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Financial Accounting © 2014 Pearson Education, Inc.15-1 chapter 15 Better Business 3rd Edition Solomon (Contributing Editor) · Poatsy · Martin.

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Presentation on theme: "Financial Accounting © 2014 Pearson Education, Inc.15-1 chapter 15 Better Business 3rd Edition Solomon (Contributing Editor) · Poatsy · Martin."— Presentation transcript:

1 Financial Accounting © 2014 Pearson Education, Inc.15-1 chapter 15 Better Business 3rd Edition Solomon (Contributing Editor) · Poatsy · Martin

2 Accounting: What is it and who needs it? © 2014 Pearson Education, Inc. 15-2 What does accounting do? “Language” of business Record transactions Track income & expenses Prepare financial statements Helps answer and assist with important business decisions ManagersStockholders EmployeesCreditors What other groups would be interested in accounting information? Accounting is a system for recognizing, organizing, analyzing, and reporting information about the financial transactions that affect an organization?

3 Accounting: Who Does It? © 2014 Pearson Education, Inc. 15-3 Managerial accounting is responsible for tracking sales and the costs of producing the sales (production, marketing, and distribution). Geared towards INTERNAL users (hence name) Financial accounting produces financial documents to aid decision makers outside an organization in making decisions regarding investments and credibility. Geared towards OUTSIDE users (although internal users also rely heavily on financial accounting information) What Accountants Do: Public and Private Accountants Forensic Accountants Corporate Accountants Internal/External Auditors Government Accountants Accountants require expertise Certified Public Accountant (CPA) Certification 150-semester hours of college Rigorous Exam Direct Work Experience in accounting Certified Management Accountant (CMA) Certified Fraud Examiners

4 Accounting Standards & Processes © 2014 Pearson Education, Inc. 15-4 Generally Accepted Accounting Principles (GAAP) – accounting standards that are used in the preparation of financial statements Financial Accounting Standards Board (FASB) – private self-regulated board that establishes and enforces GAAP Through GAAP, the FASB aims to ensure that financial statements are: Relevant Reliable Consistent Comparable

5 The Accounting Process © 2014 Pearson Education, Inc.5 GAAP establishes two main financial accounting rules:  The Accounting Equation Assets = Liabilities + Owner’s Equity Assets – The resources that a business own (ex. Cash, Accounts Receivable, Inventory, Equipment, and Real Estate/Land) Liabilities – The firm’s debts, what it owes others (ex. Accounts Payable and Notes Payable) Owner’s Equity – The difference between assets and liabilities (what would be left for the owners if the firm’s assets were sold and the money used to pay off its liabilities (ex. Retained Earnings, Stock)  Double-Entry Bookkeeping System Each financial transaction is recorded as two separate accounting entries to maintain the balance of the accounting equation

6 The Accounting Process (cont.) © 2014 Pearson Education, Inc.15-6

7 The Accounting Equation © 2014 Pearson Education, Inc.7 Owner’s Equity (what’s left over to owner’s once liabilities are taken from assets), shown as: Assets = Liabilities + Owner’s Equity Own = Owed + Owner’s Claims Cash, Accounts Receivable, Inventory, Equipment, Real Estate Accounts Payable, Notes Payable Stock, Retained Earnings (cumulation of company’s profits and losses) $826,000 = $613,000 + $213,000 Assets – Liabilities = Owner’s Equity Accounting Equation:

8 Examples of the Accounting Equation © 2014 Pearson Education, Inc.15-8

9 Financial Statements: Read All About Us © 2014 Pearson Education, Inc.9 Financial accounting includes three basic financial statements:  Balance Sheet  Income Statement  Statement of Cash Flows Corporations with publicly held stock must publish annual reports with all three statements.

10 The Balance Sheet © 2014 Pearson Education, Inc. 10 Assets = Liabilities + Owner’s Equity Owner’s Equity – the claims owners have against their firm’s assets Balance Sheet – summarizes a firm’s financial position at a specific point in time Assets – things of value that the firm owns Liabilities – indicates what the firm owes to non-owners

11 Balance Sheet (cont.) AssetsLiabilities Current assets Current liabilities + Fixed assets + Long-term liabilities = Total Liabilities Owners’ Equity = Total Assets= Total Liabilities + Owners’ Equity © 2014 Pearson Education, Inc. 15-11 Assets Listed in order of liquidity (ease with which an asset can be converted into cash) Current assets—can quickly be converted into cash or that will be used in one year or less  Cash, accounts receivable, notes receivable, and merchandise inventory Fixed assets—will be held or used for a period longer than one year  Real estate (Land and buildings), and equipment Depreciation—the process of apportioning the cost of a fixed asset over the period during which it will be used Liabilities Current liabilities—debts to be repaid in one year or less  Accounts payable—short-term obligations that arise as a result of making credit purchases  Notes payable—obligations that have been secured with promissory notes Long-term liabilities—debts that need not be repaid for at least one year Owners’ or stockholders’ equity Retained earnings—profits not distributed to stockholders

12 Balance Sheet Example © 2014 Pearson Education, Inc. 15-12

13 Analyzing a Balance Sheet with Some Financial Ratios Working Capital = Current Assets – Current Liabilities Current Ratio = Current Assets ÷ Current Liabilities Debt-to-Equity Ratio = Total Liabilities ÷ Owners’ Equity © 2014 Pearson Education, Inc. 15-13

14 The Income Statement (aka P&L Statement) © 2014 Pearson Education, Inc. 14 Revenue – Expenses = Net Income (Profit) Revenues > Expenses = Net Income (Profit) Expenses > Revenue = Loss Net Income (Profit) – the profit or loss the firm earns Income Statement – summarizes a firm’s operations over a given period of time in terms of profit and loss. Also called the Profit and Loss Statement Revenue– The $ amount a firm earns from selling its products Expenses – the cash the firm spends or other assets it uses to generate revenue

15 The Income Statement Outline Revenue (Sales Price * Quantity Sold) –Cost of Goods Sold (Beginning Inventory + Purchases - Ending Inventory) = Gross Profit –Operating Expenses = Net Income Before Taxes –Tax Expense = Net Income After Taxes © 2014 Pearson Education, Inc. 15-15 What does the Income Statement Tell Us? Revenue is the amount of money generated by a business by either selling goods or performing services. It is calculated as Sales Price * Quantity Sold. Cost of Goods Sold are the variable expenses a company incurs to manufacture and sell a product, including the price of raw materials used in creating the good along with the labor costs used to produce and sell the items. To get COGS, you will take the Beginning Inventory balance, add in Purchases to inventory for that period, and Subtract the Ending Inventory balance (when you close out period). Gross profit tells you how much money a company makes just from its products and how efficiently management controls costs in the production process. Operating expenses include sales, general, and administrative expenses. These costs may consist of items such as rent, salaries, wages, utilities, depreciation, and insurance. Net Income Before Taxes tells us how much income (profit) is available to owners prior to paying taxes. Remember, in order to pay taxes, a business must show a profit. Otherwise they don’t owe any taxes. Taxes paid are subtracted to determine net income (or net income after taxes). Net Income After Taxes is the “bottom line” and is usually stated on the very last line of an income statement.

16 Income Statement Example © 2014 Pearson Education, Inc.15-16

17 Analyzing Income Statements with Financial Ratios © 2014 Pearson Education, Inc. 15-17 Gross Profit Margin = (Revenue – COGS) / Revenue Operating profit margin = (Gross Profit – Operating Expenses) / Revenue Earnings Per Share = Net Income / Outstanding Shares

18 © 2014 Pearson Education, Inc. 15-18

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