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Chapter 14 Using Financial Information and Accounting

Chapter 14 Using Financial Information and Accounting






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    Chapter 14 Using Financial Information and Accounting Chapter 14 Using Financial Information and Accounting Presentation Transcript

    • Chapter 14 Using Financial Information and Accounting By Ryan King & Marijke Verwaijen
    • Accounting Principles
      • Accounting – the process of collecting, recording, classifying, summarizing, reporting, and analyzing financial activities
      • Managerial Accounting- financial information for managers inside the company
        • Allows for decision making
      • Financial Accounting – financial information for people outside the company
        • Allows others to see how well a company is working
        • Eases decisions for investments
      • Generally Accepted Accounting Principles (GAAP)
        • Set-up by Financial Accounting Standards Board (FASB)
        • Is the U.S. standard for accounting Principles
      • No set international accounting principles
        • Each country has its own standards
    • Accounting Profession
      • Public Accountants (CPA)
        • Does work for individuals or companies on a free-basis
        • Responsible for Audits
          • Gives “Auditor’s Opinion” on whether all financial records were done by the standards
        • CPA’s must go through several levels
          • Obtain approved Bachelor’s Degree
          • Pass test
          • Obtain experience
        • Private Accountants
          • Sever one company
          • Certified Management Accountant (CMA)
            • Must pass examination
    • Recent Accounting Problems
      • AICPA report on bad accounting procedures
        • Commit fraudulent accounting reporting
        • Unreasonable stretch accounting rules to enhance financial records
        • Use loopholes to manage financial results
      • Why do companies bend rules?
        • Larger profit margin
        • Show profit when loss
        • Look good in short term
    • Changing in Accounting Standards
      • Sarbanes-Oxley Act
        • Clarified rules for auditors and services
        • Set up the Public Company Accounting Oversight Board (PCAOB)
          • Has authority to amend auditing, quality control, and ethics standards
        • Changed audit standards
          • Must keep seven years of audit documents
        • Financial Disclosure
          • Companies must disclose all transactions
          • All significant changes must be made public on a current basis
        • Financial Statement Certification
          • Company and Financial Officers must certify records
          • Severe penalties for false certification
        • Internal Controls
          • Must have internal control for financial procedures
        • Consulting Work
          • Restrict non-auditing work done by auditors
    • The Accounting Equation
      • Assets = Liabilties + Owner’s Equity
        • Must Always Balance !!!!
    • The Accounting Cycle
      • Six step process
        • Analyze data recorded
        • Record each transaction in Journal
        • Journal entries recorded in Ledger
        • Ledger accounts totaled in Trial Balance
        • These Values used to prepare Financial Statements
        • Analyze reports and make decisions
      • Computer in Accounting
        • Accounting and Tax programs offers many tools
        • Typically represents a large portion of the software budget
    • The Balance Sheet
      • Summarizes financial position for specific point in time
      • Assets
        • Listed in order of Liquidity
        • Current Assets
          • Cash
          • Marketable Securities
          • Accounts Receivable
          • Notes Receivable
          • Inventory
        • Fixed Assets
          • Long term
          • Accumulate depreciation over time
        • Intangible Assets
          • Long term with no physical existence
            • Copyrights, patents, etc.
    • The Balance Sheet Con’t
      • Liabilities
        • Current Liabilities
          • Accounts Payable
          • Notes Payable
          • Accrued Expenses
          • Income Tax Payable
          • Current portion of long-term debt
        • Long-term Liabilities
          • Bank Loans, Mortgages, etc.
      • Owner’s Equity
        • Owner’s total investment in the company
    • Income Statement
      • Summarizes revenues and expenses
      • Revenues
        • Total income for the entity
      • Expenses
        • Total costs for running business
      • Gross Profit – Operating Expenses = Net Profit/Loss
    • The Statement of Cash Flows
      • Statement of cash flows – A financial statement that provides a summary of the money flowing into and out of a firm.
        • the financial statement used to assess the sources and uses of cash during a period
        • It tracks the firm’s cash receipts and cash payments
        • It gives financial managers and analysts a way to identify cash flow problems and assess the firm’s financial ability
        • All publicly traded firms must include a statement of cash flows in their financial reports to stockholders.
    • The Statement of Cash Flows Con’t
      • The statement of cash flows divides the firm’s cash flows into three groups;
        • Cash flow from operating activities:
          • Those related to the production of the firm’s goods and/or services.
        • Cash flows from investment activities:
          • Those related to the purchase and sake of fixed assets.
        • Cash flows from operating activities:
          • Those related to debt and equity financing.
    • Analyzing Financial Statement and Ratio Analysis
      • Purpose of analyzing financial statements
        • By studying the relationship among the financial statements, someone can gain more insight into a firm’s financial condition and performance. In order to do so, business people make use of ration analysis
      • Ratio analysis
        • The calculation and interpretation of financial ratios taken from the firm's financial statements in order to assess its condition and performance
        • Ratio analysis simply highlights potential problems; it does not prove that they exist. However, ratios can help managers understand operations better and identify trouble spots.
    • Classification of Ratios
      • Ratios can be classified by what they measure; liquidity, profitability, activity, and debt.
        • Liquidity ratios measure the firm’s ability to pay it’s short term debts as they come due
          • Current Ratio
          • Acid-Test (quick) Ratio
          • Net Working Capital
        • Profitability Ratios are ratios which measure how well a firm is using its resources to generate profit, and how efficiently it is being managed .
          • Net Profit Margin
          • Return On Equity
          • Earnings Per Share
        • Activity Ratios
          • Inventory Turnover Ratio
        • Debt Ratio
          • Debt-To-Equity Ratio
    • Ratio Analysis
      • Current Ratio - Total Current Assets
      • Total Current Liabilities
      • Acid-Test Ratio - Total Current Assets – Inventory
        • Total Current Liabilities
      • Net Working Capital - Total Current Assets –
              • Total Current Liabilities
      • 4. Net Profit Margin - Net Profit
      • Net Sales
      • 5. Return On Equity - Net Profit
      • Total Owner’s Equity
      • 6. Earning Per Share - Net Profit
      • Number of shares of
      • common stock outstanding
    • Ratio Analysis Con’t
      • Inventory Turnover - Cost of Goods Sold
              • Average Inventory
              • Cost of Goods Sold
              • (Beg. Inventory + Ending Inventory)/2
      • Debt Ratio - Total Liabilities
      • Owner’s Equity
    • Trends in Business
      • Accountants Expand their Role
        • Accountants now take an active role advising their clients on systems and procedures, accounting software, and changes in accounting regulations.
        • They also look into the risks and weaknesses of a company to prevent future complications.
      • Valuing Knowledge Assets
        • The world’s economy is becoming more knowledge-based rather than industrial-based
        • A company’s value may come from internally generated intangible assets such as brands, trademarks, and employee talent.
      • Tightening the GAAP
        • Companies have been taking advantage of loopholes in GAAP to manipulate numbers.
          • For example, Cendant was accused of fraudulently inflating income by booking
          • $500 million in factious revenues
          • Many companies are pushing the accounting edge to keep earning rising to meet expectations of investment analysts and investors
    • Discussion/Study Questions
      • Why are financial reports important?
      • Financial reports give managers, employees, investors, customers, suppliers, creditors, and government agencies a way to analyze a company’s past, current, and future performance.
      • What are the differences between public and private accountants?
      • Public accountants work for independent firms that provide accounting services such as; financial report preparation and auditing, tax return preparation, and management consulting. Private accountants are employed to serve one particular organization and may prepare financial statements, tax returns, and management reports.
    • Discussion/Study Questions
      • What is the accounting equation?
      • Assets = Liability + Owner’s Equity
      • What are the six steps in the accounting cycle?
      • Analyze collected data, record transactions to the journal, record journal entries in the ledger, total ledger in trial balance, prepare financial statements, analyze reports, and make decisions.
      • Why was the Sarbanes-Oxley Act important?
      • It closed loopholes and clarified accounting procedures.
    • Discussion/Study Questions
      • True or False; Things of value such as; cash, account receivable, and inventory, are called liabilities?
      • False, these are called assets
      • What does the balance sheet do?
      • It summarizes the financial condition of the company for a point in time
      • Why is the cash flow statement an important source of information?
      • It summarizes the firms sources and uses of cash during a financial-reporting period.
    • Discussion/Study Questions
      • What is the purpose of an income statement?
      • It summarizes revenues and expenses, showing the net profit or loss
      • Why is ratio analysis used?
      • It allows someone to gain insight into a firm’s operations, profitability, and overall financial condition.
      • What are the four types of ratios?
      • Liquidity, profitability, activity, and debt ratios