Using management and accounting information (THE INCOME STATEMENT …
Using management and accounting information
Accounting is the process of systematically collecting, analyzing, and reporting financial information
audit is an examination of a company's financial statements and the accounting practices that produced them
purpose: make sure that a firm's financial statements have been prepared in accordance with generally accepted accounting principles (GAAPs)
validity of a firm's financial statements and its accounting records would drop quickly, and
firms would find it difficult to obtain debt financing, acquire goods and services from suppliers, find investor financing, or prepare documents requested by government agencies
little oversight or supervision
Accounting Fraud, Ethical Behavior, and Reform
The accounting problems at these companies- and similar problems at even more companies-have forced many investors, lenders and suppliers, and government regulators to question the motives behind fraudulent and unethical accounting practices.
If a company reports sales and profit figures that are higher than expected,the company's stock value can increase dramatically
the employees lose their jobs
investors, lenders, and suppliers usually experience a loss
Different Types of Accounting
Managerial accounting provides managers and employees within the organization with the information needed to make decisions about a firm's financing, investing, marketing, and operating activities.
Financial accounting generates financial statements and reports for interested people outside of an organization
• Cost accounting-determining the cost of producing specific products or services;
• Tax accounting-planning tax strategy and preparing tax returns for firms or individuals
• Government accounting- providing basic accounting services to ensure that tax revenues are collected and used to meet the goals of state, local, and federal agencies
• Not-for-profit accounting- helping not-for-profit organizations to account for all donations and expenditures.
Careers in Accounting
• Ensure the business is using generally accepted accounting procedures.
• Examine financial statements to be sure that they are accurate.
• Calculate the amount of taxes owed, prepare tax returns, and ensure that taxes are paid properly and on time.
• Organize and maintain financial records.
• Assist employees, managers, and owners to improve financial decisions.
• Suggest ways to reduce costs, increase revenues, and improve profits.
to be successful
• be responsible, honest, and ethical;
• have a strong background in financial management;
• know how to use a computer and software to process data into accounting information
• be able to communicate with people who need accounting information
A private accountant is employed by a specific organization.
A public accountant works on a fee basis for clients and may be self-employed or be the employee of an accounting firm.
certified public accountant (CPA), an individual who has met state requirements for accounting education and experience and has passed a rigorous accounting examination
THE ACCOUNTING EQUATION AND THE BALANCE SHEET
The accounting equation is a simple statement that forms
the basis for the accounting process.
Assets = Liabilities + Owners' equity
• Assets are the resources a business owns- cash, inventory, equipment, and real estate.
• Liabilities are the firm's debts-borrowed money it owes to others that must be repaid.
• Owners' equity is the difference between total assets and total liabilities- what would be left for the owners if the firm's assets were sold and the money used to pay off its liabilities.
double-entry bookkeeping system is a system in which each financial transaction is recorded as two separate accounting entries to maintain the balance shown in the accounting equation
annual report is a report distributed to stockholders and other interested parties that describes a firm's operating activities and its financial condition
The Balance Sheet (statement of financial position)
summary of the dollar amounts of a firm's assets, liabilities, and owners' equity accounts at the end of a specific accounting period
listed in order from the most liquid to the least liquid
liquidity of an asset is the ease with which it can be converted into cash.
Current assets are assets that can be converted quickly into cash or that will be used in one year or less.
cash (most liquid asset)
marketable securities-stocks, bonds, and other investments that can be converted into cash in a matter of days
Fixed assets are assets that will be held or
used for a period longer than one year
values of both fixed assets are decreased by their accumulated depreciation
Depreciation is the process of apportioning the cost of a fixed asset over the period during which it will be used
Intangible assets are assets that do not exist physically
but that have a value based on the rights or privileges they confer on a firm (usually > 1 year)
includes: patents, copyrights, trademarks and brands, and goodwill
Liabilities and Owners' Equity
current liabilities are debts that will be repaid
in one year or less.
Accounts payable are short-term obligations that arise as a result of a firm making credit purchases
Notes payable are obligations that have been secured with promissory notes
Long~term liabilities are debts that need not be repaid
for at least one year
Owner or stockholder's equity
sole proprietorship or partnership: the difference between assets and liabilities
partnership: each partner's share of the ownership is reported separately m each owner's name
corporation: stockholders' equity.
Retained earnings are the portion of a business's profits not distributed to
THE INCOME STATEMENT
income statement: summary of a firm's revenues and expenses during a specified accounting period
Revenues are the dollar amounts earned by a firm from selling goods, providing services,
or performing business activities
Gross sales are the total dollar amount of all goods
and services sold during the accounting period
• sales allowances- price reductions offered to customers who accept slightly damaged or soiled merchandise
• sales discounts-price reductions offered to customers who pay their bills promptly.
• sales returns-merchandise returned to the firm by its customers;
Net sales are the actual dollar amounts received by the firm for the goods and services it has sold after adjustment for returns, allowances, and discounts
Cost of goods sold = Beginning inventory+ Net purchases- Ending inventory
gross profit: a firm's net sales
less the cost of goods sold
operating expenses are all business costs other than the cost of goods sold
Selling expenses are costs related to the firm's marketing activities
General expenses are costs incurred
in managing a business
net income: occurs when
revenues exceed expenses
net loss occurs when expenses
OF CASH FLOWS
statement of cash flows a statement that Illustrates how the company's operating, investing, and financing activities affect cash during an accounting period
• Cash flows from operating activities: first section of a statement of cash flow, addresses the firm's primary revenue source providing goods and servicee
typical adjustment: adding the amount of depreciation
to a firm's net income
• Cash flows from investing activities: second section, includes purchase and sale of land, equipment, and other assets and investments.
• Cash flows from financing activities: third and final section, reports changes in debt obligation and owners' equity accounts. (loans and repayments, the sale and repurchase of the company's own stock, and cash dividends)
Comparing Financial Data (follow GAAPs): compare their financial results with their own historical financial results,
with those of competing firms, and with industry averages
IDENTIFYING FINANCIAL NEEDS:
EVALUATION AND PLANNING
Using Ratio Analysis to Identify Current Strengths and Weaknesses (financial ratio analysis)
compare values of key accounts listed on their firm's financial statements- mainly its balance sheet and income statement
Liquidity ratios: In finance, a liquid asset is one that can be quickly converted into cash with little risk of loss
Liquidity ratios measure the ability of an organization to convert assets into the cash it needs to pay off liabilities that come due in the next year
most common: current ratio, which is computed
by dividing a firm's current assets by its current liabilities.
Asset management ratios (also sometimes called activity ratios) measure how effectively an organization uses its assets to generate net income.
inventory turnover ratio: computed by dividing the firm's cost of goods sold by average inventory levels, measures how many times a firm's inventory is sold and replaced each year
average collection period: computed by dividing accounts receivable by average daily credit sales
Financial leverage is the use of debt to meet a firm's financing needs; a highly leveraged firm is one that relies heavily on debt
Leverage ratios measure the extent to which a firm uses financial leverage.
debt-to-asset ratio: computed by dividing a firm's total liabilities by its total assets
profitability ratios provide measures
of how successful they are at achieving this goal
Return-on-equity (ROE): computed by dividing net income (profit) by owners' equity, measures the income earned per dollar invested by the stockholders
earnings per share (EPS): indicates how much net income a firm earned per share of common stock outstanding. It is calculated by dividing net income minus preferred dividends by the average number of shares of common stock outstanding.