2. What is Accounting?
Recording, classifying,
summarizing, &
interpreting financial
events & transactions
to provide management
& other parties
information to allow
them to make good
decisions.
4. Bookkeeping's Role
• Bookkeeping -- The recording of business
transactions. Bookkeepers divide a firm’s
transactions into meaningful categories and post
them into a record book or computer program called
a journal.
5. What Bookkeepers Do
• Categorize
and
• Record the Data
in
• Books of Original
Entry
–Journals
–Ledgers
using
• Double Entry
6. Bookkeeping's Role
• Double-Entry Bookkeeping -- Bookkeepers
record all transactions in two places so they can
check one list of transactions against the other for
accuracy.
10. Steps In The
Accounting Cycle
Analyze Source
Documents
Record
Transactions
in Journals
Post Journal
Entries to Ledger
Take a
Trial Balance
Prepare
Financial
Statements
Analyze
Financial
Statements
12. Financial Statements
Balance Sheet – Statement of
Financial Position (on a specific date)
Income Statement – Statement of
Revenues, Expenses, & Profits (specific
period of time)
Statement of Cash Flows –
Statement of Cash Receipts &
Disbursements (cash coming in & cash
going out)
16. Classifying Assets
• Current Assets -- Items that can or will be
converted to cash within one year.
• Fixed Assets -- Long-term assets that are
relatively permanent such as land, buildings, or
equipment.
• Intangible Assets -- Long-term assets that
have no physical form but do have value such
as patents, trademarks, and goodwill.
17. Classifying Liabilities
• Liabilities -- What the business owes to others - its
debts.
• Accounts Payable -- Current liabilities a firm owes
for merchandise or services purchased on credit.
• Notes Payable -- Short or long-term liabilities a
business promises to pay by a certain date.
• Bonds Payable -- Long-term liabilities that the firm
must pay back.
18. Owners’ Equity Accounts
• Retained Earnings --
Accumulated earnings
from the firm’s profitable
operations that are
reinvested in the business.
19. Very Vegetarian’s
Balance Sheet (Assets)
Period ending 12/31/08
Assets
Current Assets
Cash $ 15,000
Accounts Receivable 200,000
Notes Receivable 50,000
Inventory 335,000
Total Current Assets $600,000
Fixed Assets
Land $ 40,000
Buildings (net) 110,000
Equipment & Vehicles (net) 40,000
Furniture & Fixtures (net) 16,000
Total Fixed Assets $206,000
Intangible Assets
Goodwill $ 20,000
Total Intangible Assets $ 20,000
Total Assets $826,000
20. Very Vegetarian’s Balance Sheet
(Liabilities & Owner’s Equity)
Period ending 12/31/08
Liabilities & Owners’ Equity
Current Liabilities
Accounts Payable $ 40,000
Notes Payable 8,000
Accrued Taxes & Salaries 240,000
Total Current Liabilities $288,000
Long-term Liabilities
Notes Payable $ 35,000
Bonds Payable 290,000
Total Long-term Liabilities $325,000
Total Liabilities $613,000
Owners’ Equity
Common Stock (1M shares) $100,000
Retained Earnings 113,000
Total Owners’ Equity $213,000
Total Liabilities & Owners’ Equity $826,000
23. Income Statement Formula
Revenues
–Cost of Goods Sold
=Gross Profit (Gross Margin)
–Operating Expenses
=Net Income Before Taxes
–Taxes
=Net Income (or Loss)
25. Very Vegetarian Income Statement
Period Ending 12/31/10
Revenue
Net Sales $ 700,000
Cost of Goods Sold
Beginning Inventory $ 200,000
Purchases During the
Year $ 440,000
Cost of Goods Available
for Sale During the Year $ 640,000
Less: Ending Inventory $ 230,000
Less: Cost of Goods Sold $ 410,000
Gross Profit (Gross Margin) $ 290,000
26. Income Statement Formula
Revenues
–Cost of Goods Sold
=Gross Profit (Gross Margin)
–Operating Expenses
=Net Income Before Taxes
–Taxes
=Net Income (or Loss)
27. Very Vegetarian’s
Income Statement (cont’d)
Gross Profit $290,000
Operating Expenses
Selling Expenses
Salaries $ 90,000
Advertising & Supplies $ 20,000
Total Selling Expenses $ 110,000
General Expenses
Office Salaries $ 67,000
Depreciation $ 1,500
Insurance $ 1,500
Rent $ 28,000
Utilities $ 12,000
Miscellaneous $ 2,000
Total General Expenses $ 112,000
Less: Total Operating Expenses - $ 222,000
Net Income (Profit) Before Taxes $ 68,000
Less: Income Tax Expenses - $ 19,000
Net Income (Profit) After Taxes $ 49,000
28. Statement of Cash Flows
Statement of Cash Receipts & Disbursements
(cash coming in & cash going out)
29. Statement of Cash Flows
Reports cash receipts and disbursements
related to the firm’s major activities:
Operations – cash transactions
associated with running the business
Investments – cash used in or provided
by firm’s investment activities
Financing – cash raised from the
issuance of new debt or equity capital
or cash used to pay business
expenses, past debts, or company
dividends
32. Using Financial Ratios
• Ratio Analysis -- The assessment of a firm’s
financial condition using calculations and
financial ratios developed from the firm’s
financial statements.
• Key ratios include:
- Liquidity ratios
- Leverage ratios
- Activity ratios
34. Commonly Used
Liquidity Ratios
• Liquidity ratios measure a firm’s ability to turn
assets into cash to pay its short-term debts.
• Two key ratios are:
- Current ratio
- Acid-test ratio
• This information is found on the firm’s Balance
Sheet.
39. Leverage (Debt) Ratios
• Leverage ratios measure the degree to which a
firm relies on borrowed funds in its operations.
• Key ratios include:
- Debt to Owner’s Equity Ratio
• This information is found on the firm’s Balance
Sheet.
40. Debt to Equity Ratio
$613,000
$213,000
= 287%
Total Liabilities
Owners’ Equity