chapter 12: the role of accounting in business exploring business 2.0 © 2012 flat world knowledge
TRANSCRIPT
Chapter 12: The Role OfChapter 12: The Role OfAccounting In BusinessAccounting In Business
Exploring Business 2.0 © 2012 Flat World Knowledge
Chapter ObjectivesChapter Objectives1. Define accounting and explain the differences
between managerial accounting and financial accounting.
2. Identify some of the users of accounting information and explain how they use it.
3. Understand the function of the income statement.4. Understand the function of the balance sheet.5. Understand the function of the statement of
owner’s equity.6. Understand the difference between cash-basis and
accrual accounting.7. Understand the purpose of a statement of cash
flows and describe its format.Exploring Business 2.0 © 2012 Flat
World Knowledge
Chapter ObjectivesChapter Objectives8. Evaluate a company’s performance using
financial statements and ratio analysis.9. Understand why it’s not a good idea to
falsify financial statements.10.Appreciate the background behind
stricter legal and professional standards in U.S. business and accounting practice.
11.Understand ethics and their importance in the accounting profession.
12. Identify career opportunities in accounting.
Exploring Business 2.0 © 2012 Flat World Knowledge
StakeholdersStakeholders“…parties who are
interested in the activities of the business because they’re affected
by them…”
Exploring Business 2.0 © 2012 Flat World Knowledge
AccountingAccounting“…measuring and summarizing business activities, interpreting
financial information, and communicating the results to
management and other decision makers.”
Exploring Business 2.0 © 2012 Flat World Knowledge
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
Exploring Business 2.0 © 2012 Flat World Knowledge
Management AccountingManagement Accounting
“…provides… reports… tailored to the needs of individual
managers…(in a) relevant, accurate, timely…format…(to
aid) in making decisions.”
Exploring Business 2.0 © 2012 Flat World Knowledge
Financial Financial Accounting Accounting
Financial Statements• Income Statement
•Statement of owner’s equity
•Balance Sheet
•Statement of Cash Flows
Generally Accepted Accounting Principles (GAAP)
Exploring Business 2.0 © 2012 Flat World Knowledge
Users OfUsers OfAccounting InformationAccounting Information
Owners &Owners &ManagersManagers
Investors & Investors & CreditorsCreditors
Government Government AgenciesAgencies
Other UsersOther Users
Exploring Business 2.0 © 2012 Flat World Knowledge
The FunctionsThe Functionsof Financial Statementsof Financial Statements
• Income Statement – Reports a company’s sales, expenses, and net profit or loss
• Balance Sheet – Reports a company’s assets, liabilities and owners’ equity (owners’ investment in business)
• Statement of Cash Flows – shows much much cash the business has coming in and going out
Exploring Business 2.0 © 2012 Flat World Knowledge
Income StatementIncome StatementRevenues and Expenses
Cost of Goods Sold
Operating Expenses
Gross Profit
Net Income
Exploring Business 2.0 © 2012 Flat World Knowledge
Stress-BusterStress-BusterIncome StatementIncome Statement
Exploring Business 2.0 © 2012 Flat World Knowledge
ProposedProposedIncome Statement #1Income Statement #1
Exploring Business 2.0 © 2012 Flat World Knowledge
ProposedProposedIncome Statement #2Income Statement #2
Exploring Business 2.0 © 2012 Flat World Knowledge
Breakeven AnalysisBreakeven Analysis
$ Fixed Costs$ Variable Costs$ Contribution Margin Per Unit$ Breakeven Point In Units
“…total sales revenue must exactly equal all your expenses…”
Exploring Business 2.0 © 2012 Flat World Knowledge
ProposedProposedIncome Statement #3Income Statement #3
Exploring Business 2.0 © 2012 Flat World Knowledge
Balance SheetBalance Sheet
Assets – Business resources Liabilities – Debts owed to outside entitiesOwner’s Equity – Amount invested
“…tells you what you have (and where it came from) at a specific
point in time…”
Exploring Business 2.0 © 2012 Flat World Knowledge
Accounting EquationAccounting Equation
Assets = Liabilities + Owner’s Equity
Exploring Business 2.0 © 2012 Flat World Knowledge
Stress-BusterStress-BusterBalance SheetBalance Sheet
Exploring Business 2.0 © 2012 Flat World Knowledge
Stress-BusterStress-BusterBalance Sheet #2Balance Sheet #2
Exploring Business 2.0 © 2012 Flat World Knowledge
The Statement of OwnerThe Statement of Owner’’s s EquityEquity
Exploring Business 2.0 © 2012 Flat World Knowledge
How Do Financial Statements How Do Financial Statements Relate to One Another?Relate to One Another?
Exploring Business 2.0 © 2012 Flat World Knowledge
Accrual AccountingAccrual Accounting
Account ReceivableAccount PayableInventory
Long-term assets
“…accountant records a transaction when it occurs…”
Exploring Business 2.0 © 2012 Flat World Knowledge
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
Exploring Business 2.0 © 2012 Flat World Knowledge
College ShopCollege ShopBalance SheetBalance Sheet
Exploring Business 2.0 © 2012 Flat World Knowledge
College ShopCollege ShopIncome StatementIncome Statement
Exploring Business 2.0 © 2012 Flat World Knowledge
Statement of OwnerStatement of Owner’’s s EquityEquity
Exploring Business 2.0 © 2012 Flat World Knowledge
End-of-YearEnd-of-YearBalance SheetBalance Sheet
Exploring Business 2.0 © 2012 Flat World Knowledge
Statement Of Cash FlowsStatement Of Cash Flows
“…tells… where cash came from and where it went.”
ActivitiesActivities::•OperatingOperating
•InvestingInvesting
•FinancingFinancing
Exploring Business 2.0 © 2012 Flat World Knowledge
Cash Flow Cash Flow StatementStatement
Exploring Business 2.0 © 2012 Flat World Knowledge
ComparativeComparativeIncome StatementIncome Statement
Exploring Business 2.0 © 2012 Flat World Knowledge
Income Statement WithIncome Statement WithVertical Percentage Vertical Percentage
AnalysisAnalysis
Exploring Business 2.0 © 2012 Flat World Knowledge
Ratio AnalysisRatio Analysis%Profit Margin
%Management Efficiency
%Management Effectiveness
%Financial Condition
Exploring Business 2.0 © 2012 Flat World Knowledge
Gross Profit MarginGross Profit Margin
Gross ProfitMargin
= Gross ProfitSales
Exploring Business 2.0 © 2012 Flat World Knowledge
Net Profit MarginNet Profit Margin
Net ProfitMargin = Net Profit
Sales
Exploring Business 2.0 © 2012 Flat World Knowledge
Management Efficiency Management Efficiency Ratios Ratios
• These ratios reveal the way in which assets (shown on the balance sheet) are being used to generate income (shown on the income statement)
• To compute this group of ratios, you must look at both statements
Exploring Business 2.0 © 2012 Flat World Knowledge
Comparative Balance Comparative Balance SheetSheet
Exploring Business 2.0 © 2012 Flat World Knowledge
Inventory Inventory TurnoverTurnover
InventoryTurnover = Sales
Inventory
Exploring Business 2.0 © 2012 Flat World Knowledge
Return On AssetsReturn On Assets
Return OnAssets = Net Profit
Total Assets
Exploring Business 2.0 © 2012 Flat World Knowledge
Current RatioCurrent RatioCurrentRatio = Current Assets
Current Liabilities
Exploring Business 2.0 © 2012 Flat World Knowledge
Debt-To-EquityDebt-To-Equity
Total Debtto Equity =
Total LiabilitiesTotal Equity
Exploring Business 2.0 © 2012 Flat World Knowledge
Interest Interest CoverageCoverage
InterestCoverage =
Operating IncomeInterest Expense
Exploring Business 2.0 © 2012 Flat World Knowledge
Basic Things to Basic Things to SucceedSucceed
Good profit on each item Move inventory Good return on investment Watch cash
Exploring Business 2.0 © 2012 Flat World Knowledge
Challenges ToChallenges ToAccounting ProfessionAccounting Profession
WorldCom
Enron
Exploring Business 2.0 © 2012 Flat World Knowledge
Ethical AccountingEthical Accounting
Sarbanes-Oxley Act
Public Company Accounting Oversight Board (PCAOB)
The Profession’s Code of Ethics
Exploring Business 2.0 © 2012 Flat World Knowledge
Careers In Careers In AccountingAccounting
“People Profession”Skills
• Analytical• Interpersonal• Communication
Job Prospects• Certified Public Accountants- Audits• Private Accountants- Controller• Certified Management Accountants
Exploring Business 2.0 © 2012 Flat World Knowledge