principle of accounting & finance. what is accounting? a comprehensive system for collecting,...

Principle of Accounting & Finance

What Is Accounting?A comprehensive system for collecting, analyzing and communicating financial information Users of accounting information:

Business managers Employees and unions Investors and creditors Tax authorities Government regulatory agencies

The Nature of Accounting The recording, measurement, and

interpretation of financial information, often used in making business decisions.

Did You Know? Corporate fraud costs are estimated at $600 billion annually.

Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

Is it Accounting or Bookkeeping? Bookkeepers are responsible for obtaining

and recording the information that accountants require to analyze a firm’s financial position

Accountants are not only trained to record financial information, but to understand, interpret, and even develop the sophisticated accounting systems necessary to classify and analyze complex financial information


The Accounting Cycle1. Examining source documents2. Recording transactions 3. Posting transactions4. Preparing financial statements


Types of Accountants 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

CPA or a CMA (Certified Management Accountant)


Accountants and Their ResponsibilitiesController:

Managers all of a firm’s accounting activities

Types of Accounting Financial Accounting Managerial

Accounting

Accountants and Their Responsibilities

Certified public accountants (CPAs) Auditing and GAAP (Generally

Accepted Accounting Principles) Tax services Management advisory services

Non-certified public accountantsPrivate accountants

The CPA Vision Project Identifying issues for the future

Global forces as drivers of change

Recommendations A new direction

Core services Core competencies

The Users of Accounting Information


Uses of Accounting Information Internal uses:

Managerial accounting

Cash flow Budget

External uses: Reporting financial

performance to outsiders

Filing income taxes Obtaining credit Reporting to

stockholders


Internal Accounting Information Management

Plan and set goals Organize Lead and motivate Control

Lenders & suppliers Evaluate credit

risks


External Accounting Information Stockholders and

Potential Investors Evaluate soundness

of investments

Government Agencies Confirm tax

liabilities Confirm payroll Deductions Approve new

issues of stocks and bonds


Key Tools of the Accounting Trade Accounting Equation

Assets = Liabilities + Owners’ EquityAssets = Liabilities + Owners’ Equity Assets – Liabilities = Owners’ EquityAssets – Liabilities = Owners’ Equity

Double-Entry AccountingDouble-Entry Accounting Every transaction affects two accountsEvery transaction affects two accounts

The Accounting Equation The relationship between assets,

liabilities, and owners’ equityAssets

Things of value that a firm owns

Liabilities

A firm’s debts and obligations

Owners’ Equity

The difference between a firm’s assets and itsliabilities

= +


Double-Entry Bookkeeping A system of recording and classifying

business transactions in separate accounts in order to maintain the balance of the accounting equation

Assets = Liabilities + Owners’ Equity

$325 = $325


The Accounting Process The accounting equation Double-entry bookkeeping


Equivalent Terms in Accounting


The Accounting Equation and Double-Entry Bookkeeping for Anna’s Flowers


Financial Statements 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


Financial StatementsBalance Sheets

Income Statements

Statements of Cash Flows

The Balance Sheet A “snapshot” of an organization’s

financial position at a given moment Presents an accumulation of all the

company’s transactions since it began


Key Balance Sheet Terms Assets

Current assets Accounts

receivable Liabilities

Accounts payable Accrued expenses

Owner’s equity


The Income Statement A financial report that shows an

organization’s profitability over a period of time: Month Quarter Year


Key Income Statement Terms Revenue

Cost of goods sold Gross income

Expenses Selling, general & administrative R&D, engineering Interest Depreciation

Net income


Anna’s Flowers Income Statement December 31, 2005

Revenues:Net Sales: $123,850Consulting: 73,850

Total Revenues $197,700Expenses:

Cost of Goods Sold $ 72,600

Selling Expenses: 37,700General & Admin. 18,400Other expenses 5,600

Total Expenses $134,300Net Income $ 63,400


The Statement of Cash Flow Explains how the company’s cash

changed from the beginning of the accounting period to the end

Three categories:1. Cash from (used for) operating activities2. Cash from (used for) investing activities 3. Cash from (used for) financing activities


Statements of Cash FlowsCash flows from:Cash flows from:

OperationsOperations

InvestingInvesting

FinancingFinancing

GAAP Generally Accepted Accounting

Principles (GAAP) Manufacturing firms, service

providers, and nonprofit organizations each use a different set of accounting principles or rules upon which the accounting profession has agreed


Reporting Standards and PracticesGenerally Accepted Accounting Practices (GAAP) Revenue Recognition Matching Full Disclosure

Solvency Solvency RatiosRatios

Profitability Profitability RatiosRatios

Activity Activity RatiosRatios

Analyzing Financial Statements

Analyzing Financial Statements with Ratio Analysis Profitability ratios Asset utilization

ratios Liquidity ratios Debt utilization

ratios Per share data


Current Current Assets Assets

Current Current LiabilitiesLiabilities

Short Term Solvency Ratios

Current Ratio:Current Ratio:

Current Current AssetsAssets –– Current Current LiabilitiesLiabilitiesWorking Capital:Working Capital:

Long-term Solvency RatiosDebt to Owners’ Equity Ratio:Debt to Owners’ Equity Ratio:

The ability to finance an investment The ability to finance an investment through borrowed fundsthrough borrowed funds

Leverage:Leverage:

DebtDebt

Owners’ EquityOwners’ Equity

Profitability and Activity Ratios

Return on Equity:Return on Equity:

Earnings Per Share:Earnings Per Share:

Net IncomeNet Income

Total Owners' EquityTotal Owners' Equity

Inventory Turnover Ratio:Inventory Turnover Ratio: Cost of Goods SoldCost of Goods Sold

Average InventoryAverage Inventory

Net IncomeNet Income

# of Shares Outstanding# of Shares Outstanding

Profitability RatiosProfit margin = Net income

Sales

Return on assets

= Net income

Assets

Return on equity

= Net income

EquityCopyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

Asset Utilization RatiosReceivables turnover

= Sales

ReceivablesInventory turnover

= Sales

InventoryTotal asset turnover

= Sales

Total assetsCopyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

Liquidity Ratios

Current ratio

= Current assets

Current liabilitiesQuick ratio = Current assets -

inventoryCurrent liabilities


Debt Utilization RatiosDebt to total assets = Total debt

Total assetsTimes interest earned

= Income before interest & taxes

Interest expense


Per Share DataEarnings per share

= Net income

Number of shares outstanding

Dividends per share

= Total dividends paid

Number of shares outstanding


International International Accounting Accounting StandardsStandards

International International TransactionsTransactions

Foreign Foreign Currency Currency ExchangeExchange

International Accounting

Leading Accounting Firms


Anna’s Flowers Balance Sheet December 31, 2005

Assets:Current Assets:

Cash: $17,850Accounts Receivable 10,200Merchandise Inventory 8,750

Total Assets: $36,800Property & Equipment

Equipment 11,050Office Building 73,850

Total Prop. & Equip. 84,900Total Assets: $121,700Liabilities & Owner’s EquityCurrent Liabilities

Acct’s Payable $12,600Total Current Liabilities 12,600

Long-term LiabilitiesMortgage Payable 23,600

Total Liabilities 36,200Owner’s Equity:

Anna Rodriguez, Capital 85,500Total Liabilities & Owner’s Equity $121,700


Anna’s Flowers Annual Budget for 2005

Sales Consulting TotalJanuary 6,500 5,000 11,500February 6,000 6,000 12,000March 5,800 6,200 12,000April 6,100 6,500 12,600May 7,000 6,800 13,800June 8,100 7,600 15,700July 8,600 7,800 16,400August 6,900 8,000 14,900September 6,700 8,700 15,400October 5,900 9,000 14,900November 5,000 8,500 13,500December 4,500 8,000 12,500Annual $123,850 $73,850 $197,700


Industry Analysis

Dua Thank You

principle of accounting & finance. what is accounting? a comprehensive system for collecting,...

Documents