Nickels Cover Mc Hugh Mc GrawHillIrwin Understanding Business
Nickels Cover Mc. Hugh Mc. Graw-Hill/Irwin Understanding Business, 7/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -
18 Chapter Mc. Graw-Hill/Irwin Understanding Business, 7/e Understanding Financial Information and Accounting © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -2
Importance of Financial Information • Definition. Accounting • Audiences - Managers - Government - Investors, Suppliers & Creditors Mc. Graw-Hill/Irwin Understanding Business, 7/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -3
The Accounting System Mc. Graw-Hill/Irwin Understanding Business, 7/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -4
The Influence of Accounting Information Managers- Financial reports pinpoint problems/opportunities Governmentassists with tax collection Investors, Suppliers, & Creditors- provides a means to analyze business Mc. Graw-Hill/Irwin Understanding Business, 7/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -5
Areas of Accounting • Managerial Accounting - Inside Organization - C. M. A. Mc. Graw-Hill/Irwin Understanding Business, 7/e • Financial Accounting - Annual Report - Private Accountant - Public Accountant - C. P. A. • Auditing • Tax Accounting • Government & Notfor-profit Accounting © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -6
Top Business Uses of Accountants Mc. Graw-Hill/Irwin Understanding Business, 7/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -
Types of Accountants Public Private !Auditing !Management Accounting !Tax Consulting & Compliance !Management Consulting Mc. Graw-Hill/Irwin Understanding Business, 7/e !Government Accounting !Academia © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -8
Services Growth in Accounting & Auditing Taxes 2. 9% 13. 1% Management Consulting 117. 7% Mc. Graw-Hill/Irwin Understanding Business, 7/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -
“Cooking the Books” Early Recognition of Revenue Late Recognition of Expense Inadequate Reserves for Bad Debts, Returns, & Liabilities Changing Inventory Valuation Methods- 1 Time Boost to Income Phony Transactions With Partnerships Courtesy of B. Lilly- De Anza College Mc. Graw-Hill/Irwin Understanding Business, 7/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -
Steps to Control Accounting Practices Source: USA Today, “Snapshots”, Section B, pg. 1, March 26, 2003 Mc. Graw-Hill/Irwin Understanding Business, 7/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -
Bookkeeping vs. Accounting Bookkeeping Accounting – Analyze – Start of Accounting – Recommend – Record/Journalize Mc. Graw-Hill/Irwin Understanding Business, 7/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -12
Steps In The Accounting Cycle Analyze Source Documents Record Transactions in Journals Post Journal Entries to Ledger Take a Trial Balance Prepare Financial Statements Analyze Financial Statements Mc. Graw-Hill/Irwin Understanding Business, 7/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -13
Computers & Accounting • • • Tool Not Decision Maker Simplification Accounting Packages Up-To-the-Minute Information Less Monotony Mc. Graw-Hill/Irwin Understanding Business, 7/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -
Financial Statements Ø Balance Sheet- Statement of Financial Position Ø Income Statement- Statement of Revenues & Expenses Ø Statement of Cash Flows – Statement of Cash Receipts & Disbursements Mc. Graw-Hill/Irwin Understanding Business, 7/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -15
Accounting Equation Assets = Liabilities + Owner’s Equity Owned = Owed + Owner’s Claims $213, 0 $826, 000 = $613, 000 + 00 Mc. Graw-Hill/Irwin Understanding Business, 7/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -16
Fiberrific’s Balance Sheet (Assets) Assets Fiberriffic, Inc. Period ending 12/31/04 Current Assets Cash Accounts Receivable Notes Receivable Inventory Total Current Assets Fixed Assets Land Buildings (net) Equipment & Vehicles (net) Furniture & Fixtures (net) Total Fixed Assets Intangible Assets Goodwill Total Intangible Assets Total Assets Mc. Graw-Hill/Irwin Understanding Business, 7/e $ 15, 000 200, 000 50, 000 335, 000 $ 40, 000 110, 000 40, 000 16, 000 $600, 000 $206, 000 $ 20, 000 $826, 000 © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -
Fiberrific’s Balance Sheet (Liabilities & Owner’s Equity) Fiberiffic, Inc. Period ending 12/31/04 Liabilities & Owners’ Equity Current Liabilities Accounts Payable Notes Payable Accrued Taxes & Salaries Total Current Liabilities Long-term Liabilities Notes Payable Bonds Payable Total Long-term Liabilities Total Liabilities Owners’ Equity Common Stock (1 M shares) Retained Earnings Total Owners’ Equity Total Liabilities & Owners’ Equity Mc. Graw-Hill/Irwin Understanding Business, 7/e $ 40, 000 8, 000 240, 000 $ 35, 000 290, 000 $288, 000 $325, 000 $613, 000 $100, 000 113, 000 $213, 000 $826, 000 © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -
Fiberrific’s Income Statement Fiberiffic, Inc. Period Ending 12/31/04 Revenue Net Sales $ 700, 000 Cost of Goods Sold Beginning Inventory $ 200, 000 Net Purchases $ 440, 000 Cost of Goods $ 640, 000 Less: Ending Inventory - $ 230, 000 Less: Cost of Goods Sold - $ 410, 000 Gross Profit (Gross Margin) $ 290, 000 Mc. Graw-Hill/Irwin Understanding Business, 7/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -
Fiberrific’s Income Statement(cont’d) Gross Profit Operating Expenses Selling Expenses Salaries Advertising & Supplies Total Selling Expenses General Expenses Office Salaries Depreciation Insurance Rent Utilities Miscellaneous Total General Expenses Less: Total Operating Expenses Net Income (Profit) Before Taxes Less: Income Tax Expenses Net Income (Profit) After Taxes Mc. Graw-Hill/Irwin Understanding Business, 7/e $290, 000 $ 20, 000 $ 110, 000 $ 67, 000 $ 1, 500 $ 28, 000 $ 12, 000 $ 112, 000 - $ 222, 000 $ 68, 000 - $ 19, 000 $ 49, 000 © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -
Fiberrific Statement of Cash Flow Net Cash Flow from Operations $ 52, 000 Net Cash Flows from Investments ( 6, 000) Net Cash Flow from Financing (19, 000) Net Change in Cash & Equivalents $ 27, 000 Beginning Cash Balance Ending Cash Balance Mc. Graw-Hill/Irwin Understanding Business, 7/e ( 2, 000) $ 25, 000 ===== © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -21
Applying Accounting Knowledge in Business Ø Depreciation Ø Inventory Valuation ØFIFO- First In First Out ØLIFO- Last In First Out Mc. Graw-Hill/Irwin Understanding Business, 7/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -
Sarbanes-Oxley Timeline Effective Requirements July 30, 2002 Prohibit personal loans to officers/directors. CEOs/CFOs return incentive-based compensation after erroneous financial report. August 29, 2002 CEOs/CFOs must certify annual/quarterly reports. Officers must make certifications regarding company’s internal controls. January 26, 2003 Responsibilities for attorneys/audit firms increased. Disclosure requirements for offbalance sheets transactions tightened. April 26, 2003 Audit committees must: be independent directors, be responsible for compensation & oversight of certifying accountants. Mc. Graw-Hill/Irwin Understanding Business, 7/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -
Liquidity Ratios Current Ratio Current Assets Current Liabilities Quick (Acid-Test) Ratio Cash + Marketable Securities + Receivables Current Liabilities Mc. Graw-Hill/Irwin Understanding Business, 7/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -24
Current Ratio- Fiberrific $600, 000 = 2. 08 $288, 000 Mc. Graw-Hill/Irwin Understanding Business, 7/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -25
Quick (Acid-Test) Ratio $265, 000 = 0. 92 $288, 000 Mc. Graw-Hill/Irwin Understanding Business, 7/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -
Debt to Equity Ratio Total Liabilities Owners’ Equity $613, 000 = 287% $213, 000 Mc. Graw-Hill/Irwin Understanding Business, 7/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -27
Profitability Ratios Profitability = Operating Success Return on Sales Net Income Net Sales Earnings Per Share Net Income # Common Shares Return on Equity Net Income Owners’ Equity Mc. Graw-Hill/Irwin Understanding Business, 7/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -28
Profitability Ratios Return on Sales $ 49, 000 = 7% $700, 000 Return on Equity $ 49, 000 = 23% $213, 000 Earnings per Share Mc. Graw-Hill/Irwin Understanding Business, 7/e $ 49, 000 = $. 049 1, 000 © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -29
Activity Ratios Inventory Turnover Cost of Goods Sold Avg. Inventory Turnover $410, 000 = 1. 9 $215, 000 Mc. Graw-Hill/Irwin Understanding Business, 7/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -30
How to Read a Corporate Annual Report &Read management’s discussion of changes in operations. Try to identify strengths or weaknesses. &Review the firm’s consolidated balance sheet. (Its assets, liabilities, and owners’ equity. ) &Analyze the Income Statement. Look beyond the year. (Sales drops can spell trouble. ) &Review the statement of changes in cash flows. &Review auditor’s opinion. Mc. Graw-Hill/Irwin Understanding Business, 7/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 18 -
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