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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8 8
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8 8 Accounting: Decision Making by the Numbers 2 LO1What is accounting? How is accounting information used? LO2What are the goals of generally accepted accounting principles? LO3What are the key elements of the major financial statements? LO4What are methods stakeholders can use to obtain useful insights from a company’s financial statements? LO5What is the role of managerial accounting and what are the various cost concepts identified by managerial accountants? LO6How does the budget process help managers plan, motivate and evaluate their organization’s performance?
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Accounting: Who Needs It? 3 ManagersStockholders EmployeesCreditors What other groups would be interested in accounting information?
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Accounting: Who does it? What Accountants Do: Public Accountants Forensic Accountants Management Accountants Internal Auditors Government Accountants Accountants require expertise Certified Public Accountant (CPA) Certification 150-semester hours of college Rigorous Exam Direct Work Experience in accounting Certified Management Accountant (CMA) Certified Fraud Examiners 4 ©Digital Vision/Jupiterimages © The Studio Dog/Photodisc/Getty Images
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financial Accounting Financial accounting is the branch of accounting that addresses the needs of external stakeholders Stockholders Creditors Government Regulators Financial accounting includes financial statements to provide broad information 5
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Role of the Financial Standards Accounting Board 6 Generally Accepted Accounting Principles (GAAP) – accounting standards that are used in the preparation of financial statements Financial Accounting Standards Board (FASB) – private self-regulated board that establishes and enforces GAAP Through GAAP, the FASB aims to ensure that financial statements are: Relevant Reliable Consistent Comparable
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. He Madoff With How Much? Madoff was convicted for perpetrating the biggest investment fraud in U.S. history Rich and Famous Charitable organizations Billions of dollars vanished Forensic Accountants helped with the case Like CSI or Law & Order Forensic accountants have impressive credentials 7 Source: "Meet Irving Picard, the Lawyer With the Toughest Task in the World," by Vivek Ahuja, December 7, 2010, Financial News website: http://www.efinancialnews.com/story/2010-12-07/madoff-irving-picard; "Half of Madoff Losses Recovered After $7 Billion Settlement," by Josh Nathan-Kazis, The Jewish Daily Forward website: http://www.forward.com/articles/134060/; "Accounting Sleuths on the Trail of Madoff Money," by Rob Scherer, December 22, 2008, Christian Science Monitor website: http://www.csmonitor.com/2008/1222/p01s01-usec.htm; "Post-Madoff, Forensic Accountants Seeing Increase in Business," Shareholders Foundation website: AP Images/Kathy Willens
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Ethics in Accounting Accounting scandals rocked American business in the late 1990s Enron Tyco WorldComm Adelphia CEOs and top executives landed in jail The scandals were a wake-up call to the profession State boards began passing ethics related requirements 8 Source: “Scandal Sheet,” CBS Marketwatch website: http://www.marketwatch.com/news/features/scandal_sheet.asp; “Corporate Scandal Sheet,” Citizen Works website: http://www.citizenworks.org/enron/corp-scandal.php; “The Corporate Scandal Sheet,” by Penelope Patsuris, Forbes, August 26, 2002, http://www.forbes.com/2002/07/25/accountingtracker.html.
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financial Statements: Read All About Us Financial accounting includes three basic financial statements: Balance Sheet Income Statement Statement of Cash Flows Corporations with publicly held stock must publish annual reports with all three statements. 9
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Balance Sheet: What We Own and How We Got It 10 Assets = Liabilities + Owner’s Equity Owner’s Equity – the claims owners have against their firm’s assets Balance Sheet – summarizes a firm’s financial position at a specific point in time Assets – things of value that the firm owns Liabilities – indicates what the firm owes to non-owners
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Balance Sheet for Bigbux 11
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Income Statement: So, How Did We Do? 12 Revenue – Expenses = Net Income Net Income – the profit or loss the firm earns Income Statement – summarizes a firm’s operations over a given period of time in terms of profit and loss Revenue– the increase in the amount of assets the firm earns Expenses – the cash the firm spends or other assets it uses to generate revenue
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement for Bigbux 13
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Statement of Cash Flows: Show Me the Money 14 Cash flowing into and out of the firm Operations Investing Financing Increases and decreases Total amount of cash on hand Stakeholders want to know if there is adequate cash to pay workers, creditors, suppliers and IRS.
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Bigbux’s Statement of Cash Flows 15
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Other Statements: What Happens to the Owner’s Stake? 16 Statement of Retained Earnings – reports how retained earnings have changed Stockholder’s Equity Statement – reports how net income and dividends affect retained earnings
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Interpreting Financial Statements: Digging Beneath the Surface 17 It’s important to view financial statements and: The Independent Auditor’s Report Notes to Financial Statements Comparative Statements
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Independent Auditor’s Report: A Necessary Stamp of Approval 18 Publicly traded corporations are required to have a CPA firm perform an external audit Rigorous Process Check figures and methods Physical Counts The auditor will issue an unqualified, qualified or adverse opinion Auditors must be independent © Fuse/Jupiterimages © The Studio Dog/Photodisc/Getty Images
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Google’s External Auditor’s Opinion 19
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GAAP or IFRS? The International Financial Reporting Standards (IFRS) govern key U.S. partners The differences complicate processes for U.S. firms GAAP has been working with IASB to reduce differences Negotiation has been long and complex Significant changes are coming to U.S. standards 20 Source: "FASB and IASB Rejigger Convergence Plans," by Michael Cohn, Accounting Today website: http://www.accountingtoday.com/news/FASB-IASB-Rejigger-Convergence-Plans-56116-1.html; "IFRS: Current Situation and Next Steps," PricewaterhouseCoopers website: http://www.pwc.com/us/en/issues/ifrs-reporting/transition-to-ifrs-status.jhtml; "Compromise Reached for Financial Instruments; Revenue Recognition and Leases Less Certain," by Matthew G. Lamoreaux, Journal of Accountancy website: http://www.journalofaccountancy.com/Web/20113797.htm; "IFRS and US GAAP Similarities and Differences," PricewaterhouseCoopers website: http://www.pwc.com/us/en/issues/ifrs-reporting/assets/ifrs-simdif_book-final-2010.pdf © The Studio Dog/Photodisc/Getty Images ©Dieter Spannknebel/Photodisc/ Jupiterimages
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Checking Out the Notes to Financial Statements: What’s in the Fine Print? 21 Additional information may be required to explain the numbers, and notes can be very revealing: Can be many pages… Additional information about operations Clarify and supplement numbers Explain accounting methods or changes Detail status of lawsuits Another important section: Management’s Discussion and Analysis
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Looking for Trends in Comparative Statements The SEC requires publicly traded companies to provide comparative financial statements 2-3 years of figures side-by-side View changes over a period of time Trace what has happened to key assets and liabilities Comparative analysis is a form of horizontal analysis 22 © The Studio Dog/Photodisc/Getty Images
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Inside Intelligence: The Role of Managerial Accounting 23 Managers rely on information to make important decisions Measuring and assigning costs Developing budgets Management accounting systems are a huge source of competitive advantage
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Managerial Accounting vs. Financial Accounting 24
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Types of Costs 25 Out-of-pocket costs – also called explicit costs; actual expenditures. Payments made to suppliers, workers and rent for office space Implicit costs– opportunity costs; not monetary but what is given up Fixed costs– do not changes with levels of production Variable costs– rise and vary when the firm produces goods and services ©ColorBlind Images/Blend Images/Jupiterimages
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cost Concepts: A Cost for All Reasons Determine the most desirable mix of products Identify areas where efficiency is lagging Measure costs and assign to products Cost is the value of what is given up in exchange for something else Managerial accountants work with different kinds of costs 26
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Budget: Planning for Accountability Outline how resources will be used to meet goals Translates goals into measurable quantities and identify resources Communication and coordination among managers and employees Motivate achievement of goals Monitor progress 27 ©unique pic/Cultura/Jupiterimages
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Preparing the Budget: Top-Down or Bottom-Up? 28 Top-down budgeting – top management prepares the budget with little or no input from middle and supervisory managers Bottom-up or participatory budgeting - allows middle and supervisory managers to actively participate in the creation of the budget
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Developing the Key Budget Components: One Step at a Time 29 Operating Budgets identify sales and production goals. Sales Budget Production Budget Direct Labor Budget Financial Budgets focus on the firm’s financial objectives. Cash Budget Capital Budget Master Budget – brings together all of the budgets to represent the overall plan
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Development of the Master Budget 30
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©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8 8 Looking Back What is accounting? How is accounting information used? What are the goals of generally accepted accounting principles? What are the key elements of the major financial statements? What are methods stakeholders can use to obtain useful insights from a company’s financial statements? What is the role of managerial accounting and what are the various cost concepts identified by managerial accountants? How does the budget process help managers plan, motivate and evaluate their organization’s performance? 31
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