1. © Prentice Hall, 2007Excellence in Business, 3eChapter 16 - 1 Getting to the Bottom Line: Basic Accounting Concepts

2. © Prentice Hall, 2007Excellence in Business, 3eChapter 16 - 2 What is Accounting? Financial Management

3. © Prentice Hall, 2007Excellence in Business, 3eChapter 16 - 3 What Accountants Do Bookkeeping Cost accounting Tax accounting Financial analysis

4. © Prentice Hall, 2007Excellence in Business, 3eChapter 16 - 4 Ten Most Important Accounting Skills Analytical Problem solving Interpersonal Listening Communication Leadership Decision making Time management Teamwork Computer

5. © Prentice Hall, 2007Excellence in Business, 3eChapter 16 - 5 Types of Accountants Private –CMA or CPA –Internal audit Public –CPA –External audit

6. © Prentice Hall, 2007Excellence in Business, 3eChapter 16 - 6 Typical Finance Department Vice President Manufacturing Vice President Manufacturing Vice President Finance Vice President Finance Vice President Sales Vice President Sales President Board of Directors Board of Directors Controller Treasurer Director of Capital Budgeting Director of Capital Budgeting Credit Manager Credit Manager Inventory Manager Inventory Manager Cost Accounting Cost Accounting Tax Department Tax Department Financial Accounting Financial Accounting

7. © Prentice Hall, 2007Excellence in Business, 3eChapter 16 - 7 Accounting Rules Generally Accepted Accounting Principles (GAAP) Financial Accounting Standards Board (FASB) International Accounting Standards (IAS) Securities and Exchange Commission (SEC)

8. © Prentice Hall, 2007Excellence in Business, 3eChapter 16 - 8 Sarbanes-Oxley Act Advantages –Authority of auditors, conflict of interest, investor protection, corporate accountability Disadvantages –Implementation, cost of compliance, enforcement, reporting requirements

9. © Prentice Hall, 2007Excellence in Business, 3eChapter 16 - 9 Fundamental Accounting Concepts The accounting equation Double-entry bookkeeping The matching principle

10. © Prentice Hall, 2007Excellence in Business, 3eChapter 16 - 10 The Accounting Equation Owner’s Equity: Accounting Equation: Assets = Liabilities + Owner’s Equity Assets – Liabilities = Owner’s Equity

11. © Prentice Hall, 2007Excellence in Business, 3eChapter 16 - 11 Maintaining Balance Double-entry bookkeeping –Credit purchase –Cash purchase Matching principle –Accrual basis –Cash basis

12. © Prentice Hall, 2007Excellence in Business, 3eChapter 16 - 12 How Are Financial Statements Used? A transaction takes place The transaction is measured and recorded Journal entries are analyzed and posted to a ledger Account data are summarized and used to prepare budgets, reports, and financial statements

13. © Prentice Hall, 2007Excellence in Business, 3eChapter 16 - 13 Understanding Financial Statements Balance sheet Income statement Cash-flow statement

14. © Prentice Hall, 2007Excellence in Business, 3eChapter 16 - 14 The Balance Sheet Assets –Current –Fixed Liabilities and shareholder’s equity –Current liabilities –Long-term liabilities –Shareholder’s equity

15. © Prentice Hall, 2007Excellence in Business, 3eChapter 16 - 15 The Income Statement 4Revenues Gross Sales Less Sales Returns and Allowances 4Cost of Goods Sold Beginning Inventory + Net Purchases – Ending Inventory 4Operating Expenses Selling Expenses General Expenses 4Net Income After Taxes Net Income Before Taxes – Income Taxes 4Income Taxes

16. © Prentice Hall, 2007Excellence in Business, 3eChapter 16 - 16 The Cash-Flow Statement Operations Investments Financing

17. © Prentice Hall, 2007Excellence in Business, 3eChapter 16 - 17 Analyzing Financial Statements Trend Analysis Ratio Analysis Consider More Than One Ratio Uncover Business Shifts Consider Extraordinary Circumstances Check Specific Data

18. © Prentice Hall, 2007Excellence in Business, 3eChapter 16 - 18 Types of Financial Ratios Profitability Liquidity Activity Leverage

19. © Prentice Hall, 2007Excellence in Business, 3eChapter 16 - 19 Profitability Ratios 4Return on Sales Net Income/Net Sales 4Return on Equity Net Income/Total Owner’s Equity 4Earnings per Share Net Income/Average Shares Outstanding

20. © Prentice Hall, 2007Excellence in Business, 3eChapter 16 - 20 Liquidity Ratios 4Current Ratio Current Assets/Current Liabilities 4Quick Ratio Current Assets – Inventory/Current Liabilities

21. © Prentice Hall, 2007Excellence in Business, 3eChapter 16 - 21 Activity Ratios 4Inventory Turnover Cost of Goods Sold/Average Inventory 4Accounts Receivable Turnover Sales/Average Accounts Receivable

22. © Prentice Hall, 2007Excellence in Business, 3eChapter 16 - 22 Leverage Ratios 4Debt to Equity Total Liabilities/Total Equity 4Debt to Total Assets Total Liabilities/Total Assets