smb300_Chap013 _wk6


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  • Any information used in accounting must be accurate meaning correct and up-to-date. It must also be relevant- pertain to the situation at hand.
  • Many reports can be generated using software but in this case less may be more. Focus on five key reports- each of which are discussed in turn.
  • smb300_Chap013 _wk6

    1. 1. Small Business Accounting Projecting and Evaluating Performance Chapter 13McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
    2. 2. Learning ObjectivesLO1 Review the basic concepts of accountingLO2 Specify the requirements for a small business accounting systemLO3 Explain the content and format of common financial statementsLO4 Use accounting information as a tool for managing your business effectivelyLO5 Develop a complete set of budgets for your businessLO6 Use accounting information to make better business decisions 13-2
    3. 3. Why Accounting Matters Proves what your business did financially Shows how much your business is worth Banks, creditors, development agencies, and investors require it Provides easy-to-understand plans for business operations You can’t know how your business is doing without it 13-3
    4. 4. Types of Accounting Managerial accounting – Accounting methods that are specifically intended to be used by managers for planning, directing, and controlling a business. 13-4
    5. 5. Types of Accounting Tax accounting  Financial – An accounting accounting approach based – A formal, rule-based on specific set of accounting accounting principles and requirements set procedures by governmental intended for use by taxing agencies. outside owners, investors, banks, and regulators. 13-5
    6. 6. Basic Accounting Concepts Business entity  Going concern concept concept – The concept that a – The accounting business has an concept that a existence separate business is from that of its expected to owners. continue in existence for the foreseeable future. 13-6
    7. 7. The Accounting Equation Accounting equation – The statement that assets equal liabilities plus owner’s equity (assets liabilities owners’ equity). 13-7
    8. 8. The Accounting Equation Asset – something the business owns that will have value in the future Liability – a legal obligation to pay some amount at a time in the future. Owners’ equity – whatever value is left after all liabilities have been paid. 13-8
    9. 9. Revenues, Expenses, and Costs Cost  Expense – The value given up – A decrease in to obtain owners’ equity something that you caused by want. consuming your product or service. 13-9
    10. 10. Information UsefulnessOnly two reasons to do accounting:1.To produce information that is useful to you for managing your business2.To meet legal or contractual requirements 13-10
    11. 11. Why Does Accounting Matter? MACRS rate – the Modified Accelerated Cost Recovery System – lets taxpayers depreciate more of the cost earlier Depreciation – Regular and systematic reduction in income that transfers asset value to expense over time. 13-11
    12. 12. Accounting Systems for Small Business Computerized systems simplify the accounting process by providing automatic error checking, entry screens that look like the common business forms, and automatic production of financial statements and management reports. 13-12
    13. 13. Financial Reports Financial statements – Formal summaries of the content of an accounting system’s records of transactions. 13-13
    14. 14. Financial Reports Five common financial statements – Income statement – Statement of retained earnings – Statement of owner’s equity – Balance sheet – Cash flow statement 13-14
    15. 15. Flow ofInformation in FinancialStatements Figure 13.1 13-15
    16. 16. Financial Reports Retained earnings – The sum of all profits and losses, less all dividends paid since the beginning of the business. Articulate – The concept that information flows from the income statement through the statements of retained earnings and owners’ equity to the balance sheet. 13-16
    17. 17. Everyday Financial Documents and Similar Financial Reports Figure 13.2 13-17
    18. 18. Financial Reports Income statement – A statement that lists revenues and expenses and shows the amount of profit a business makes for a specified period of time. 13-18
    19. 19. Organization of theIncome Statement Figure 13.3 13-19
    20. 20. Typical Single-Step Format Income Statement Figure 13.4A 13-20
    21. 21. Typical Multiple-Step Income Statement Figure 13.4B 13-21
    22. 22. Financial Reports Balance sheet – A statement of what a business owns (assets), what it owes to others (liabilities), and how much value the owners have invested in it (equity). Liquidity – A measure of how quickly a company can raise money through internal sources by converting assets to cash. 13-22
    23. 23. Organization of the Balance Sheet Figure 13.5 13-23
    24. 24. Typical Balance SheetFigure 13.6 13-24
    25. 25. Balance Sheet Financial flexibility – A business’s ability to manage cash flows in such a manner that the company can respond appropriately to unexpected opportunities and needs. Financial strength – The ability of a business to survive adverse financial events. 13-25
    26. 26. Cash Flow Statement Cash flow statement – A statement of the sources and uses of cash in a business for a specific period of time. GAAP – Generally Accepted Accounting Principles are the standardized rules for accounting procedures – used in all audits and submissions of accounting reports to the government. 13-26
    27. 27. Typical Cash Inflows and Outflows on the Cash Flow Statement Figure 13.7 13-27
    28. 28. Cash Flow Statement Operating activities  Financing activities – Activities involved in – Activities through producing and which cash is selling goods and obtained from and services. paid to lenders, Investing activities owners, and investors. – The purchase and sale of land, buildings, equipment, and securities. 13-28
    29. 29. Uses of Financial Accounting 13-29
    30. 30. Uses of Managerial Accounting External (cost)  Internal (cost) factors factors – Aspects of the – Aspects of or world outside the choices within the business which business which could cause the could cause the business’s costs to business’s costs to change. change. 13-30
    31. 31. Uses of Managerial Accounting Cost-volume-profit analysis – A managerial accounting technique which looks at the fixed and variable costs of a business to arrive at a number of unit sales (volume) to maximize profits. – Variable, fixed costs 13-31
    32. 32. Total CostsFigure 13.8 13-32
    33. 33. Breakeven Point Breakeven point – The point at which total costs equal gross revenue. Figure 13.11 13-33
    34. 34. The Business Plan and the Budget Process Budget – A financial plan for the future, based on a single level of operations; a quantitative expression of the use of resources necessary to achieve a business’s strategic goals. Pro forma – indicates estimated or hypothetical information 13-34
    35. 35. Budgeting Relationships Figure 13.2 13-35
    36. 36. The Business Plan and the Budget Process Master budget – A budget which consists of sets of budgets that detail all projected receipts and spending for the budgeted period. – also referred to as a comprehensive budget 13-36
    37. 37. The Business Plan and the Budget Process Cost of goods sold budget – A schedule that shows the predicted cost of product actually sold during the accounting period. Activity-based cost estimates – An accounting method which assigns costs based on the different types of work a business does in order to sell a particular product or service. 13-37
    38. 38. Controlling Variance – The difference between an actual and budgeted revenue or cost Variance analysis – The process of determining the effect of price and quantity changes on revenues and expenses. 13-38
    39. 39. Controlling Favorable/unfavorable variance – A label applied to variances to indicate their effect upon the income statement; – Favorable variances would result in profits being greater than budgeted, all other things being equal; – Unfavorable variances would result in profits being less than budgeted, all other things being equal. 13-39
    40. 40. Decision MakingTo make good decisions we need:1.Good information2.Efficient ways to condense information so it is understandable3.Methods to help compare alternatives. 13-40