Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit Chapter Fourteen © 2007  The...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Explain h...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>ROIC </li...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>GAAP </li...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>GAAP </li...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>GAAP </li...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>GAAP </li...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Accountin...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Accountin...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Accountin...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Accountan...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Accountan...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Accountan...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Financial...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Financial...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>The Accou...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>The   Acc...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Key Terms...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Key Terms...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Income St...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Income St...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Cash Flow...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Cash Flow...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Financial...
Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Financial...
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Accounting: Measuring how Efficiently and Effectively ...

  1. 2. Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit Chapter Fourteen © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin Introduction to Business
  2. 3. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Explain how the success of a company’s business model can be measured by financial accounts and describe the various kinds of activities that accounting perform. </li></ul><ul><li>Analyze a company’s balance sheet and describe how it balances the assets a company owns against the capital owed to its creditors and stockholders. </li></ul><ul><li>Explain how the income statement is used to measure a company’s bottom line profit and the various costs and expenses that must be deducted to arrive at this total. </li></ul><ul><li>Understand the need for cash, as well as profit, affects a company’s business model, and how the cash flow statement measures the cash that flows into and out of a company. </li></ul><ul><li>Appreciate how financial ratios can be used to analyze the information in company’s financial statements and how they help both managers and investors evaluate a company’s current and future profitability. </li></ul>
  3. 4. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>ROIC </li></ul><ul><li>Accurate measure of company’s profitability </li></ul><ul><li>Increasing profitability and sales suggests customer value and a competitive advantage </li></ul><ul><li>Evaluate ROIC and relate to creating value and profit. Explain its significance </li></ul><ul><li>Evaluate the ROIC calculation and relate to creating value and profit. Explain its significance </li></ul>
  4. 5. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>GAAP </li></ul><ul><li>Accounting is a process of collecting, measuring and recording data in an organized method or generally accepted accounting principles (GAAP) </li></ul><ul><li>Evaluate GAAP and relate to creating value and profit. Explain its caveat significance </li></ul>
  5. 6. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>GAAP </li></ul><ul><li>For example, the matching principle requires that expenses incurred be deducted from the revenue within the same time period. </li></ul>
  6. 7. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>GAAP </li></ul><ul><li>Also the revenue is stated in the time frame when the sale is made not when the customer pays for the sale and companies must follow this accrual basis of accounting </li></ul>
  7. 8. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>GAAP </li></ul><ul><li>This data is analyzed and then reported the results into financial reports and statement </li></ul>
  8. 9. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Accounting System </li></ul><ul><li>The financial information system used to measure, record, analyze and report all the transactions involved in its value-creation process </li></ul><ul><li>All company stakeholders are interested in the financial report and statements resulting from the accounting function </li></ul><ul><li>Stockholders, managers, and employees all use these statements to analyze the financial health and improve company performance </li></ul>
  9. 10. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Accounting System </li></ul><ul><li>Employees, even if not stockholders, are concerned the company will be able to reward and employ them in the future </li></ul><ul><li>Evaluate the illustration of a cost accounting system (scroll down the page) and relate how it contributes value and profit. Why is it illustrated as a puzzle? </li></ul>
  10. 11. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Accounting Activities </li></ul><ul><li>Is a hierarchy of data information and knowledge </li></ul><ul><li>Bookkeeping is the recording activity needed to monitor and track all financial transactions </li></ul><ul><li>Depreciation is the process of reducing the value of the asset over time as it is used </li></ul>
  11. 12. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Accountants </li></ul><ul><li>Companies employ accountants, both internal and external, and certified professionals (CPA) </li></ul><ul><li>To perform the accounting activities necessary to meet strict professional and legal requirements </li></ul><ul><li>Evaluate the role of Accounting and relate to the AON video </li></ul>
  12. 13. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Accountants </li></ul><ul><li>The Sarbanes-Oxley Act of 2002 added to these requirements necessitating the CEO as well as others to sign off (thereby legally liable) on all financial statements </li></ul>
  13. 14. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Accountants </li></ul><ul><li>Financial accountants who specialize in preparing and analyzing financial data for use by managers </li></ul><ul><li>Financial accountants who specialize in preparing financial data for use by stakeholders </li></ul><ul><li>Evaluate the role of Franchising in Accounting and relate to creating value and profit </li></ul>
  14. 15. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Financial Statements </li></ul><ul><li>Managers of all levels use accounting financial statements and need to understand the accounting methods used to prepare these statements </li></ul><ul><ul><li>Balance sheet </li></ul></ul><ul><ul><li>Income statement </li></ul></ul><ul><ul><li>Statement of cash flows </li></ul></ul>
  15. 16. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Financial Statements </li></ul><ul><li>The balance sheet is a summary of the financial conditions of a company for a specific time and as of a specific day (think of a “snapshot” or a still picture) </li></ul><ul><li>Evaluate the role/purposes of personal financial statements and relate to creating value to you </li></ul>
  16. 17. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>The Accounting Equation </li></ul><ul><li>Assets minus liabilities equals owner equity </li></ul><ul><li>Assets are the resources a company owns from cash to all investments </li></ul><ul><li>Liabilities are the financial obligations a company incurs from purchasing or borrowing to obtain capital </li></ul><ul><li>The other main source of a company’s capital is its stockholder’s equity which is the total capital invested by its founders and stockholders </li></ul>
  17. 18. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>The Accounting Equation </li></ul><ul><li>This equation is balanced by double entry bookkeeping which records the dual effects of a financial transaction on a company’s assets and liabilities </li></ul><ul><li>Evaluate the efficiency and effectiveness of the accounting equation and relate how it creates value and profit to the business organization </li></ul>
  18. 19. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Key Terms </li></ul><ul><li>Current liabilities are debts due and payable within one year </li></ul><ul><li>Total equity is the sum of the capital stock invested and retained earnings </li></ul>
  19. 20. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Key Terms </li></ul><ul><li>Liquidity is how fast an asset can be converted to cash and may be categorized as current (working) or long term assets </li></ul>
  20. 21. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Income Statement </li></ul><ul><li>Reports the results of a company’s profitability and may be called a profit and loss statement </li></ul>
  21. 22. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Income Statement </li></ul><ul><li>The basic equation of sales revenue minus expenses equals profit (or loss) is used on this statement to determine the bottom line profit or the amount of net income (or profits or earnings) </li></ul>
  22. 23. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Cash Flow Statement </li></ul><ul><li>Shows how much cash a company generates during a specific financial period, and how it is used </li></ul>
  23. 24. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Cash Flow Statement </li></ul><ul><li>In accounting cash refers to the value of a company’s assets that can be converted into cash immediately </li></ul>
  24. 25. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Financial Ratios </li></ul><ul><li>Measures of different aspects of a company's performance and profitability and categorized as liquidity, asset management and profitability ratios </li></ul>
  25. 26. Chapter 14 Accounting: Measuring how Efficiently and Effectively Resources are Creating Value and Profit <ul><li>Financial Ratios </li></ul><ul><li>Note that gross margin indicates how much of each sales dollar remains after deducting cost of goods sold from sales </li></ul>

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