Chapter Fourteen Accounting and Financial Statements

Chapter FourteenAccounting and FinancialStatementsThe Nature of AccountingThe recording, measurement, and interpretation of financial information, often used in making business decisions.Types of AccountantsPublic AccountantAn independent professional who provides accounting services to the public (individuals or firms) for a fee. A Certified Public Account (CPA) is an individual who has been certified in the state in which he or she resides by meeting state requirements for accounting, education, and experience and by passing a 2 1/2 -day accounting examination.Private AccountantAn accountant employed by a corporation, government agency, or other organization. Can be either a CPA or a CMA (Certified Management Accountant).Is it Accounting or Bookkeeping?Bookkeeping is much narrower and more mechanical than accounting.Bookkeeping is typically limited to routine day-to-day business transactions and obtaining and recording information that accountants use in financial analysis.Corporate America’s Demand for Accounting SpecialtiesAccounts Receivable – 21%Accounts Payable – 15%Payroll – 15%Cost Accounting – 9%General Ledger – 8%Tax – 5%Credit – 2%Uses for Accounting InformationInternal Uses:Managerial AccountingCash FlowBudgetExternal Uses:Reporting financial performance to outsidersFiling Income TaxesObtaining CreditReporting to StockholdersInternal Accounting InformationManagement Plan and set goals Organize Lead and motivate ControlLenders & Suppliers Evaluate Credit Risks External Accounting Information Stockholders and Potential InvestorsEvaluate soundnessof investmentsGovernment AgenciesConfirm tax liabilities Confirm payroll Deductions Approve new issues of stocks and bondsWho Uses Accounting Information?Source: Needles, Belverd E., Henry R. Anderson, and James C. Caldwell. Principles of Accounting, Fourth Edition. Copyright © 1990 by Houghton-Mifflin. Used with permission.TaxauthoritiesFederal (IRS)StateMunicipalOtherRegulatoryAgenciesSECStockexchangesICC, FAA,etc.OtheragenciesEconomicPlannersCouncil ofEconomicAdvisorsFederalReserveBoardGovernmentplannersOthergroupsEmployeesand laborunionsFinancialadvisorsCustomersand thegeneralpublicManagementOwners, partnersBoards ofdirectorsOfficers of thecompanyManagersDepartmentheadsSupervisorsThose withDirect FinancialInterestPresent orpotentialinvestorsPresent orpotentialcreditorsThose with Indirect Financial InterestActions That Affect Business ActivitiesBusiness ActivitiesAccountingThe Accounting Process:The Accounting EquationAssets = Liabilities + Owners’ EquityThingsof valuethat afirm ownsA firm’sdebts andobligationsThe differencebetween a firm’sassets and itsliabilitiesThe Accounting Process:Double-Entry BookkeepingAssets = Liabilities + Owners’ Equity$325$325=The Accounting Cycle1. Examining Source Documents4. Preparing Financial Statements3. Posting Transactions2. Recording TransactionsPreparing Accounting Statements with GAAPGenerally Accepted Accounting Principles (GAAP)The Best-known Financial Statements:Income StatementBalance SheetEquivalent Accounting TermsTerm: Equivalent Term:Revenues SalesGross Profit Gross Income / Gross EarningsOperating Income Operating Profit / Earnings Before Income & Taxes / Income Before Interest & TaxesIncome Before Taxes Earnings Before Taxes / Profit Before TaxesNet Income Earnings After Taxes / Profit After TaxesIncome Available to Earnings Available to Common Stockholders StockholdersThe Income StatementA financial report that shows an organization’s profitability over a period of time – month, quarter or year.Key Income Statement TermsRevenueCost of Goods SoldGross IncomeExpensesSelling, general & administrativeR&D, engineeringInterestDepreciationNet IncomeAnna’s Flowers Income StatementDecember 31, 2002Revenues: Net Sales $123,850 Consulting: 73,850Total Revenues $197,700Expenses: Cost of Goods Sold $ 72,600 Selling Expenses 37,700 General & Admin. 18,400 Other expenses 5,600Total Expenses $134,300Net Income $ 63,400The Balance SheetA “snapshot” of an organization’s financial position at a given moment.Key Balance Sheet TermsAssetsAccounts ReceivableLiabilitiesAccounts PayableAccrued ExpensesOwner’s EquityAnna’s Flowers Balance SheetDecember 31, 2002Assets:Current Assets: Cash: $17,850 Accounts Receivable 10,200 Merchandise Inventory 8,750 Total Assets: $36,800Property & Equipment Equipment 11,050 Office Building 73,850 Total Prop. & Equip. 84,900Total Assets: $121,700Liabilities & Owner’s EquityCurrent Liabilities Acct’s Payable $12,600 Total Current Liabilities 12,600Long-term Liabilities Mortgage Payable 23,600 Total Liabilities 36,200Owner’s Equity: Anna Rodriguez, Capital 85,500Total Liabilities & Owner’s Equity $121,700 Anna’s Flowers Annual Budgetfor 2002 Sales Consulting TotalJanuary 6,500 5,000 11,500February 6,000 6,000 12,000March 5,800 6,200 12,000April 6,100 6,500 12,600May 7,000 6,800 13,800June 8,100 7,600 15,700July 8,600 7,800 16,400August 6,900 8,000 14,900September 6,700 8,700 15,400October 5,900 9,000 14,900November 5,000 8,500 13,500December 4,500 8,000 12,500Annual $123,850 $73,850 $197,700 Analyzing Financial Statements with Ratio AnalysisProfitability ratiosAsset utilization ratiosLiquidity ratiosDebt utilization ratiosPer share dataProfitability RatiosProfit Margin = Return on Assets = Return on equity = Asset Utilization RatiosReceivables turnover = Inventory turnover = Return on equity = Liquidity RatiosCurrent ratio = Quick ratio = Debt Utilization RatiosDebt to total assets = Times interest =earned Per Share DataEarnings per share = Dividends per =share Solve the Dilemma1. Describe the two basic accounting statements. What type of information does each provide that can help you evaluate the situation?2. Which of the financial ratios are likely to prove to be of greatest value in identifying problem areas in the company? Why? Which of your company’s financial ratios might you expect to be especially poor?3. Discuss the limitations of ratio analysis.Explore Your Career OptionsWhat contributions do accountants make to organizations?Additional Discussion Questions and Exercises1. What is the accounting equation? Which financial statement (income statement or balance sheet) is most similar to the accounting equation?2. What is meant by the liquidity of assets?3. In measuring a firm’s performance, many investors and managers prefer industry analysis or industry ratios. What is the advantage in using industry ratios?Additional Discussion Questions and Exercises4. How do public accounts, private accountants, and certified public accountants differ?5. What are some different types of liabilities?Chapter 14 Quiz1. Which generally appears on an income statement? a. Assets = Liability + Owners’ equity b. Revenue - Expenses = Profit or loss c. Assets - Expenses = revenue d. Current assets/Current liabilities2. An accountant who provides accounting services to individuals and/or businesses for a fee is considered a a. certified public accountant (CPA). b. public accountant. c. private accountant. d. local accountant.Chapter 14 Quiz3. Assume a firm’s inventory turnover was 25. That means a. the firm made a 25 percent profit on its sales. b. the firm has sold and replaced its inventory 25 times in a year. c. the firm has 25 items in inventory. d. the firm needs to sell 25 items in inventory to make a profit.4. The internal financial statement that forecasts expenditures and revenues for a period is known as a. a balance sheet. b. an income statement. c. a budget. d. an annual report.Multiple Choice Questions about the Video1. The financial position of a company at a given time is reflected on its a. balance sheet. b. income statement. c. owners’ equity statement. d. statement of cash flows. e. checkbook.2. The most important of the firm’s financial statements is its a. balance sheet. b. income statement. c. owners’ equity statement. d. statement of cash flows. e. collateral loan.