for managing the business
Net income
The profit earned (or the loss suffered) by a firm during an accounting period, after all expenses have been deducted from revenues.
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14. Personal Income Statement
Marty Campbell
Personal Income Statement
For the month ended December 31, 20XX
LESS MONTHLY EXPENSES
Automobile loan
Credit card payment
Apartment rent
Utilities
Food
Clothing
Recreation & entertainment
INCOME (Take-home pay)
$1,900
$ 250
100
500
200
250
TOTAL MONTHLY EXPENSES
1,650
CASH SURPLUS (or profit) $
By subtracting expenses from income, you can determine if you have a surplus or deficit at the end of a specific calendar month.
Figure 18.3
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15. Business Income Statement
Income Statement For the Year Ended
December 31, 20XX
Revenues
Gross sales
Less sales returns and allowances
Less sales discounts
Net sales
$ 9,500
4,500
$465,000
14,000
$ 40,000
$375,000
41,000
335,000
$451,000
334,000
$117,000
Cost of goods sold
Beginning inventory, January 1, 20XX
Purchases
Less purchase discounts
Net purchases
Cost of goods available for sale
Less ending inventory December 31, 20XX
Gross profit
$346,000
11,000
Northeast Art Supply, Inc.
Operating expenses
Selling expenses
Sales salaries
Advertising
Sales promotion
Depreciation—store equipment
Depreciation—delivery equipment
Miscellaneous selling expenses
Total selling expenses
General expenses
Office salaries
Rent
Depreciation—office furniture
Utilities expense
Insurance expense
Miscellaneous expense
Total general expense
Total operating expenses
NET INCOME BEFORE TAXES
Less federal income taxes
Net income from operations
Less interest expense
NET INCOME AFTER TAXES
42,500
$ 37,000
$ 37,500
2,000
$ 79,500
$ 35,500
5,325
$ 30,175
$ 22,000
4,000
2,500
3,000
1,500
$ 28,500
8,500
1,000
500
$117,000
Gross profit
Figure 18.4
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16. The Statement of Cash Flows
A statement that 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 long-term assets).
Cash flows from financing activities (cash outflows for debt repayments and cash dividends).
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17. Statement of Cash Flows
For the Year Ended
December 31, 20XX
Cash flows from operating activities
Cash received from customers
Cash paid to suppliers and employees
Interest paid
Income taxes paid
Interest and dividends received
Net cash provided by operating activities
$ 451,000
(384,500)
( 2,000)
( 5,325)
500
$ 59,675
Cash flows from investing activities
Purchase of equipment
Purchase of short-term investments
Sale of short-term investments
Net cash provided by investing activities
$( 4,250)
( 10,000)
11,500
$( 2,750)
Cash flows from financing activities
Payment of short-term debt
Payment of long-term debt
Payment of dividends
Net cash provided by financing activities
$( 4,000)
( 7,000)
( 15,000)
$(26,000)
NET INCREASE (DECREASE) IN CASH
Cash at beginning of year
CASH AT END OF YEAR
$ 30,925
28,075
$ 59,000
Northeast Art Supply, Inc.
A statement of cash flows summarizes how a firm’s operating, investing, and financing activities affect its cash during a specified period—one month, three months, six months, or a year.
Figure 18.5
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18. Evaluating Financial Statements
Comparison of financial statements
Identify trends in growth, borrowing, and other business variables.
Determine whether the firm is on track in terms of meeting its long-term goals.
Why audited statements are important
An audit examines the company’s financial statements to make sure that they have been prepared in accordance with generally accepted accounting principles (GAAP).
Audited statements help lenders and others verify the borrower’s worth and the capability of the borrower to repay.
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19. Comparing Data for Previous Accounting Periods
1997
1998
1999
6,854
2.49
1.15
(.18)
2,309
56,154
57,993
45,800
1,120
(178)
6,972
6,732
NET SALES
NET INCOME
EARNINGS
PER SHARE
TOTAL DEBT
Dollars in millions
Dollars in share
Research and Development
1,924
3,315*
3,560*
2,577*
1,391
1,665
1,236
1,895
1,341
Capital expenditures
*Total capital expenditures/R&D
CAPITAL
EXPENDITURES/R&D
Comparison of Present and Past Financial Statements for the Boeing Corporation
Figure 18.6
Source: Adapted from the Boeing Corporation, 1999 Annual Report, p.3
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20. Financial Ratios Financial ratio
A number that shows the relationship between two elements of a firm’s financial statements.
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21. Financial Ratios (cont’d)
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22. Financial Ratios (cont’d)
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