1. Accounting Role of Accounting in Business
Exploring Business
Chapter 12
Thursday 9/8/11

2. Stakeholders Purpose of Accounting:
To help Stakeholders, i.e., parties who are interested in the activities of the business because they’re affect by them

3. Accounting Activities
Measuring and summarizing business activities
Analyzing and Interpreting financial statements
Communicating the results to management and other decision makers.

4. Two Major Fields of Accounting
Management Accounting – provides information to decision makers inside the organization to help operate the business
Financial Accounting – furnishes information to individuals and groups inside/outside the organization to assess the firm’s financial performance

5. Careers In Accounting “People Profession” Skills Job Prospects
Analytical
Interpersonal
Communication
Job Prospects
Certified Public Accountants- Audits
Private Accountants- Controller
Certified Management Accountants

6. Generally Accepted Accounting Principles [GAAP]
Financial Accounting
Statements
Income Statement
Balance Sheet
Statement of Cash Flows
Generally Accepted Accounting Principles [GAAP]

7. Users Of Accounting Information
Owners &
Managers
Government Agencies
Other Users
Investors & Creditors

8. The Users of Accounting Information

9. The Functions of Financial Statements
Income Statement [Profit & Loss or P&L Statement]– Shows sales, cost of sales, expenses and if it resulted in a profit or loss
Balance Sheet – Indicates assets/liabilities and amount invested in company
Statement of Cash Flows – Shows how much cash in and out of firm

10. Income Statement Elements
Net Revenues: Gross sales less returns
Cost of Goods Sold [COGS]: Variable cost component of products or services
Gross Profit: Net Revenues - COGS
Operating Expenses: Fixed cost component of running a business including staff salaries, general selling expenses, operating costs, R&D, engineering, rent, interest, depreciation
Net Profit or <Loss>: Gross profit - Operating Expenses

11. Equivalent Terms in Accounting
Term Equivalent Term

12. The Income Statement
A financial report that shows an organization’s profitability over a period of time:
month, quarter, or year
It can represent a single entity or
be consolidated
Revenue: Net Sales
Cost of Goods or Services Sold: Variable costs associated with Sales
Gross Income: Gross Profit
Expenses: Fixed costs
Net Income <Loss>:

13. Stress-Buster Income Statement
Month Ending 8/31/11 % of Sales Gross Revenue (100 units x $10/unit) = $1,000 = 100% less Cost of Goods Sold ($6/unit) = <$600> = 60% Gross Profit = $400 = 40% less Operating Expenses [OH] Staff Salaries = $240 Advertising, Rent = $60 < $300> = 30% Net Income [Profit] Before Taxes = $100 = 10% less Taxes [25%] = $25 Net Income after Taxes = $75

14. Tool for Analysis Microsoft Excel
Goal Seek – A “what if” analysis tool that enables you to find the input value needed to achieve a goal or objective.
For example, “what if” I added $20 to my expenses. How much more in Sales would I need to do to maintain the same bottom line % of Sales?

15. Proposed Income Statement #1 What if I added a new staff member adding $20 in expenses. How much more sales do I need to keep the bottom line % the same?
Stress- Buster Corp.
Manual Calculation: $320 / 30% = $1067.

16. Proposed Income Statement #2: What if I found a cheaper source of raw materials that drove my COGS down to $5/unit
Stress-Buster Corp.
Month Ending 8/31/11 % of Sales Gross Revenue [or Sales] (100 units x $10/unit) = $1,000 = 100% less COGS ($5/unit) = <$500> = 50% Gross Profit = $500 = 50% less Operating Expenses [OH] Staff Salaries = $240 Advertising, Rent = $60 < $300> = 30% Net Income [Profit] Before Taxes = $200 = 20%

17. Proposed Income Statement #3: What if demand for my product drove sales to increase to 150 units per month?
Stress-Buster Corp
Assumption: You had extra plant manufacturing capacity to meet demand % of Sales Gross Revenue [or Sales] (150 units x $10/unit) = $1,500 = 100% less COGS ($6/unit) = <$900> = 60% Gross Profit = $600 = 40% less Operating Expenses [OH] Staff Salaries = $240 Advertising, Rent = $60 < $300> = 20% Net Income [Profit] Before Taxes = $300 = 20%

18. Breakeven Analysis Calculation: Total sales revenue must exactly
equal all your expenses
Fixed Costs
Variable Costs
Contribution Margin per unit
Breakeven Point In Units

19. Breakeven Analysis Sell Price [SP]/Unit = $10
Stress-Buster Corp
Sell Price [SP]/Unit = $10
Variable Cost [VC]/Unit = $6
Contribution Margin [CM]/Unit = SP/Unit – VC/Unit = $4
Fixed Costs [FC]= $300
Breakeven in Units =
FC / CM/Unit
= $300 / $4 per Unit = 75 Units

20. Breakeven Analysis
Stress-Buster Corp
Revenue (75 units x $10/unit) = $750 less COGS ($6/unit) = <$450> Gross Profit = $300 less Operating Expenses [OH] Staff Salaries = $240 Advertising, Rent = $60 < $300> Net Income [Profit] Before Taxes = $0

21. Balance Sheet Balance Sheet - tells what you have (and where
it came from) at a specific point in time
A “snapshot” of an organization’s financial
position at a given moment. It presents an
accumulation of all the company’s transactions
since it began
Assets: Business resources
Liabilities: Debts owed to outside entities
Owner’s Equity: Amount invested

22. Classified Balance Sheet
Assets
Current - Convert to cash within a year
Long-Term - Intend to hold for more than a year
Liabilities
Current - Pay off within a year
Long-Term - Not due for more than a year
Stockholder Equity

23. Balance Sheet Equation: Total Assets = Total Liabilities + Stockholder Equity
ABC’s Year-End Balance Sheet as of 12/31/09
Assets
$(000)
Liabilities
$(000)
Cash + Liquid Securities
Account Receivables
 Inventory
Total Current Assets
2,000
Account Payable
1,000
500
100
Wages Payable
Taxes Payable
Interest Payable
1,000
 Total Current Liabilities
2,000
4,000
Notes Receivable ,000
Property & Equipment ,000
Intangible Assets [GW & TM] 1,000
 Total Long Term Assets ,000
 Long Term Debt ,000
 Total Shareholder Equity 8,000
Total Liabilities &
Stockholder Equity ,000
 Total Assets ,000

24. Balance Sheet Equation: Total Assets = Total Liabilities + Stockholder Equity
ABC’s Year-End Balance Sheet as of 12/31/10
Assets
Liabilities
Cash + Liquid Securities
Account Receivables
 Inventory
Total Current Assets
1,500
Account Payable
800
Wages Payable
Taxes Payable
Interest Payable
450 50
700
 Total Current Liabilities
1,550
3,000
Notes Receivable ,000
Property & Equipment ,000
Intangible Assets [GW & TM 1,000
 Total Long Term Assets ,000
 Long Term Debt ,000
 Total Shareholder Equity 6,450
Total Liabilities &
Stockholder Equity ,000
 Total Assets ,000

25. The Statement of Cash Flow
Explains how the company’s cash changed from the beginning of the accounting period to the end. Where did cash come from? Where did it go?
Three categories:
Cash from (used for) operating activities
Cash from (used for) investing activities
Cash from (used for) financing activities

26. Financial Statement Analysis
Profit Margin Ratios – how much of each sales $ is left after certain costs are covered
Management Efficiency – how efficiently your assets are being managed [Asset Utilization]
Management Effectiveness – how effective management is at running the business. It also measures overall company performance
Financial Condition – helps assss the company financial strength

27. Financial Statement Analysis
1) Need Information from the Income Statement for the same period 2) Need Information from the Balance Sheet for the same period

28. Ratio Analysis Vertical Percentage Analysis
Analyze relationships between items on your income statement; between geographic divisions; etc.
Compare your financial results with those of other companies in your industry or sector

29. Year-To-Year Comparative Income Statement

30. Financial Statement Analysis
1) Profitability Ratios
Gross Profit Margin
Net Profit Margin
Return on Equity
Management Efficiency [Asset Utilization]
1) Accounts Receivable Ratio
Inventory Turnover Ratio
3) Management Effectiveness/Financial Condition
Debt to Total Assets
Return on Assets Ratio
Debt to Equity
Current Ratio [Liquidity measure]
Acid Test Ratio [Liquidity measure]
4) Per share Data Ratios
Earnings per Share
Dividends per Share

31. Comparative Profitability Ratios
How does this compare with your industry?

32. Profitability Differences
Extreme Examples
Grocery Stores [like Safeway] – Operating Margins in the 1% - 3% range.
How do they operate with such low margins?
What other strategies have they employed over the last few decades to increase profits?
Semiconductor Manufacturers [like Intel] - Operating Margins in the 30% - 40% range.
How long doies it take Intel to pay off a new $4.5 billion factory [FAB]?

33. Accounts Receivable Ratio Measures Management Efficiency
A/R is turning over at a rate of 12 times per year and year to year is about the same.
Another way to look at it is year–end A/R = 1 month of sales.

34. Inventory Turnover Ratio Measures Management Efficiency
Inventory is “turning over” at a rate of 8 times per year. You make money when you sell inventory, so the higher the number the better.

35. Return on Assets Ratio Measures Management Effectiveness

36. Liquidity Ratios Measure Management Effectiveness & Financial Condition
ABC’s Year-End Balance Sheet as of 12/31/09
Net Working Capital [BS] = Current Assets – Current Liabilities
2,000 =
This is a measure of ABC’s “Liquidity position”, i.e, it’s ability to pay its
bills coming due
Current = Total Current Assets [BS] = 4000 Ratio Total Current Liabilities [BS] 2000 = 2:1
ABC has 2 times the current assets needed to pay
its current liabilities
Acid Test = Total Current Assets – Inventory [BS] = 4000 – = 1.5:1
Ratio Total Current Liabilities [BS]
ABC has 1.5 times the assets “quickly convertible” to cash it needs
to pay off its bills. If the ratio is less than 1, the company may have
Problems meeting its current bills.

37. Debt Utilization Ratios
Debt to total assets =
Total debt
Total assets
Times interest earned
Income before interest & taxes
Interest expense

38. Number of shares outstanding
Per Share Data
Earnings per share =
Net income
Number of shares outstanding
Dividends per share
Total dividends paid