FHF Ferrell Hirt Ferrell M: Business 2 nd Edition

FHF 14 Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Accounting and Financial Statements

FHF The recording, measurement, and interpretation of financial information, often used in making business decisions After the financial crisis and recession, international accounting boards reexamined fair value accounting rules A difficult and contentious science Accounting 14-3

FHF GAAP Generally accepted accounting principles. SEC Securities & Exchange Commission provides oversight Accounting Terms 14-4

FHF Public Accountant An independent professional who provides accounting services to the public (individuals or firms) for a fee CPA (Certified Public Accountant) Private Accountant An accountant employed by a corporation, government agency, or other organization Can be CPAs or CMAs (Certified Management Accountant) Types of Accounting 14-5

FHF Analyzing financial data in search of fraudulent entries or financial misconduct Can help uncover money laundering, terrorist activity Marital and family law A growth area for public accountants Forensic Accounting 14-6

FHF Bookkeeping Often (mistakenly) used interchangeably with accounting The routine day-to-day recording of business transactions Accounting or Bookkeeping? 14-7

FHF Much more than number crunching Requires an in-depth understanding of the industries in which your clients are involved Transparency and open communication are essential ✴ Ernst & Young is a global accounting and financial advisory firm Ernst & Young ✴ 144,000 employees ✴ Concern for ethics, social responsibility and the environment What Does a Job in Accounting Involve? 14-8

FHF Internal Managerial accounting: internal use of accounting statements by managers in planning and directing activities Cash flow is management’s greatest concern Accounting helps management prepare a budget External The annual report for owners and potential investors Obtaining credit Filing taxes As a gauge of performance Uses of Accounting 14-9

Uses of Accounting Information FHF 14-10

FHF The Accounting Equation The relationship between assets, liabilities, and owners’ equity ASSETS=LIABILITIES+OWNER’S EQUITY Things of value that a firm owns A firm’s debts and obligations The difference between a firm’s assets and its liabilities

FHF Double-Entry Bookkeeping $325 = $-700+$1,025 A system of recording and classifying business transactions in separate accounts in order to maintain the balance of accounting equation ASSETS=LIABILITIES+OWNER’S EQUITY

The Accounting Cycle FHF Examine source documents Record transactions Post transactions Prepare financial statements 14-13

FHF The end results of the accounting process are a series of financial statements Income statement Balance sheet Statement of cash flows Financial statements are provided to: Stockholders and potential investors Creditors Government agencies Internal Revenue Service The Accounting Cycle 14-14

FHF A financial report that shows an organization’s profitability over a period of time Month Quarter Year The Income Statement 14-15

FHF Revenue Cost of goods sold Gross income Expenses Selling, general & administrative R&D, engineering Interest Depreciation Net income Key Terms 14-16

FHF John’s Pizza Income Statement December 31,

FHF A “snapshot” of an organization’s financial position at a given moment Presents an accumulation of all the company’s transactions since it began The Balance Sheet 14-18

FHF Assets Current assets Accounts receivable Liabilities Accounts payable Accrued expenses Owner’s equity Key Balance Sheet Terms 14-19

FHF John’s Pizza Balance Sheet December 31,

FHF Explains how the company’s cash changed from the beginning of the accounting period to the end Three categories: ✴ Cash from (used for) operating activities ✴ Cash from (used for) investing activities ✴ Cash from (used for) financing activities Statement of Cash Flow 14-21

Ratio Analysis FHF Profitability ratios Asset utilization ratios Liquidity ratios Debt utilization ratios Per share data 14-22

FHF Profitability Ratios Profit Margin=Net Income/ Sales Return on Assets=Net Income/ Assets Return on Equity=Net Income/ Equity

FHF Asset Utilization Ratios Current Turnover=Sales/ Receivables Inventory Turnover=Sales/ Inventory Total Asset Turnover=Sales/ Total Assets 14-24

FHF Liquidity Ratios Current Ratio=Current Assets/ Current Liabilities Quick Ratio=Current Assets - Inventory/ Current Liabilities 14-25

FHF Debt Utilization Ratios Debt to Total Assets=Total Debt/ Total Assets Times Interest Earned =Income Before Interest & Taxes/ Interest Expense 14-26

FHF Per Share Data Earnings per Share= Net Income/ Number of Shares Outstanding Dividends per share= Total Dividends Paid/ Number Shares Outstanding

FHF Industry Analysis 14-28

FHF 14-29