Chapter 14 Using Financial Information and Accounting By  Ryan King & Marijke Verwaijen
Accounting Principles <ul><li>Accounting – the process of collecting, recording, classifying, summarizing, reporting, and ...
Accounting Profession <ul><li>Public Accountants (CPA) </li></ul><ul><ul><li>Does work for individuals or companies on a f...
Recent Accounting Problems <ul><li>AICPA report on bad accounting procedures </li></ul><ul><ul><li>Commit fraudulent accou...
Changing in Accounting Standards <ul><li>Sarbanes-Oxley Act  </li></ul><ul><ul><li>Clarified rules for auditors and servic...
The Accounting Equation <ul><li>Assets = Liabilties + Owner’s Equity </li></ul><ul><ul><li>Must Always Balance !!!! </li><...
The Accounting Cycle <ul><li>Six step process </li></ul><ul><ul><li>Analyze data recorded </li></ul></ul><ul><ul><li>Recor...
The Balance Sheet <ul><li>Summarizes financial position for specific point in time </li></ul><ul><li>Assets  </li></ul><ul...
The Balance Sheet Con’t <ul><li>Liabilities </li></ul><ul><ul><li>Current Liabilities </li></ul></ul><ul><ul><ul><li>Accou...
Income Statement <ul><li>Summarizes revenues and expenses </li></ul><ul><li>Revenues </li></ul><ul><ul><li>Total income fo...
The Statement of Cash Flows <ul><li>Statement of cash flows  – A financial statement that provides a summary of the money ...
The Statement of Cash Flows Con’t <ul><li>The statement of cash flows divides the firm’s cash flows into three groups; </l...
Analyzing Financial Statement and Ratio Analysis <ul><li>Purpose of analyzing financial statements  </li></ul><ul><ul><li>...
Classification of Ratios <ul><li>Ratios can be classified by what they measure; liquidity, profitability, activity, and de...
Ratio Analysis <ul><li>Current Ratio -  Total Current Assets </li></ul><ul><li>Total Current Liabilities </li></ul><ul><li...
Ratio Analysis Con’t <ul><li>Inventory Turnover  -  Cost of Goods Sold </li></ul><ul><ul><ul><ul><ul><li>  Average Invento...
Trends in Business <ul><li>Accountants Expand their Role </li></ul><ul><ul><li>Accountants now take an active role advisin...
Discussion/Study Questions <ul><li>Why are financial reports important? </li></ul><ul><li>Financial reports give managers,...
Discussion/Study Questions <ul><li>What is the accounting equation? </li></ul><ul><li>Assets = Liability + Owner’s Equity ...
Discussion/Study Questions <ul><li>True or False; Things of value such as; cash, account receivable, and inventory, are ca...
Discussion/Study Questions <ul><li>What is the purpose of an income statement? </li></ul><ul><li>It summarizes revenues an...
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Chapter 14 Using Financial Information and Accounting

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Chapter 14 Using Financial Information and Accounting

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

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