> > > > > > > > Chapter 16
Understanding
Accounting and
Financial Statements
ng Goals
Learni
1

2

3

4

5

Explain the functions and major
components of the four principal financial
statements: the ...
c ou n t i n g
Ac
Accounting is the process of measuring, interpreting, and
communicating financial information to support...
pen Book
O
agement
Man
• Open book management - sharing sensitive financial
information with employees and teaching them h...
Activities
Business
Accounting
Involving
• Financing activities provide necessary funds to
start a business and expand it ...
Accounting
ssionals
Profe
• Public Accountants
– Provide accounting services to
individuals or business firms for a fee

•...
oundation of
The F
ting Systems
Accoun
•

Generally accepted accounting principles (GAAP) encompass the
conventions, rules...
ccounting
Th e A
Cycle
Accounting process - set of activities involved in
converting information about transactions
into f...
ting Equation
T h e A c c ou n
• Assets - anything of value owned or leased by a business.
• Liability - claim against a f...
uters & The
pact of Comp
Im
ccounting
I n te r n e t o n A
•

Simplifies the accounting process by automating data entry a...
e S h ee t
Ba l a n c
 Balance sheet - statement of a firm’s financial
position—what it owns and the claims against its
a...
nce Sheet
ample Bala
S
Inc

em en t
e Sta t
om

 Income Statement - financial record of a company’s
revenues and expenses, and profits over a pe...
le Income
Samp
atement
St
atement of
St
er’s Equity
Own
 Statement of Owner’s Equity - is designed to show
the components of the change in equity f...
tement of
ample Sta
S
er’s Equity
Own
tement of
The Sta
sh Flows
Ca
 Statement of cash flows - a firm’s cash receipts and
cash payments that presents informati...
tement of
ample Sta
S
sh Flows
Ca
t io s A n a l y s is
Financial Ra
Ratio analysis - tool for measuring a firm’s liquidity, profitability,
and reliance on ...
y Ratios
L i qu i d i t
Total current assets

Current ratio compares
current assets to current
liabilities.
Total current ...
i t y R a t i os
Activ
Net sales

Inventory turnover
ratio indicates the
number of times
merchandise moves
through a busin...
i t y R a t i os
Profitabil
Profitability ratios measure the organization’s overall financial
performance by evaluating it...
e Ratios
Leverag
• Leverage ratios measure the extent to which a firm relies on
debt financing.

• Total liabilities to to...
Budgets
•

Budget - planning and control tool that reflects a
firm’s expected sales revenues, operating
expenses, and cash...
B u d ge t
Sample
ernational
Int
ccounting
A
•

•

International Accounting Standards Committee (IASC)
promotes worldwide consistency in fin...
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Ch16 introto business

  1. 1. > > > > > > > > Chapter 16 Understanding Accounting and Financial Statements
  2. 2. ng Goals Learni 1 2 3 4 5 Explain the functions and major components of the four principal financial statements: the balance sheet, the income statement, the statement of owner’s equity, and the statement of cash flows. 6 Discuss how financial ratios are used to analyze a company’s financial strengths and weaknesses. 7 Describe the role of budgets in a business. 8 Outline accounting issues facing global business and the move toward one set of worldwide accounting rules. Explain the functions and importance of accounting, and identify the three basic activities involving accounting. Describe the roles played by public, management, government and not-forprofit accountants. Identify the foundations of the accounting system, including GAAP and the role of the Financial Accounting Standards Board (FASB). Outline the steps in the accounting cycle, and define double-entry bookkeeping and the accounting equation.
  3. 3. c ou n t i n g Ac Accounting is the process of measuring, interpreting, and communicating financial information to support internal and external business decision making.
  4. 4. pen Book O agement Man • Open book management - sharing sensitive financial information with employees and teaching them how to understand and use financial statements. • Viewing financial information may help them better understand how their work contributes to the company’s success. • Outsiders use financial data to evaluate investment opportunities.
  5. 5. Activities Business Accounting Involving • Financing activities provide necessary funds to start a business and expand it after it begins operating. • Investing activities provide valuable assets required to run a business. • Operating activities focus on selling goods and services, but they also consider expenses as important elements of sound financial management.
  6. 6. Accounting ssionals Profe • Public Accountants – Provide accounting services to individuals or business firms for a fee • Management Accountants – Provide timely, relevant, accurate, and concise information that executives can use to operate their firms • Government and Not-for-Profit Accountants
  7. 7. oundation of The F ting Systems Accoun • Generally accepted accounting principles (GAAP) encompass the conventions, rules, and procedures for determining acceptable accounting practices at a particular time. • Financial Accounting Standards Board (FASB) is primarily responsible for evaluating, setting, or modifying GAAP in the U.S. • Sarbanes-Oxley Act responded to cases of accounting fraud. – Created the Public Accounting Oversight Board, which sets audit standards and investigates and sanctions accounting firms that certify the books of publicly traded firms. – Senior executives must personally certify that the financial information reported by the company is correct. – Resulted in increase in demand for accountants.
  8. 8. ccounting Th e A Cycle Accounting process - set of activities involved in converting information about transactions into financial statements.
  9. 9. ting Equation T h e A c c ou n • Assets - anything of value owned or leased by a business. • Liability - claim against a firm’s assets by a creditor. • Owner’s equity - all claims of the proprietor, partners, or stockholders against the assets of a firm, equal to the excess of assets over liabilities. • Basic accounting equation - relationship that states that assets equal liabilities plus owners’ equity. • Double-entry bookkeeping - process by which accounting transactions are entered; each individual transaction always has an offsetting transaction.
  10. 10. uters & The pact of Comp Im ccounting I n te r n e t o n A • Simplifies the accounting process by automating data entry and calculations. • Available products are customized for businesses of different sizes. – Entrepreneurs and small businesses use: QuickBooks, Peachtree, and BusinessWorks. – Larger firms use larger scale software packages like: Computer Associates, Oracle, and SAP. • Software that handles accounting information for international businesses is another option. Offers different country information/language. • Some systems offer web-based packages for small and medium businesses.
  11. 11. e S h ee t Ba l a n c  Balance sheet - statement of a firm’s financial position—what it owns and the claims against its assets—at a particular point in time.  Photograph of firm’s assets together with its liabilities and owner’s equity  Follows the accounting equation
  12. 12. nce Sheet ample Bala S
  13. 13. Inc em en t e Sta t om  Income Statement - financial record of a company’s revenues and expenses, and profits over a period of time.  Firm’s financial performance in terms of revenues, expenses, and profits over a given time period.  Reports profit or loss.  Focus on revenues and costs associated with revenues.
  14. 14. le Income Samp atement St
  15. 15. atement of St er’s Equity Own  Statement of Owner’s Equity - is designed to show the components of the change in equity from the end of one fiscal year to the end of the next.  Begins with the amount of equity shown on the balance sheet.  Net income is added, and cash dividends paid to owners are subtracted.
  16. 16. tement of ample Sta S er’s Equity Own
  17. 17. tement of The Sta sh Flows Ca  Statement of cash flows - a firm’s cash receipts and cash payments that presents information on its sources and uses of cash.  Accrual accounting - method that records revenue and expenses when they occur, not necessarily when cash actually changes hands.
  18. 18. tement of ample Sta S sh Flows Ca
  19. 19. t io s A n a l y s is Financial Ra Ratio analysis - tool for measuring a firm’s liquidity, profitability, and reliance on debt financing, as well as the effectiveness of management’s resource utilization.
  20. 20. y Ratios L i qu i d i t Total current assets Current ratio compares current assets to current liabilities. Total current liabilities Acid-test (or quick) ratio measures the ability of a firm to meet its debt payments on short notice. Cash and equivalents + short-term investments + accounts receivable Total current liabilities
  21. 21. i t y R a t i os Activ Net sales Inventory turnover ratio indicates the number of times merchandise moves through a business. Average of inventory Net sales Total asset turnover ratio indicates how much in sales each dollar invested in assets generates. Average of total assets
  22. 22. i t y R a t i os Profitabil Profitability ratios measure the organization’s overall financial performance by evaluating its ability to generate revenues in excess of operating costs and other expenses.
  23. 23. e Ratios Leverag • Leverage ratios measure the extent to which a firm relies on debt financing. • Total liabilities to total assets ratio > 50 percent indicates that a firm is relying more on borrowed money than owners’ equity.
  24. 24. Budgets • Budget - planning and control tool that reflects a firm’s expected sales revenues, operating expenses, and cash receipts and outlays. • Management estimates of expected sales, cash inflows and outflows, and costs. • Budgets are a financial blueprint that serves as a financial plan. • Cash budget - tracks the firm’s cash inflows and outflows.
  25. 25. B u d ge t Sample
  26. 26. ernational Int ccounting A • • International Accounting Standards Committee (IASC) promotes worldwide consistency in financial reporting practices. In 2001, became the International Accounting Standards Board (IASB). International Financial Reporting Standards (IFRS) are the standards. Exchange Rates - ratio at which a country’s currency can be exchanged for other currencies. • Consolidated financial statements must reflect gains and losses due to changes in exchange rates. • Can have significant impact on financial statement.

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