The Role OfThe Role OfAccounting In BusinessAccounting In Business

Chapter ObjectivesChapter Objectives1. Define accounting and identify uses of its

information2. Understand the three basic financial

statements3. Understand cash-basis vs. accrual4. Evaluate a company’s performance5. Discuss career opportunities in accounting

and its future

StakeholdersStakeholders•“…parties who are

interested in the activities of the business because they’re affect

by them…

AccountingAccounting• “…measuring and summarizing

business activities, interpreting financial statements, and

communicating the results to management and other decision

makers.”

Fields of Fields of AccountingAccounting

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

Management AccountingManagement Accounting

• “…provides… reports… tailored to the needs

of individual managers… (in a) relevant, accurate,

timely… format… (to aid) in making decisions.”

Financial Financial Accounting Accounting

Statements•Income Statement

•Balance Sheet

•Statement of Cash Flows

Generally Accepted Accounting Principles

Users OfUsers OfAccounting InformationAccounting Information

Owners &Owners &ManagersManagers

Investors & Investors & CreditorsCreditors

Government Government AgenciesAgencies

Other UsersOther Users

The FunctionsThe Functionsof Financial Statementsof Financial Statements

Income Statement – Shows sales/expenses and if made a profit

Balance Sheet – Indicates assets/liabilities and amount invested in company

Statement of Cash Flows – Shows how much cash in and out of firm

Income StatementIncome StatementRevenues and Expenses

Cost of Goods Sold

Operating Expenses

Gross Profit

Net Income

Stress-BusterStress-BusterIncome StatementIncome Statement

ProposedProposedIncome Statement #1Income Statement #1

ProposedProposedIncome Statement #2Income Statement #2

Breakeven AnalysisBreakeven Analysis

$ Fixed Costs$ Variable Costs$ Contribution Margin Per Unit$ Breakeven Point In Units

• “…total sales revenue must exactly equal all your

expenses…”

ProposedProposedIncome Statement #3Income Statement #3

Balance SheetBalance Sheet

Assets – Business resources Liabilities – Debts owed to outside entitiesOwner’s Equity – Amount invested

• “…tells what you have (and where it came from) at a specific

point in time…”

Accounting EquationAccounting Equation

• Assets = Liabilities + Owner’s Equity

Stress-BusterStress-BusterBalance SheetBalance Sheet

Stress-BusterStress-BusterBalance Sheet #2Balance Sheet #2

Accrual AccountingAccrual Accounting

Account ReceivableAccount PayableInventory

• “…accountant records a transaction when it occurs…”

Classified Balance SheetClassified Balance Sheet

Assets Current- Convert to cash within a year Long-Term- Intend to hold for more than

a yearLiabilities

Current- Pay off within a yearLong-Term- Not due for more than a year

College ShopCollege ShopBalance SheetBalance Sheet

College ShopCollege ShopIncome StatementIncome Statement

End-of-YearEnd-of-YearBalance SheetBalance Sheet

Statement Of Cash FlowsStatement Of Cash Flows

• “…tells… where cash came from and where it went.”

ActivitiesActivities::

•OperatingOperating

•InvestingInvesting

•FinancingFinancing

Cash Flow Cash Flow StatementStatement

ComparativeComparativeIncome StatementIncome Statement

Income Statement WithIncome Statement WithVertical Percentage Vertical Percentage

AnalysisAnalysis

Ratio AnalysisRatio Analysis%Profit Margin

%Management Efficiency

%Management Effectiveness

%Financial Condition

Gross Profit MarginGross Profit Margin

• Gross Profit• Margin •= • Gross Profit

• Sales

Net Profit MarginNet Profit Margin

• Net Profit• Margin •= • Net Profit

• Sales

Comparative Balance Comparative Balance SheetSheet

Inventory Inventory TurnoverTurnover

• Inventory• Turnover •= • Sales

• Inventory

Return On AssetsReturn On Assets

• Return On• Assets •= • Net Profit

• Total Assets

Current RatioCurrent Ratio• Current• Ratio

•= • Current Assets• Current Liabilities

Debt-To-EquityDebt-To-Equity

• Total Debt• to Equity •=

• Total Liabilities• Total Equity

Interest Interest CoverageCoverage

InterestCoverage =

Operating IncomeInterest Expense

Basic Things to Basic Things to SucceedSucceed

Good profit on each item Move inventory Good return on investment Watch cash

Challenges ToChallenges ToAccounting ProfessionAccounting Profession

Arthur Andersen

Enron

Sarbanes-Oxley Act

Public Accounting Oversight Board

Careers In Careers In AccountingAccounting

“People Profession”Skills

• Analytical• Interpersonal• Communication

Job Prospects• Certified Public Accountants- Audits• Private Accountants- Controller• Certified Management Accountants