Using Financial Information and Accounting Chapter 19

Chapter 19 Learning Goals 1.W 1.Why are financial reports and accounting information important, and who uses them? 2.W 2.What are the differences between public and private accountants? 3.W 3.What are the six steps in the accounting cycle? 4.I 4.In what terms does the balance sheet describe the financial condition of an organization?

Chapter 19 Learning Goals (cont’d.) 5.H 5.How does the income statement report a firm’s profitability? 6.W 6.Why is the statement of cash flows an important source of information? 7.H 7.How can ratio analysis be used to identify a firm’s financial strengths and weaknesses? 8.W 8.What major trends are affecting the accounting industry today?

Learning Goal 1 WWhy are financial reports and accounting information important, and who uses them? –Financial reports give information about a company’s past, present and future performance to: Managers – Can use reports to make decisions about firm’s operations Employees Investors and customers Suppliers, creditors, and government agencies

Accounting: The process of collecting, recording, classifying, summarizing, reporting, and analyzing financial activities; results in reports that describe the financial condition of an organization

Learning Goal 2 WWhat are the differences between public and private accountants? –Public accountants Work for independent firms that provide accounting services to other organizations on a fee basis –Financial report preparation and auditing –Tax return preparation –Management consulting –Private accountants Employed to serve one particular organization –Prepare financial statements –Tax returns –Management reports

Public accountant: Independent accountant who serves organizations & individuals on a fee basis; offers a wide range of services including preparation of financial statements & tax returns, independent auditing, & management consulting

Private accountant: Accountant who is employed by one particular organization and works only for it

Salary Information for Accountants Salaries are averaged for manager-level positions: Public accountant$65,700 Management consultant$73,300 Credit analyst$52,100 Financial analyst$64,100 Cash management$58,700 Private accounting Cost accounting$58,600 Info. systems auditor$70,200 General accounting$55,200 Internal auditor$65,400 Tax accounting$67,600 Source: Source Services Corporation survey at JobStar,

Learning Goal 3 WWhat are the six steps in the accounting cycle? –Accounting cycle: –Accounting cycle: the process of generating financial statements 1.A 1.Analyzing business transactions 2.R 2.Recording transactions in journals 3.P 3.Posting transactions to ledgers 4.S 4.Summarizing ledger totals in a trial balance 5.P 5.Preparing financial statements and reports 6.A 6.Analyzing reports and making decisions

The Accounting Cycle 1. Analyze business transaction documents 2. Record business transactions in journal 3. Post entries to ledgers 4. Prepare trial balance 5. Prepare financial statements & management reports 6. Analyze reports

Learning Goal 4 IIn what terms does the balance sheet describe the financial condition of an organization? –Balance sheet represents: The financial condition of a firm at one moment in time, in terms of assets, liabilities, and owner’s equity –Assets Current, fixed and intangible –Liabilities Current and long-term –Owner’s equity Amount of owners’ investment into the firm after all liabilities have been paid

The Balance Sheet Summarizes a firm’s financial position at a specific point in time Assets 1. Assets (resources) current, fixed, intangible, depreciation Liabilities 2. Liabilities (obligations) current, long-term equity 3. Assets minus obligations (equity) retained earnings

Learning Goal 5 HHow does the income statement report a firm’s profitability? –Income statement: Summary of firm’s operations over some period –Main parts of income statement Revenues –Gross and net sales Cost of goods sold Operating expenses –Selling and general and administrative expenses Taxes Net profit or loss

The Income Statement Summarizes the firm’s revenues & expenses and shows total profit or loss over a period of time Revenues 1. Revenues gross sales, net sales Expenses 2. Expenses cost of goods sold, operating expenses Net profitloss 3. Net profit or loss

The Income Statement: Revenues Increased revenues don’t always lead to increased stock value: –US Office Products decreased –US Office Products had very high revenue growth in 1998, but it’s stock price decreased 88% Source: Fortune, Sept. 28, 1998, p. 232.

Learning Goal 6 WWhy is the statement of cash flows an important source of information? –Statement of cash flows Summarizes the firm’s sources and uses of cash during financial reporting period Shows net change in firm’s cash and marketable securities –Breaks firm’s cash flows into those from: Operating activities Investment activities Financing activities

The Statement of Cash Flows Summarizes the money flowing into and out of a firm for a period of time Sources of cash flow: –operating activities –investment activities –financing activities

Learning Goal 7 HHow can ratio analysis be used to identify a firm’s financial strengths and weaknesses? –Ratio analysis Using financial statements to gain insight into a firm’s –Operations –Profitability –Overall financial condition Comparing ratio’s can indicate trends and highlight financial strengths and weaknesses –Four main types of ratios Liquidity ratios Profitability ratios Activity ratios Debt ratios

Analyzing Financial Statements Ratio analysis: Ratio analysis: calculating & interpreting financial ratios taken from financial reports to assess a firm –liquidity ratios –profitability ratios –activity ratios inventory turnover ratio –debt ratios debt-to-equity ratio

Liquidity & Profitability Ratios Liquidity ratios –current ratio –acid-test (quick) ratio –net working capital Profitability ratios –net profit margin –return on equity –earnings per share

Learning Goal 8 WWhat major trends are affecting the accounting industry today? –Role of accountants has expanded Includes management consulting in areas such as: –Computer systems –Human resources –Electronic commerce –Major issue: How to treat key intangible assets FASB and SEC are raising concerns about quality of reported earnings

Trends in Accounting Accountants expand their role  more involvement in operations Valuing knowledge assets –R&D, brands, trademarks, employee talent Tightening the GAAP  reducing loopholes

Accountants’ Expanded Role The following areas of study are recommended for Certified Public Accountants: Accounting financial, managerial, auditing, taxation Behavioral sciences Business law Communications Economics Ethics Finance Globalization Information systems Legal & social environment Marketing Quantitative applications Total quality management Source: About.com, businessmajors.about.com/education/businessmajors