1. Business in a Changing World McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved. Chapter 14 Accounting and Financial Statements 1

2. 14-2

3. 14-3 The Nature of Accounting Accounting is the financial language that all organizations used to; record, measure, and interpret the financial information, which are often used in making business decisions. Who prepares accounting information and how it is used?

4. 14-4 Types of Accountants Public Accountant - An independent professional who provides accounting services to the public (individuals or firms) for a fee.They are certificated (CPA=Certificated public Accountant) by the state and most of them work for public accounting firms such as PWC andKPMG. Private Accountant - An accountant employed by a corporation, government agency, or other organization in order to prepare and analyze their financial statements.Private accountants can be CPA and may become certificated management accountants (CMAs)after completing rigorous examination by the local accountant institurion.

5. 14-5 Accounting or Bookkeeping ? Bookkeepers -- responsible for obtaining and recording the information that accountants require to analyze a firm’s financial position.Their duty is limited to the routine day to day recording of business transactions. Accountants -- record financial information and understand, interpret, and develop sophisticated accounting systems necessary to classify and analyze complex financial information.

6. 14-6 The Users of Accounting Information To aid in: Internal purposes planning and control of business activities. Managerial accounting is the internal use of accounting statements by managers in planning and directing the organization’s activities. Cash Flows and Budgets are the major instruments for internal users. External purposes: Managers also use the accounting statements to report the business financial performance to outsiders such as creditors, stockholders, investors. Annual Reports are the summary of firms’ financial information for owners’ and potential investors.

7. 14-7 Uses of Accounting Information Internal uses: Managerial accounting – internal use of accounting statements by managers in planning & directing the organization’s activities Cash flow – movement of money through organization over a daily, weekly, or monthly basis Budget – the internal financial plan that forecasts expenses and income over a set period of time.

8. 14-8 Uses of Accounting Information External uses: – Reporting financial performance to outsiders Annual report – summary of the firm’s financial information, products, and growth plans for owners and investors. Audited financial statements – annual report signed by a CPA certifying accuracy. – Filing income taxes – Obtaining credit – Reporting to stockholders

9. 14-9 External Accounting Information Stockholders and Potential Investors – Evaluate soundness of investments Government Agencies – Confirm tax liabilities – Confirm payroll – Deductions – Approve new issues of stocks and bonds

10. 14-10 The Accounting Equation The relationship between assets, liabilities, and owners’ equity Assets A firms economic recources, or items of value that it owns. Cash, inventory, land, equipment, building and all tangiable and intangible things Liabilities A firm’s debts and obligations that a firm owes to others Owners’ Equity The difference between a firm’s assets and its liabilities and reflects historical values. =+

11. 14-11 Double-Entry Bookkeeping A system of recording and classifying business transactions in separate accounts in order to maintain the balance of the accounting equation. Thus; assume that Anna buys roses for $325 by credit in order to use in the wedding ceremony of Mr and Mrs Brown. Let:s record this transaction Assets =Liabilities+ Owners’ Equity $325 = $325 + Owners’ Equity She buy roses to her shop. She buy the roses by credit. Her inventory increases. So, she should record a debt to a suplier or a bank. Thus in order to keep the accounting equation in balance, each business transcation must be recorded in two seperate accounts.

12. 14-12 The Accounting Equation and Double-Entry Bookkeeping for Anna’s Flowers

13. 14-13 The Accounting Cycle 1.Examining source documents such as checks, credit card receipts, sales slips 2.Recording transactions in an accounting journal: A time ordered list of account transaction 3.Posting recorded transactions into ledger which is a book or computer program with separate sections for each account. 4.Preparing financial statements. Ledgers are used in the preparation of financial statements such as income statement, balance sheet and annual budgets.

14. 14-14 The Income Statement A financial report that shows an organization’s profitability over a period of time: – Month – Quarter – Year Key Income Statement Terms Revenue – Cost of goods sold – Gross income Expenses – Selling, general & administrative – R&D, engineering – Interest – Depreciation Net income

15. John’s Pizza Income Statement December 31, 2008 14-15

16. 14-16 The Balance Sheet A “snapshot” of an organization’s financial position at a given moment – Presents an accumulation of all the company’s transactions since it began Key Balance Sheet Terms Assets – Current assets – Accounts receivable Liabilities – Accounts payable – Accrued expenses Owner’s equity

17. John’s Pizza Balance Sheet December 31, 2008 14-17

18. 14-18 John’s Pizza Annual Budget for 2008 SalesConsulting Total January6,500 5,00011,500 February6,000 6,00012,000 March5,800 6,20012,000 April6,100 6,50012,600 May7,000 6,80013,800 June8,100 7,60015,700 July8,600 7,80016,400 August6,900 8,00014,900 September6,700 8,70015,400 October5,900 9,00014,900 November5,000 8,50013,500 December4,500 8,00012,500 Annual $123,850 $73,850 $197,700

19. 14-19 The Statement of Cash Flow Explains how the company’s cash changed from the beginning of the accounting period to the end Three categories: 1.Cash from (used for) operating activities 2.Cash from (used for) investing activities 3.Cash from (used for) financing activities