1. Fourth Edition Copyright ©2003 Prentice Hall, Inc. PART 5........................ Managing Information

2. Copyright ©2003 Prentice Hall, Inc. 13 - 2 Chapter 13 Understanding Principles of Accounting

3. Copyright ©2003 Prentice Hall, Inc. 13 - 3 “I am incredibly nervous that we will implode in a wave of accounting scandals” ~ Sherron Watkins, Enron Vice President, four months prior to Enron’s collapse

4. Copyright ©2003 Prentice Hall, Inc. 13 - 4 Key Topics The role of public and private accountants The CPA vision project The accounting equation and double-entry accounting Basic financial statements Key financial ratios Accounting in international businesses

5. Copyright ©2003 Prentice Hall, Inc. 13 - 5 What Is Accounting? Business managers Employees and unions Investors and creditors Tax authorities Government regulatory agencies A comprehensive system for collecting, analyzing and communicating financial information Users of accounting information:

6. Copyright ©2003 Prentice Hall, Inc. 13 - 6 Financial Accounting Managerial Accounting Accountants and Their Responsibilities Controller: Managers all of a firm’s accounting activities

7. Copyright ©2003 Prentice Hall, Inc. 13 - 7 Accountants and Their Responsibilities Certified public accountants (CPAs) Auditing and GAAP Tax services Management advisory services Non-certified public accountants Private accountants

8. Copyright ©2003 Prentice Hall, Inc. 13 - 8 The CPA Vision Project Identifying issues for the future Global forces as drivers of change Recommendations A new direction Core services Core competencies

9. Copyright ©2003 Prentice Hall, Inc. 13 - 9 Global Forces Impacting the New CPA Profession Technical Forces Economical Forces Political Forces Social Forces Human Resource Forces Regulatory Forces

10. Copyright ©2003 Prentice Hall, Inc. 13 - 10 Key Tools of the Accounting Trade Accounting Equation Double-Entry Accounting Every transaction affects two accounts Double-Entry Accounting Every transaction affects two accounts Assets = Liabilities + Owners’ Equity Assets – Liabilities = Owners’ Equity

11. Copyright ©2003 Prentice Hall, Inc. 13 - 11 Financial Statements Balance Sheets Income Statements Statements of Cash Flows

12. Copyright ©2003 Prentice Hall, Inc. 13 - 12 ASSETS Perfect Posters’ Balance Sheet Example

13. Copyright ©2003 Prentice Hall, Inc. 13 - 13 LIABILITIES & OWNER'S EQUITY Perfect Posters’ Balance Sheet Example

14. Copyright ©2003 Prentice Hall, Inc. 13 - 14 Perfect Posters’ Income Statement Example

15. Copyright ©2003 Prentice Hall, Inc. 13 - 15 Statements of Cash Flows Cash flows from: Operations Investing Financing

16. Copyright ©2003 Prentice Hall, Inc. 13 - 16 Perfect Posters’ Sales Budget Example

17. Copyright ©2003 Prentice Hall, Inc. 13 - 17 Reporting Standards and Practices Revenue Recognition Matching Full Disclosure

18. Copyright ©2003 Prentice Hall, Inc. 13 - 18 Solvency Ratios Profitability Ratios Activity Ratios Analyzing Financial Statements

19. Copyright ©2003 Prentice Hall, Inc. 13 - 19 Short Term Solvency Ratios Current Ratio: Current Assets – Current Liabilities Working Capital: Current Assets Current Liabilities

20. Copyright ©2003 Prentice Hall, Inc. 13 - 20 Long-term Solvency Ratios Debt to Owners’ Equity Ratio: Ability to finance an investment through borrowed funds Leverage:Debt Owners’ Equity

21. Copyright ©2003 Prentice Hall, Inc. 13 - 21 Profitability and Activity Ratios Return on Equity: Earnings Per Share: Net Income Total Owners' Equity Inventory Turnover Ratio: Net Income # of Shares Outstanding Cost of Goods Sold Average Inventory

22. Copyright ©2003 Prentice Hall, Inc. 13 - 22 International Accounting Standards International Transactions Foreign Currency Exchange International Accounting

23. Copyright ©2003 Prentice Hall, Inc. 13 - 23 Chapter Review Explain the role of accountants, public and private Discuss the CPA Vision Project Explain the accounting equation and double- entry accounting Describe the three basic financial statements

24. Copyright ©2003 Prentice Hall, Inc. 13 - 24 Chapter Review Explain how key financial ratios can help analyze the financial strength of a business Explain some of the special issues facing accountants at firms that do international business