Chapter 14 Using Financial Information and AccountingPresentation Transcript
Chapter 14 Using Financial Information and Accounting By Ryan King & Marijke Verwaijen
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
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
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
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
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
Must have internal control for financial procedures
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
Listed in order of Liquidity
Accumulate depreciation over time
Long term with no physical existence
Copyrights, patents, etc.
The Balance Sheet Con’t
Income Tax Payable
Current portion of long-term debt
Bank Loans, Mortgages, etc.
Owner’s total investment in the company
Summarizes revenues and expenses
Total income for the entity
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
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
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
Inventory Turnover Ratio
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
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
Cost of Goods Sold
(Beg. Inventory + Ending Inventory)/2
Debt Ratio - Total Liabilities
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
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.
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.
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.
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