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Chap017
 

Chap017

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  • See Learning Goal 1: Demonstrate the role financial information and accounting plays for a business and for its stakeholders.
  • See Learning Goal 1: Demonstrate the role financial information and accounting plays for a business and for its stakeholders. The Accounting System For students who are not taking an accounting class this slide can help them understand an accounting system from a production perspective: *Inputs - Sales documents, purchasing documents, payroll records travel expenses, etc. *Processing – Entries are made to journals; then transferred into ledgers; and finally summarized and reviewed to compile a trial balance. *Outputs – Development of financial statements such as the balance sheet, income statement, and statement of cash flows, prepared for management personnel within the company as well as interested parties outside the company. It is very important for students to understand the importance of integrity when calculating numbers. Generally Accepted Accounting Principles (GAAP) outlines procedures that are generally accepted in the accounting field. This would be a good time to ask the students what role questionable accounting procedures played with Enron, Fannie Mae, and World Com.
  • See Learning Goal 2: Identify the different disciplines within the accounting profession.
  • See Learning Goal 2: Identify the different disciplines within the accounting profession.
  • See Learning Goal 2: Identify the different disciplines within the accounting profession. How to Read an Annual Report This slide presents the key areas to read when analyzing a company’s annual report. It is important that students understand that the annual report is more than a balance sheet but contains different areas which are just as important. The auditor’s opinion is a critical area for students to understand. Basically there are four different types of opinion letters that can be submitted. They are: Unqualified opinion - An unqualified opinion letter involves a certification made by the independent CPA firm that the company's financial statements were prepared in conformity with Generally Accepted Accounting Principles [GAAP], and fairly represented the firm's financial condition on the statement date. Qualified opinion - A qualified auditor's opinion letter is one in which the CPA has included one or more specific qualifications to its assurance that the customer's financial statements follow GAAP. This means that one or more irregularities were found, and that the customer could not or would not correct these irregularities. Adverse opinion – This is the most serious of all the opinion letters that can accompany a customer's financial statements. When a CPA firm discovers information during the course of its audit that demonstrates material noncompliance with GAAP accounting rules, the CPA may choose to submit an adverse opinion letter to accompany the financial statements of the company under review. Disclaimer of opinion - Due to scope limitations, a CPA may be unwilling to express any opinion about the accuracy of a customer's financial statements. A disclaimer of opinion letter means the CPA does not assume responsibility for the accuracy of the company's financial statements. (Source: www.encyclopediaofcredit.com)
  • See Learning Goal 2: Identify the different disciplines within the accounting profession. This slide helps highlight the difference in public and private accounting. This may be a good time to discuss what accounting or finance careers will do for students: Develop them into a well rounded business executives Help them learn how to analyze and forecast financial goals through utilization of historical data, competitor information and financial data/information Make an impression at a multi-billion dollar corporation See the company increase its financial vitality by being a part of the financial planning and reporting process (Source: Retailology.com)
  • See Learning Goal 2: Identify the different disciplines within the accounting profession. Steps to Control Accounting Practices This slide charts the four key steps to controlling the accounting practice. If the events of the last ten years have taught us anything it is that accurate financial data is critical for creditors, investors and managers to make informed decisions. The federal government has reacted with the passage of Sarbanes-Oxley. This law which went into effect in 2002 has five major components: Section 302 - Periodic statutory financial reports are to include certifications that: The signing officers have reviewed the report; the report does not contain any material untrue statements or material omission or be considered misleading; the financial statements and related information fairly present the financial condition and the results in all material respects; the signing officers are responsible for internal controls and have evaluated these internal controls within the previous ninety days and have reported on their findings; a list of all deficiencies in the internal controls and information on any fraud that involves employees who are involved with internal activities; and any significant changes in internal controls or related factors that could have a negative impact on the internal controls Section 401 - Financial statements published by issuers are required to be accurate and presented in a manner that does not contain incorrect statements. Section 404 - Issuers are required to publish information in their annual reports concerning the scope and adequacy of the internal control structure and procedures for financial reporting. Section 409 - Issuers are required to disclose to the public, on an urgent basis, information on material changes in their financial condition or operations. Section 802 - Imposes penalties or fines and/or up to 20 years imprisonment for altering, destroying, mutilating, concealing, falsifying records, documents or tangible objects with the intent to obstruct, impede or influence a legal investigation. (Source: www.soxlaw.com)
  • See Learning Goal 2: Identify the different disciplines within the accounting profession.
  • See Learning Goal 2: Identify the different disciplines within the accounting profession.
  • See Learning Goal 3: List the steps in the accounting cycle, distinguish between accounting and bookkeeping, and explain how computers are used in accounting. With this slide students are provided with the step-by-step progression of the accounting cycle. Place particular emphasis on the accounting cycle to give the student an overview of reporting requirements. To start a discussion with students ask the following questions before showing the next few slides: Can you explain the differences between accounting and bookkeeping? What’s the difference between an accounting journal and a ledger? Why does a bookkeeper prepare a trial balance?
  • See Learning Goal 3: List the steps in the accounting cycle, distinguish between accounting and bookkeeping, and explain how computers are used in accounting.
  • See Learning Goal 3: List the steps in the accounting cycle, distinguish between accounting and bookkeeping, and explain how computers are used in accounting.
  • See Learning Goal 3: List the steps in the accounting cycle, distinguish between accounting and bookkeeping, and explain how computers are used in accounting. Student’s often do not understand that financial statements are more than a balance sheet but incorporate the income statement and statement of cash flows.
  • See Learning Goal 4: Explain how the major financial statements differ. See Figure 17.5 in the text for a sample Balance Sheet for Very Vegetarian.
  • See Learning Goal 4: Explain how the major financial statements differ.
  • See Learning Goal 4: Explain how the major financial statements differ. Assets are divided into three categories according to how fast they can be converted into cash.
  • See Learning Goal 4: Explain how the major financial statements differ.
  • See Learning Goal 4: Explain how the major financial statements differ.
  • See Learning Goal 4: Explain how the major financial statements differ.
  • See Learning Goal 4: Explain how the major financial statements differ. See Figure 17.7 in the text for a sample Income Statement for Very Vegetarian.
  • See Learning Goal 4: Explain how the major financial statements differ.
  • See Learning Goal 4: Explain how the major financial statements differ. While depreciation is an expense, it is a non-cash expense for the company.
  • See Learning Goal 4: Explain how the major financial statements differ.
  • See Learning Goal 4: Explain how the major financial statements differ. See Figure 17.8 in the text for a sample Statement of Cash Flows for Very Vegetarian.
  • See Learning Goal 4: Explain how the major financial statements differ.
  • See Learning Goal 5: Demonstrate the application of ratio analysis in reporting financial information. Ratio analysis provides an assessment of the firm’s financial condition. It can be extremely useful when results of a ratio analysis are compared to industry peers.
  • See Learning Goal 5: Demonstrate the application of ratio analysis in reporting financial information. The acid-test ratio is sometimes referred to as the quick ratio.
  • See Learning Goal 5: Demonstrate the application of ratio analysis in reporting financial information.
  • See Learning Goal 5: Demonstrate the application of ratio analysis in reporting financial information.
  • See Learning Goal 5: Demonstrate the application of ratio analysis in reporting financial information.

Chap017 Chap017 Presentation Transcript

  • * * Chapter Seventeen Understanding Accounting and Financial Information Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
  • WHAT’S ACCOUNTING? * *
    • Accounting -- Recording, classifying, summarizing and interpreting of financial events and transactions in an organization to provide interested parties needed financial information.
    • Outside parties - like employees, owners, creditors, unions, investors and the government - make use of a firm’s accounting information.
    What is Accounting? LG1 17-
  • The ACCOUNTING SYSTEM * * What is Accounting? LG1 17-
  • AREAS OF ACCTG
    • 1. MANAGERIAL
    • 2. FINANCIAL
    • 3. AUDITING
    • 4. TAX
    • 5. GOVT/NON PROFIT
  • MANAGERIAL ACCOUNTING * *
    • Managerial Accounting -- Provides information and analysis to managers inside the organization to assist them in decision making.
    • Managerial accounting is involved with:
      • Costs of production
      • Costs of marketing
      • Preparation and control of budgets
      • Minimizing tax liabilities
    Managerial Accounting LG2 17-
  • FINANCIAL ACCOUNTING * *
    • Financial Accounting -- Financial information and analyses are generated for people primarily outside the organization. Outside users are interested in these questions:
      • Is the organization profitable?
      • Is it able to pay its bills?
      • How much debt does it owe?
    • Annual Report -- A yearly statement of the financial condition, progress, and expectations of the firm.
    Financial Accounting LG2 17-
  • HOW to READ an ANNUAL REPORT * *
    • Key things to watch for and read:
    Financial Accounting LG2
      • Management’s discussion and analysis of operations
      • Balance sheet
      • Income statement
      • Statement of cash flows
      • Auditor’s opinion
    17-
  • PUBLIC vs. PRIVATE ACCOUNTANTS * *
    • Private Accountants -- Work in a single firm, government agency, or nonprofit organization.
    • Public Accountants -- Provide accounting services to individuals or businesses.
    • Certified Public Accountants (CPAs) -- Accountants who have passed a series of examinations established by the American Institute of Certified Public Accountants (AICPA) and met a states requirements for education and experience.
    Financial Accounting LG2 17-
  • STEPS to CONTROL ACCOUNTING PRACTICES * * Financial Accounting LG2 17-
  • AUDITING CHECKS ACCURACY * *
    • Auditing -- Reviewing and evaluating the information used to prepare a company’s financial statements.
    • Independent Audit -- An evaluation and unbiased opinion about the accuracy of a company’s financial statements.
    • Certified Internal Auditors (CIAs) -- Accountants who have a bachelor’s degree and two years of experience in internal auditing and pass an exam administered by the Institute of Internal Auditors .
    Auditing LG2 17-
  • SPECIALIZED ACCOUNTANTS * *
    • Tax Accountants -- Accountants trained in tax law and are responsible for preparing tax returns or developing tax strategies.
    • Government and Not-for-Profit Accounting -- Support for organizations whose purpose is not generating a profit, but serving others according to a duly approved budget.
    Tax Accounting LG2 17-
  • The ACCOUNTING CYCLE * *
    • Accounting Cycle - - A six-step procedure that results in the preparation and analysis of the major financial statements.
    The Accounting Cycle LG3 17-
  • BOOKKEEPING’S ROLE * *
    • Bookkeeping -- The recording of business transactions. Bookkeepers divide a firm’s transactions into meaningful categories and post them into a record book or computer program called a journal.
    • Double-Entry Bookkeeping -- Bookkeepers record all transactions in two places so they can check one list of transactions against the other for accuracy.
    The Accounting Cycle LG3 17-
  • BOOKKEEPING’S ROLE * *
    • Ledger -- A specialized accounting book or program where all information is in one place.
    • Trial Balance -- A summary of all the information in the account ledgers.
    The Accounting Cycle LG3 17-
  • FINANCIAL STATEMENTS * *
    • Financial Statement -- A summary of all the financial transactions that have occurred over a particular period.
    Understanding Key Financial Statements LG3
    • Key financial statements of business are:
      • Balance sheet
      • Income statement
      • Statement of cash flows
    17-
  • BALANCE SHEET
    • Shows what you own and who you owe
    • Is a particular date in time (ex. March 31, 2010)
    • Broken down into assets, liabilities, and equity
  • The FUNDAMENTAL ACCOUNTING EQUATION * *
    • Fundamental Accounting Equation -- The basis for the balance sheet.
    • The equation must always be balanced and includes the formula:
      • Assets = Liabilities + Owners Equity
    The Fundamental Accounting Equation LG4 17-
  • ASSETS * *
    • Assets -- Economic resources owned by a firm. Items can be tangible or intangible.
    • Liquidity -- Ease with which assets can be converted into cash.
    Classifying Assets LG4 17-
  • CLASSIFYING ASSETS * *
    • Current Assets -- Items that can or will be converted to cash within one year.
    • Fixed Assets -- Long-term assets that are relatively permanent such as land, buildings, or equipment.
    • Intangible Assets -- Long-term assets that have no physical form but do have value such as patents, trademarks, and goodwill.
    Classifying Assets LG4 17-
  • CLASSIFYING LIABILITIES * *
    • Liabilities -- What the business owes to others - its debts.
    • Accounts Payable -- Current liabilities a firm owes for merchandise or services purchased on credit.
    • Notes Payable -- Short or long-term liabilities a business promises to pay by a certain date.
    • Bonds Payable -- Long-term liabilities that the firm must pay back.
    Liabilities and Owners’ Equity Accounts LG4 17-
  • OWNERS’ EQUITY ACCOUNTS * *
    • Owners’ Equity -- The amount of the business that belongs to the owners minus any liabilities of the owners.
    • Retained Earnings -- Accumulated earnings from the firm’s profitable operations that are reinvested in the business.
    Liabilities and Owners’ Equity Accounts LG4 17-
  • The INCOME STATEMENT * *
    • Income Statement -- The financial statement that shows a firm’s bottom line - that is, its profit after costs, expenses, and taxes.
    • Net Income/Net Loss -- The revenue left over or depleted.
    The Income Statement LG4 17-
  • The INCOME STATEMENT * *
    • The formula for the income statement :
      • Revenue
      • Minus Cost of Goods Sold
      • Equals Gross Profit
      • Minus Operating Expenses
      • Equals Net Income before Taxes
      • Minus Taxes
      • Equals Net Income or Net Loss
    The Income Statement LG4 17-
  • ACCOUNTS of the INCOME STATEMENT * *
    • Revenues is the monetary value a firm received for goods sold, services rendered or other payments.
    • Cost of Goods Sold (or Manufactured) -- Measures the cost of merchandise the firms sells or the cost of raw materials and supplies it used in producing items for resale.
    • Gross Profit -- How much a firm earned by buying (or making) and selling merchandise.
    The Income Statement LG4 (Continued) 17-
  • ACCOUNTS of the INCOME STATEMENT ( Continued ) * *
    • Operating Expenses -- Expenses a firm incurs in selling goods and services such as rent, salaries and supplies.
    • Depreciation -- The systematic write-off of the cost of a tangible asset over its estimated useful life.
    The Income Statement LG4 17-
  • ACCOUNTING for WHAT’S COMING and GOING in SMALL BUSINESS Spotlight on Small Business * *
    • Generally Accepted Accounting Principles (GAAP) sometimes permits accountants to use different method of accounting for inventory.
    • FIFO: First-In, First-Out
    • LIFO: Last-In, Last-Out
    • Each valuation can affect income and ending inventory valuation.
    17-
  • The STATEMENT of CASH FLOWS * *
    • Statement of Cash Flows -- Reports cash receipts and cash disbursements related to the three major activities of a firm:
      • Operations
      • Investments
      • Financing
    The Statement of Cash Flows LG4 17-
  • UNDERSTANDING CASH FLOW * *
    • Cash Flow -- The difference between cash coming in and cash going out of a business.
    The Need for Cash Flow Analysis LG4
    • Managing cash flow is a key consideration of a business and can be particularly challenging for small and seasonal businesses.
    17-
  • USING FINANCIAL RATIOS * *
    • Ratio Analysis -- The assessment of a firm’s financial condition using calculations and financial ratios developed from the firm’s financial statements.
    • Key ratios include:
      • Liquidity ratios
      • Leverage ratios
      • Performance ratios
      • Activity ratios
    Analyzing Financial Performance Using Ratios LG5 17-
  • COMMONLY USED LIQUIDITY RATIOS * *
    • Liquidity ratios measure a firm’s ability to turn assets into cash to pay its short-term debts.
    • Two key ratios are:
      • Current ratio
      • Acid-test ratio
    • This information is found on the firm’s balance sheet .
    Liquidity Ratios LG5 17-
  • Liquidity ratios
    • Current ratio =
    • current assets/ current liabilities
    • Acid test ratio =
    • cash +AR+marketable securites/ current liab
    • **(the acid test uses easily convertible items but excludes inventory)
  • LEVERAGE RATIOS * *
    • Leverage ratios measure the degree to which a firm relies on borrowed funds in its operations.
    • Key ratios include:
      • Debt to Owner’s Equity Ratio
    • This information is found on the firm’s balance sheet .
    Leverage (Debt) Ratios LG5 17-
  • Leverage ratio
    • = Total liab/owners equity
    • *this could show that a firm with too much debt would have difficulty paying creditors and stockholders a return
    • * a number greater than 100 could imply riskier venture
  • PROFITABILITY RATIOS * *
    • Profitability ratios measure how effectively a firm’s managers are using the firm’s various resources to achieve profits.
    • Key ratios include:
      • Basic earnings per share
      • Return on sales
      • Return on equity
    • This information is found on the firm’s balance sheet and income statement .
    Profitability (Performance) Ratio LG5 17-
  • Profitability ratios
    • EPS
    • Return on sales = net income / net sales
    • Return on equity = net income after tax/ owner equity
  • ACTIVITY RATIOS * *
    • Activity ratios measure how effectively management is turning over inventory.
    • Key ratios include:
      • Inventory turnover ratio
    Activity Ratio LG5
      • This information is found on the firm’s balance sheet and income statement .
    17-
  • Inventory turn over
    • How many times are you turning inventory over to make the sales (helps est. purchasing, helps est. profitability on inv dollars)
    • Inventory turnover = cogs /avg inventory
    • **this number could indicate obsolescence, poor purchasing, poor stocking