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    18 18 Presentation Transcript

    • Text by Profs. Gene Boone & David Kurtz Multimedia Presentation by Prof. Milton Pressley The University of New Orleans [email_address] CHAPTER EIGHTEEN UNDERSTANDING ACCOUNTING AND FINANCIAL STATEMENTS
      • Explain the functions of accounting and its importance to the firm’s management, investors, creditors, and government agencies
      • Identify the three basic activities involving accounting
      • Describe the roles played by public, management, government, and not-for-profit accountants
      • Outline the steps in the accounting process
      LEARNING GOALS
      • Explain the functions and major components of the three principal financial statements: the income statement, the balance sheet, and statement of cash flows
      • Discuss how financial ratios are used to analyze the firm’s financial strengths and weaknesses
      • Describe the role of budgets in a business
      • Explain how exchange rates influence international accounting practices and the importance of uniform financial statements for global business
      LEARNING GOALS
    • CHAPTER OVERVIEW
      • Accounting: practice of measuring, interpreting, and communicating financial information to support internal and external business decision making
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    • CHAPTER OVERVIEW
      • This chapter:
        • Describes who uses accounting information
        • Discusses financing, investing, and operating
        • Explains the accounting process
        • Discusses the development of accounting statements from information about financial transactions
        • Presents the methods of interpreting these statements
        • Examines the role of budgets in planning and controlling for a business
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    • USERS OF ACCOUNTING INFORMATION
      • People both inside and outside and organization rely on accounting information to help them make business decisions
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    • Figure 18.1 Users of Accounting Information
    • ACCOUNTING AND THE ENVIRONMENTS OF BUSINESS
      • Accountants contribute important information to help managers deal with the competitive and economic environments
      • They help others to understand, predict, and react to the technological, regulatory, and social and cultural environments
      © PhotoDisc
    • BUSINESS ACTIVITIES INVOLVING ACCOUNTING
      • Accounting plays a key role in:
        • Financing
        • Investing
        • Operating
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    • ACCOUNTING PROFESSIONALS
      • Public accountant: provides accounting services to individuals or business firms for a fee
      • Most commonly provided services provided by accountants:
        • Auditing
        • Tax planning and preparation
        • Management consulting
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    • Figure 18.2 Accounting Firms Do More Than Just Prepare Financial Statements
    • ACCOUNTING PROFESSIONALS
      • Management accountant: accountant employed by a business other than a public accounting firm
        • Responsible for collecting and recording financial transactions, and preparing and interpreting financial statements used by the firm’s managers
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    • ACCOUNTING PROFESSIONALS
      • Government and Not-for-Profit accountants: work for federal, state, and local governments or not-for-profit organizations – perform professional services similar to those of management accountants
      • Instead of an emphasis on measuring profit or loss, they concern themselves with determining how efficiently the organizations accomplish their objectives
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    • THE ACCOUNTING PROCESS
      • Accounting process: the set of activities involved in converting data about individual transactions to financial statements
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    • Figure 18.3 the Accounting Process
    • The Impact of Computers and the Internet on the Accounting Process
      • Has simplified the process, making it faster and easier than the manual method
      • Accounting software allows:
        • A do-it-once approach
        • Numbers can be easily converted into graphs and charts
        • Other automatic conversion
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    • The Impact of Computers and the Internet on the Accounting Process
      • The internet has brought about:
        • Web-based accounting products designed for small business
        • Outsourced, Web-based bookkeeping and accounting services
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    • Figure 18.4 Web-Based Accounting Services
    • THE FOUNDATION OF THE ACCOUNTING SYSTEM
      • Generally Accepted Accounting Principles (GAAP): guidelines, or standards, that accountants follow to provide reliable, consistent, and unbiased information to decision makers
      • Financial Accounting Standards Board (FASB): responsible for evaluating, setting, or modifying the GAAP
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    • The Accounting Equation
      • Asset: anything of value owned or leased by a business
        • Includes land, buildings, supplies, cash, accounts or notes receivable, and marketable securities
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    • The Accounting Equation
      • Liability: a claim against a firm’s assets by a creditor
        • Includes accounts payable, notes payable, wages payable and long-term debt
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    • The Accounting Equation
      • Owners’ equity: all claims of the proprietor, partners, or stockholders against the assets of a firm, equal to the excess of assets over liabilities
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    • The Accounting Equation
      • Accounting equation: states that Assets = Liabilities + Owner’s Equity
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      • Balance sheet: statement of a firm’s financial position – what it owns and the claims against its assets -- at a particular time
        • Similar to a photograph of the firm’s assets together with its liabilities and owners’ equity at a specific moment in time
      FINANCIAL STATEMENTS Balance sheet
    • Figure 18.5 Balance Sheet for Sierra Pasta Company
      • Income statement: a financial record of a company’s revenues, expenses, and profits over a period of time
        • It helps decision makers to focus on the overall revenues and costs involved in generating them
      FINANCIAL STATEMENTS Balance sheet Income statement
    • Figure 18.6 Income Statement for Sierra Pasta Company
      • Statement of cash flows: statement of a firm’s cash receipts and cash payments that present information on its sources and uses of cash
      FINANCIAL STATEMENTS Balance sheet Income statement Statement of cash flows
    • Figure 18.7 Statement of Cash Flows for Sierra Pasta Company
      • Accrual accounting: accounting method that records revenues and expenses when they occur, not necessarily when cash actually changes hands
      FINANCIAL STATEMENTS Balance sheet Income statement Statement of cash flows
    • FINANCIAL RATIO ANALYSIS
      • Ratio analysis: one of the most commonly used tools for measuring the firm’s liquidity, profitability, and reliance on debt financing, as well as the effectiveness of management’s use of its resources
      • Allows comparisons with other firms and with the firm’s own past performance
      Liquidity ratios Profitability ratios Leverage ratios Activity ratios © PhotoDisc
    •  
    • FINANCIAL RATIO ANALYSIS
      • Firm’s ability to meet its short-term obligations when they must be paid is measured by liquidity ratios
      • Current ratio and acid-test ratio are two commonly used liquidity ratios
      Liquidity ratios © PhotoDisc
    • FINANCIAL RATIO ANALYSIS
      • Current ratio: compares current assets to current liabilities
        • Gives managers information about the firm’s ability to pay its current debts as they mature
      Liquidity ratios © PhotoDisc
    • FINANCIAL RATIO ANALYSIS
      • Acid-test (or quick) ratio: compares quick assets – the most current liquid assets – against current liabilities
        • Quick assets generally consist of cash and marketable securities, and accounts receivable
        • Measures the ability of the firm to meet its debt payments on short notice
      Liquidity ratios © PhotoDisc
    • FINANCIAL RATIO ANALYSIS
      • Profitability ratios: compare the firm’s earnings with total sales or investments
      • Over time, may reveal the effectiveness of management in operating the business
      Liquidity ratios Profitability ratios © PhotoDisc
    • FINANCIAL RATIO ANALYSIS
      • Five important profitability ratios are:
        • Gross profit margin
        • Net profit margin
        • Earnings per share
        • Return on assets
        • Return on equity
      Liquidity ratios Profitability ratios © PhotoDisc
    • FINANCIAL RATIO ANALYSIS
      • Leverage ratios: measures the extent to which a firm relies on debt financing
      • Provide particularly interesting information to potential investors and lenders
      Liquidity ratios Profitability ratios Leverage ratios © PhotoDisc
    • FINANCIAL RATIO ANALYSIS
      • Activity ratios: measure the effectiveness of management’s use of the firm’s resources
      Liquidity ratios Profitability ratios Leverage ratios Activity ratios © PhotoDisc
    • FINANCIAL RATIO ANALYSIS
      • Inventory turnover ratio: indicates the number of times merchandise moves through a business
      • Total asset turnover: measures how much in sales each dollar in assets generates
      Liquidity ratios Profitability ratios Leverage ratios Activity ratios © PhotoDisc
    • BUDGETING
      • Budget: a planning and controlling tool that reflects the firm’s expected sales revenues, operating expenses, and cash receipts and outlays
      • Quantifies the firm’s plans for a specified future period
      • Serves as a financial blueprint
      • Standard for comparison against actual performance
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    • Figure 18.8 Sample Cash Budget for Sierra Pasta Company
    • INTERNATIONAL ACCOUNTING
      • Accounting procedures and practices must be adapted to accommodate an international business environment
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    • Exchange Rates
      • Exchange rate: the ratio at which a country’s currency can be exchanged for other currencies
      • Currency prices change daily according to supply and demand
        • Such fluctuations complicate accounting entries and practices
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    • International Accounting Standards
      • International Accounting Standards Committee (IASC), established in 1973, promotes worldwide consistency in financial reporting practices
      • Every five years, an international congress is held to:
        • Judge progress in achieving consistency in standards
        • Work toward increasing comparability among nations’ financial data and currencies
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    • WHAT’S AHEAD
      • In next chapter, the financing function of an organization will be introduced
      • Finance deals with planning, obtaining, and managing the organization funds to accomplish its objective in the most efficient and effective manner possible
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