Presentation on theme: "Using Accounting Information"— Presentation transcript:
1 Using Accounting Information Chapter 15Using Accounting Information
2 Learning ObjectivesExplain why accurate accounting information and audited financial statements are important.Identify the people who use accounting information and possible careers in the accounting industry.Discuss the accounting process.Read and interpret a balance sheet.Read and interpret an income statement.Describe business activities that affect a firm’s cash flow.Summarize how managers evaluate the financial health of a business.
3 Accounting…the process of systematically collecting, analyzing, and reporting financial information.
4 Accounting Provides Answers How much profit did a business earn last year?How much tax does a business owe the Internal Revenue Service?How much cash does a business have on hand?
5 Accounting As an Information System Source: Needles, Powers, Crosson, Principles of Accounting (Boston: Houghton Mifflin, 2005).
6 Recent Accounting Problems Pressure to “cook” the booksGreed: compensation tied to stock valueInaccurate/misleading reportingIncreased SEC and IRS scrutiny
7 Audited Financial Statements Audit: Examination of a company’s financial statements and accounting practices that produced themGenerally Accepted Accounting Principles (GAAPs): Accepted set of guidelines and practices for companies reporting financial information and for the accounting profession
8 Organizations Influencing Accounting Profession Financial Accounting Standards Board (FASB)American Institute of Certified Public Accountants (AICPA)International Accounting Standards Board (IASB)
9 Sarbanes-Oxley Act (2002)SEC established oversight boardCEO/CFO required to certify reportsAccounting firms cannot provide non-auditing/consulting servicesAuditors keep documents/work papers for 5 yearsPrison sentences up to 20 years for document destructionChange auditing firm every 5 yearsProtection of whistle-blowers
10 Table 15.1: Users of Accounting Information Managers + outside individuals + other organizations
11 Types of AccountingManagerial: provides information to make decisions about financing, investing, and operationsFinancial: generates statements/reportsCost: determines cost of productionGovernment: ensures tax revenues collectedNot-for-Profit: accounts for donations and expendituresTax: plans tax strategy and prepares returns
12 To Be Successful in Accounting Be responsible, honest, ethicalHave strong background in financial managementKnow computer/software to process dataBe able to communicate about accounting information
13 Income for Accountants and Auditors SpotlightIncome for Accountants and AuditorsSource: The Bureau of Labor Statistics web site at May 18, 2009.
14 Accountant Classifications Private: employed by specific organizationPublic: works on fee basis for clients and may be self-employedCertified Public Accountant (CPA): individual has met state requirements for accounting education and experience and has passed AICPA examCertified Management Accountant (CMA): certified by Institute for Management Accountants
15 Requirements for Becoming a CPA Education = 150 undergraduate and/or graduate semester hoursMost areasAt least a bachelor’s degreeTwo+ years of public accounting (some areas accept non-public accounting)Certificate and license: pass exam and fulfill experienceAge = 18+Source: SmartPros, “Basic Information on the CPA Exam”, 2000,
16 Assets = Liabilities + Owners’ Equity Accounting Equation Assets = Resources Business OwnsLiabilities = Firm’s DebtsOwners’ Equity = Total Assets - Total Liabilities
17 Double-Entry Bookkeeping …a system in which each financial transaction is recorded as two separate accounting entries to maintain the balance shown in the accounting equation.
18 Analyze Record Post Prepare Close Accounting CycleAnalyzeRecordPostPrepareClose
19 Balance Sheet…a summary of the dollar amounts of a firm’s assets, liabilities, and owners’ equity accounts at the end of a specific accounting period.
20 Figure 15.1: Personal Balance Sheet Individuals determine their net worth, or owner’s equity, by subtracting the value of their debts from the value of their assets.
21 Balance Sheet Assets Listed Most LiquidLeast Liquid
22 Figure 15.2: Business Balance Sheet Summarizes firm’s accounts at the end of an accounting period.Note that assets ($340,000) equal liabilities plus owners’ equity ($340,000).
23 Income Statement…a summary of a firm’s revenues and expenses during a specified accounting period.
24 Figure 15.3: Personal Income Statement By subtracting expenses from income, anyone can construct a personal income statement and determine if they have a surplus or deficit at the end of each month.
25 Income Statement Expense Accounts Cost of Goods Sold =Beginning InventoryNet PurchasesEnding Inventory+-
26 Figure 15.4: Business Income Statement Summarizes firm’s revenues and expenses during a specified accounting period.For Northeast Art, net income after taxes is $30,175.
27 Statement of Cash Flows A statement that illustrates how the operating, investing, and financing activities of a company affect cash during an accounting period.
28 Figure 15.5: Statement of Cash Flows For Northeast Art, the amount of cash at the end of the year is $59,000—the same amount reported for the cash account on the firm’s balance sheet.
29 Cash Flows ActivitiesOperating : cash flow from primary revenue sourceInvesting: cash flow from investments such as purchase/sale of land, equipment, etc.Financing: cash flow from financing such as changes in debt obligation and owners’ equityAdded to beginning cash balance to get ending cash balance
30 Using Annual Reports to Compare Data Determine profitabilityRead the lettersCompare current statements with prior period statementsExamine footnotesLearn to calculate financial ratiosCompare with other firms’
31 Comparison of Financial Statements Since the beginning of the company TimeframeMain AccountsIncomeUp to 1 yearExpenseProfitBalance SheetSince the beginning of the companyAssetsLiabilitiesEquityCash FlowOperatingInvestmentFinancing
32 Financial Ratio…a number that shows the relationship between two elements of a firm’s financial statements.
33 Ratio Classification Profitability: effectiveness in use of resources Short-Term: ability to pay current liabilitiesActivity: how many times per year accounts receivable collected or inventory soldDebt to Owners’ Equity: degree operations financed through borrowing
34 Return on Owners’ Equity Profitability Ratiosnet income after taxnet sales$30,175$451,000Return on Sales===6.7%Return on Owners’ Equitynet income after taxowners’ equity$30,175$230,000===13.0%net income after taxcommon stockshares outstandingEarnings per Share$30,175$25,000===$1.21
36 Activity Ratios A/R Turnover = = = Inventory Turnover = = = net salesaccounts receivableA/R Turnover=$451,000$38,000==11.9 times per yearInventory Turnovercost of goods soldaverage inventory=$334,000$40,500==8.2 times per year
37 Debt-to-Owners’ Equity Ratio total liabilitiesowners’ equity=$110,000$230,000==48 percent
39 Chapter QuizThe __________ is designed to improve accounting standards.Ethics in Accounting ActGraham-Rudman Reform ActSarbanes-Oxley ActSecurities and Exchange Accounting ActAccounting Standards Establishment Act
40 Chapter QuizAn accountant who is employed by a specific business or organization is referred to as a(n)public accountant.private accountant.proprietary accountant.AICPA accountant.asset accountant.
41 Chapter Quiz The first step in the accounting cycle is to analyze source documents.record individual transactions.post individual transactions.construct a beginning financial statement.prepare a list of employees.
42 Chapter QuizAssets, liabilities, and owners’ equity would be listed on a firm’sbalance sheet.income statement.statement of earnings.statement of retained earnings.statement of capital.
43 Chapter Quiz Current assets minus current liabilities equals return on owners’ equity.current ratio.acid-test ratio.working capital.current cash statement.