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© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

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1Accounting Informationfor Business Decisions

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Communication News

Facts

Access

Commentary

Living in the Information Age

Data

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Timeliness

Independence

Freedom-of-

Expression

Living in the Information Age

Communication News

Facts

Access

Commentary

Data

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Identifies

Records

CommunicatesRelevant

Reliable

Comparable

Influence of Accounting

Accountingis a

system that

information

that is

to help users makebetter decisions.

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Ret e 100.00$

Materials and labor (60.08)

Depreciation (2.09)

Rent (1.62) Adver tising and promotion (10.87)

Selling and administrative (14.39)

Interest (0.50)

U.S. taxes (3.78)

Ot er (0.23)

NIKE prof it 6.44$

Nike¶s Profit Breakdown

Exh.

1.1

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Return$

Risk?

rofit zInvestment

Amount of uncertaintyabout thereturn we

expect toearn

R eturn and R isk

The lower the risk of our investment,the lower is our expected return.

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R eturns for Bonds with Different

R isks

Source: The Wall Street Journal

Exhibit 1.2

0% 2% 4% 6% 8% 10%

Hi h R isk

Mediu R isk

Low R isk

U.S. Tre sury

B o n d T y p

e s

DifferentR isk Le els

Bonds arewritten promises

by organizationsto repay

amounts loaned

to them withinterest.

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Identifying& Measuring

Recording

Reporting &Analyzing

Focus of Accounting

Exh.

1.3

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All rovide input to

Generally Accepted Accounting rinciples

Help set

Securities andExchange

Commission

Unions

Investors

Accountants

oliticians

Lenders

Others

AIC A

Setting Accounting R ules

Financial Accounting Standards Board

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Reduces time, effortand cost of

recordkeeping.

Reduces time, effortand cost of

recordkeeping.

Improves clericalaccuracy.

Improves clericalaccuracy.

Changes the way westore, process andsummarize largemasses of data.

Changes the way westore, process andsummarize largemasses of data.

Technology

Accounting and echnolog

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Corporation

Law Offices

artnership

roprietorship

Sally¶sGrocery

Business

Forms of Organization

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Private

NonprofitGovernment

Nonbusiness

Forms of Organization

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Characteristics Proprietorship Partnership Corporation

Business entity yes yes yes

Legal entity no no yes

Limited liability no no yes

Unlimited life no no yes

Business taxed no no yes

One owner allowed yes no yes

*

* Proprietorships and partnerships set up as LLC¶s can

limit their liability.

Characteristics of Business

Organizations

Exh.

1.4

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Owners of a corporation are calledshareholders (or stockholders).

When a corporation issues onlyone class of stock, we call it

common stock (or capital stock).

Cor oration

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Financing

Financing Activities

Owner financing (equity)

Nonowner financing(liabilities)

Activities in Organizations

Exh.

1.5

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Financing


Investing

Investing Activities

Buying resources (assets)

Selling resources (assets)

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1.5

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Financing


Operating

Investing

Operating activities

Aimed at selling productsand services

Result in sales and expenses

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1.5

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Balance Sheet A balance sheet reports on investing and financing

activities. It lists amounts for assets, liabilities, and equityat a point in time. The relationship is reflected in the

Balance Sheet equation:

Assets = Liabilities + Equity

Cash 254.3$ Liabilities 2,720.9$

Noncash assets 5,602.6 Equity:

Common Stock 2.8

Retained Earnings 2,887.0

Other Equity 246.2

Total Assets $ 5,856.9

Total Liabilities &

Equity $ 5,856.9

NIKE

Balance Sheet (in millions)

May 31, 2000

Exh.

1.7

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Income Statement An income statement reports on operating activities.

It lists sales (revenues), costs, and expenses over a period of time. The relationship is expressed:

Net Income = Revenues - Expenses

Revenues 8,995.1$

Costs and Expenses 8,416.0

Net Income 579.1$

NIKE

Income Statement (in millions)

For the Year Ended May 31, 2000

Exh.

1.7

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Statement of R etained arnings

This statement reports changes in the retainedearnings of the business over a period of time. It

includes changes due to net income and anydividends paid to shareholders.

Retained Earnings, May 31, 1999 3,066.5$Add: Net Income 579.1

Less: Dividends (131.5)

Other changes (627.1)

Retained Earnings, May 31, 2000 2,887.0$

.

NIKE

Statement of Retained Earnings (in millions)


Exh.

1.7

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Statement of Cash Flows

The statement of cash flows reports on cash flows for operating, investing, and financing activities over a

period of time.

Cash from operating activities 759.9$

Cash from investing activities (440.0)

Cash from financing activites (263.7)

Net increase in cash 56.2$

.

NIKE

Statement of Cash Flows (in millions)


Exh.

1.7

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Managerial Accountingis aimed at I nternal

Users

Financial Accounting isaimed at External Users

Managers

OfficersInternal Auditors

Sales Staff Budget Officers

Controllers

Lenders

ShareholdersGovernmentsLabor Unions

External AuditorsCustomers

Users of Accounting Information

Exh.

1.8

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Research & Development

AccountingServices

Internal O erating Functions

Purchasing

Human Resources

Production

Marketing

Distribution

Servicing

Exh.

1.9

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Beliefs thatseparate right

from wrong Acceptedstandards of good and

badbehavior

Often coincidewith laws

Ethics

Ethics and Social R es onsi ilit

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Identify EthicalConcerns

AnalyzeOptions

Make EthicalDecision

Use personalethics to

recognize anethical concern.

Consider allgood and bad

consequences.

Choose the bestoption after weighing all

consequences.

Guidelines for Ethical Decision

aking

Exh.

1.10

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Social R es onsi ilit

Donations to nonprofit

organizations

Programs to reduce

pollution

Programs to improve

worker and consumer

safety

Paid time off for workers

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Financial Managerial Taxation Accounting-related

Selected Opportunities in

Accounting

Exh.

1.11

Preparation Statement

Analysis Auditing Regulatory Consulting Planning Criminal

Investigation

GeneralAccounting

Cost Accounting Budgeting Consulting Controller Treasurer Strategy

Preparation Planning Regulatory Investigations Consulting

Lenders Consultants Analysts Traders Managers Directors Underwriters Planners Appraisers FBI

Investigations

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Accounting Specializations

Certified Public

Accountant (CPA)

Certified Management

Accountant (CMA)

Certified Internal Auditor

(CIA)

Chartered Financial

Analyst (CFA)

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= Net income ÷ Avg. total assets

ROI is viewed as anindicator of operating

efficiency.

R eturn on Investment (R OI)

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Liquidity &Efficiency Solvency Profitability MarketProspects

Typical Ratios Used in Decision

Analysis

Current ratio Acid-test ratio A/R turnover Inventory

turnover Days¶ sales

uncollected Days¶ sales in

inventory Total asset

turnover

Debt ratio Equity ratio Pledged assets

to securedliabilities

Total assetturnover

Profit margin ratio Gross margin ratio Return on total

assets Return on common

stockholders¶equity Book value per

common share Basic earnings per

share

Price-earningsratio

Dividends yield

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End of Chapter

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