Goals

Document Sample
Goals Powered By Docstoc
					Busn 101 Chapter 17
Accounting &
Financial Information


                        1
 Goals
• Accounting Professions
• Accounting & Financial Statements and Reports
• Accounting Cycle
• Accounting Vs. Bookkeeping
• Computers in Accounting
• Financial Statements & Ratio Analysis




                                              2
Accounting Professions
• Financial Accounting (CPA or other)
  ▫ Accountants inside the business that creating financial
    statements, reports and other useful information so that
    people outside the business can use the information to make
    decisions
• Tax Accounting (CPA or EA)
  ▫ Accounting that prepares tax returns that comply with tax
    law, and tax strategies
• Auditing (CPA or CIA)
  ▫ Accountants that look at business’s internal accounting and
    issues reports about the credibility of the internal accounting
    (Internal or External)
  ▫ Independent Audit
     Evaluation and unbiased opinion about the accuracy (credibility) of a
                                                                           3
      company’s reports
Accounting Professions
• Managerial Accounting (CMA or other)
  ▫ Accountants inside a business that provide useful
    information and analysis to managers inside the business
    so they can make decisions
• Private Accountant
  ▫ Works for a single entity
• Public Accountant
  ▫ Provides accounting services to many entities for a fee
• Government or Not-for-profit accounting
  ▫ Accounting system for an entity whose purpose is not to
    generate a profit, but to serve ratepayers, taxpayers, and
    others according to a duly approved budget

                                                                 4
Accounting Rules

• Generally accepted accounting principles (GAAP)
 ▫ The rules or guidelines used for carrying out the
   accounting process

• Who creates the rules?
 ▫ Voters  Congress  SEC  PCAOB  FASB 
   GAAP




                                                       5
       Why do we want to learn
            Accounting?

   Language of Business




                                 6
Why is accounting important?
• Accounting is the language of business
 ▫ You cannot run a business without knowing basic
   accounting
 ▫ You cannot run a business without knowing how to
   read and interpret financial statements




                                                      7
Double-entry accounting

• The system by which each business transaction
  is recorded in at least two accounts and the
  accounting equation is kept in balance

• Example: Buy Paper for Printer:
• 1st Account = Cash
• 2nd Account = Paper Expense (Supplies
  Expense)



                                                  8
What Is Accounting

• Definition Accounting:
 ▫ The recording, classifying, summarizing, and
   interpreting of financial events and transactions to
   provide management and other interested parties the
   information they need to make good decisions

 ▫ Process of analyzing, classifying, recording,
   summarizing, and interpreting business
   transactions in financial or monetary terms


                                                      9
The Accounting System
                17-10
Financial Statements and Reports:
• The end result of financial accounting
• The accounting numbers summarized for a
  particular period in a way that provides useful
  information

• Financial Statements provide useful information
  that can be used as is or used after analyzing to
  then make business decisions
 ▫ Example: Promotion expense too high, lower it
• Financial Statements and Reports can be annual,
  quarterly, monthly, daily, or other time periods
                                                      11
Financial Statements:
• Income Statement
 ▫ What is your profit for the period?
 ▫ Revenues – Expenses = Net Income or Loss
• Balance Sheet
 ▫ Account balances on the last day or the period
• Statement of Cash Flows
 ▫ Cash flows in and out for three areas:
    Operations
    Investment
    Financing
• Other Reports…
                                                    12
How Accounting works (Accounting Cycle)
1. Analyze source documents
 ▫ Invoices, loan documents, etc.
2. Record Transactions in Journal
 ▫ Journal is the book of original entry (data entered here first)
3. Post to information in Journal to Ledgers
 ▫ Ledgers are listings of all individual accounts such as Cash or
   Rent Expense and the transactions and balances for the period
4. Trial Balance
 ▫ Prove that everything balances for the period (DR = CR)
5. Prepare Financial Statements
 ▫ IS, BS, SOCF, more…
6. Analyze Financial Statements
 ▫ Make decisions from the Financial Statements                 13
Accounting Vs. Bookkeeping

• There is not an exact distinction between
  bookkeeping & accounting
• In General:
 ▫ Bookkeeping
    Systematic recording of business transactions in
     financial terms

 ▫ Accounting
    Create accounting system, audit accounting system, or
     create official reports



                                                             14
 Fundamental Accounting Equation

• A = L + OE

• Assets = Liabilities + Owner’s Equity


                   Amounts
 Items                           Owner’s
                   owed to
 owned                         investment
                   creditors



      Accounting Is Fun!                    1 - 15
                           Define Asset

• Asset
  – Cash, properties, and other things of value
    owned by an economic unit or business
    entity
  – Provides (probable) future economic
    benefits




      Accounting Is Fun!                          1 - 16
                          Identify Assets
• Examples of assets:
  –   Cash
  –   Trucks
  –   Buildings
  –   Land
  –   Shoes in a shoe store (Inventory)
  –   Kites in a kite store (Inventory)
  –   Accounts Receivable
       • The amount owed to you or the business




         Accounting Is Fun!                       1 - 17
     Define Accounts Receivable

• Accounts Receivable
  – An account used to record the amounts
    owed by charge customers
     • The business has legal claims against charge
       customers


• A/R = Holding Tank for future receipt of
  cash



       Accounting Is Fun!                             1 - 18
                              Assets
• Current Assets
  – Assets that can be converted to cash within 1
    year (Cash, Inventory, AR)
• Fixed Assets (Long-term Assets)
  – Long lived assets like Buildings, Equipment and
    Land
• Intangible Assets
  – No physical form (Patents, Trademarks,
    Goodwill)


         Accounting Is Fun!                         1 - 19
                        Define Liability

• Liability
  – Debts or amounts owed to creditors
  – (Probable) sacrifice of future economic
    benefits


• In one word:
  – Debt



       Accounting Is Fun!                     1 - 20
                    Identify Liabilities

• Examples of Debts/Liabilities
  – Accounts Payable account
     • Buy goods/services on credit
     • Receive a bill, but don’t pay until later
     • Buy supplies from a store, but pay for them
       later
  – Notes Payable
     • Long or short-term loans (liabilities)
  – Bonds Payable
     • Long-term loans (liabilities)

       Accounting Is Fun!                            1 - 21
       Define Accounts Payable

• Accounts Payable
  – A liability account used for short-term
    liabilities or charge accounts, usually due
    within thirty days

• A/P = Holding Tank for cash the
  business will pay out later




      Accounting Is Fun!                          1 - 22
           Define Owner’s Equity

• The owner’s right to or investment in the
  business

• Assets – Liabilities = Owners’ Equity
• A – L = OE




      Accounting Is Fun!                      1 - 23
          Identify Owner’s Equity

• What is left over for the owner after all
  the debts have been paid
  – Remember: Creditors must be paid before
    the owner’s are paid




       Accounting Is Fun!                     1 - 24
                 Retained Earnings

• All Net Income (Profit) from Firm’s
  history that has not been paid back to
  owners




      Accounting Is Fun!                   1 - 25
 Fundamental Accounting Equation


Suppose the total value of the assets is
$26,000 and the business entity does not
owe any amount against the assets.


   Assets         =         Liabilities   +   Owner’s Equity
   $26,000        =             $0        +      $26,000




       Accounting Is Fun!                                      1 - 26
Fundamental Accounting Equation

Suppose the total value of the assets
consists of a truck that costs $23,000.
The owner invested $11,000 in the truck
and borrowed 12,000 from the bank.


 Assets         =         Liabilities   +   Owner’s Equity
 $23,000        =          $12,000      +      $11,000




     Accounting Is Fun!                                      1 - 27
     Determine Owner’s Equity

Ms. Burns has $9,000 invested in her travel
agency, and the agency owes creditors
$2,000.
  Assets           =         Liabilities   +      Owner’s Equity
    ?              =          $2,000       +          $9,000

                             $2,000 Liabilities
               +              9,000 Owner’s Equity
               =             11,000 Assets

  Assets           =         Liabilities   +      Owner’s Equity
 $11,000           =          $2,000       +          $9,000

        Accounting Is Fun!                                         1 - 28
     Determine Owner’s Equity

Mr. Shea owns an auto lube shop. His
business has assets of $36,000 and it owes
creditors $5,000.
  Assets        =         Liabilities   +       Owner’s Equity
 $36,000        =           $5,000      +             ?

                          $36,000 Assets
            -               5,000 Liabilities
            =              31,000 Owner’s Equity

  Assets        =         Liabilities   +       Owner’s Equity
 $36,000        =           $5,000      +          $31,000
     Accounting Is Fun!                                          1 - 29
     Determine Owner’s Equity

Mr. Stan’s insurance agency has assets of
$32,000; his investment (his equity) amounts
to $20,000.
  Assets        =         Liabilities   +       Owner’s Equity
 $32,000        =              ?        +          $20,000

                          $32,000 Assets
            -              20,000 Owner’s Equity
            =              12,000 Liabilities

  Assets        =         Liabilities   +       Owner’s Equity
 $32,000        =          $12,000      +          $20,000

     Accounting Is Fun!                                          1 - 30
                   Define Revenues

• The amounts a business earns
• Examples
  – Fees earned for performing services
  – Sales of merchandise
  – Rent income, and interest income
• May take the form of cash, credit card
  receipts, or accounts receivable (charge
  accounts)

      Accounting Is Fun!                     1 - 31
       Identify Revenue Accounts

•   Fees Earned for performing services
•   Sales Income from selling merchandise
•   Rent Income for the use of property
•   Interest Income for lending money
•   Credit Sales where cash will be
    received at a later time
    – Example: Home Depot sells lumber to a
      customer and lets the customer pay later

        Accounting Is Fun!                       1 - 32
                   Define Expenses

• The costs that relate to earning revenue
  (the costs of doing business)
• Examples
  – Wages
  – Rent
  – Interest
  – Advertising
• May be paid in cash, immediately or at
  a future time (accounts payable)

      Accounting Is Fun!                     1 - 33
         Identify Expense Accounts

•   Wages Expense for labor performed
•   Rent Expense for the use of property
•   Interest Expense for the use of money
•   Advertising Expense
•   Expense incurred but not paid:
    – Example: Received a bill for a newspaper ad
      you took out last week
    – Cash will be paid at a later time

         Accounting Is Fun!                         1 - 34
           Depreciation Expense

• The systematic write-off of the cost of a
  tangible asset over its estimated life
• Annual Straight Line Depreciation =
• (Cost – Salvage Value)/(Estimated Life
  in Years)
• Annual Straight Line Depreciation =
• (20,000-5000)/6 = 2500


      Accounting Is Fun!                      1 - 35
Cost Of Goods Sold (COGS) & Gross Profit

  • COGS = the cost of the item sold, such
    as the shoe or the boomerang or the car
  • Sales Price = Price tag
  • Gross Profit = Sales Price - COGS




        Accounting Is Fun!                    1 - 36
                                          Bay Air Tools
                                       Income Statement
                             For the Year Ended December 31, 2002

Revenues from Sales:
    Sales                                                              $ 301,010.00
    Less: Sales Returns & Allowances                    $ 3,000.00
    Sales Discounts                                        24,300.00       27,300.00
Net Sales                                                                              $ 273,710.00
Cost of Goods Sold:
  Merchandise Inventory, Jan. 1, 2002                                  $ 55,500.00
  Purchases                                             $ 215,000.00
  Less: Purchases Returns & Allowances       $ 3,450.00
        Purchases Discount                     2,400.00     5,850.00
  Net Purchases                                         $ 209,150.00
  Add Freight In                                            7,000.00
  Delivered Cost of Purchases                                            216,150.00
  Goods Available for Sale                                             $ 271,650.00
  Less Merchandise Inventory, Dec. 31, 2002                               53,400.00
  Cost of Goods Sold:                                                                   218,250.00
Gross Profit                                                                           $ 55,460.00
Operating Expenses:
  Wages Expense                                                        $ 28,270.00
  Advertising Expense                                                     3,900.00
  Rent Expense                                                            8,400.00
  Store Supplies Expense                                                    300.00
  Insurance Expense                                                         615.00
  Depreciation Expense, Store Equipment                                   6,395.00
  Total Operating Expenses                                                               47,880.00
Income From Operations                                                                    7,580.00
Other Income:
  Investment Income                                                    $    3,900.00
Other Expenses:
  Investment Expenses                                                            250      3,650.00
Net Income                                Accounting Is Fun!                           $ 11,230.00    37
       Performance Measures
• Different measure on the classified income
  statement tell us different things:

   – Gross profit:
      • How profitable the company is after only subtracting COGS
      • Common measure used to compare companies (GP%)

   – Operating income:
      • How profitable the company is from its ordinary operations,
        before any “other revenue/expenses”
      • Common measure used in estimating future profitability

   – Net income:
      • The bottom line
      • Profit for the period

                            Accounting Is Fun!                        38
                    Calculate Net Sales
                                          Bay Air Tools
                                       Income Statement
                             For the Year Ended December 31, 2002

Revenues from Sales:
    Sales                                                                   $ 301,010.00
    Less: Sales Returns & Allowances                        $    3,000.00
    Sales Discounts                                             24,300.00     27,300.00
Net Sales                                                                                  $ 273,710.00




                                       Accounting Is Fun!                                        39
                        Calculate COGS
                                          Bay Air Tools
                                       Income Statement
                             For the Year Ended December 31, 2002

Revenues from Sales:
    Sales                                                                   $ 301,010.00
    Less: Sales Returns & Allowances                        $    3,000.00
    Sales Discounts                                             24,300.00     27,300.00
Net Sales                                                                                  $ 273,710.00
Cost of Goods Sold:
 Merchandise Inventory, Jan. 1, 2002                                        $ 55,500.00
 Purchases                                                  $ 215,000.00
 Less: Purchases Returns & Allowances        $ 3,450.00
        Purchases Discount                     2,400.00         5,850.00
 Net Purchases                                              $ 209,150.00
 Add Freight In                                                 7,000.00
 Delivered Cost of Purchases                                                  216,150.00
 Goods Available for Sale                                                   $ 271,650.00
 Less Merchandise Inventory, Dec. 31, 2002                                     53,400.00
 Cost of Goods Sold:                                                                        218,250.00

                                       Accounting Is Fun!                                        40
                  Calculate Gross Profit
                                          Bay Air Tools
                                       Income Statement
                             For the Year Ended December 31, 2002

Revenues from Sales:
    Sales                                                               $ 301,010.00
    Less: Sales Returns & Allowances                       $ 3,000.00
    Sales Discounts                                           24,300.00    27,300.00
Net Sales                                                                            $ 273,710.00
Cost of Goods Sold:
 Merchandise Inventory, Jan. 1, 2002                                    $ 55,500.00
 Purchases                                                 $ 215,000.00
 Less: Purchases Returns & Allowances        $ 3,450.00
        Purchases Discount                      2,400.00       5,850.00
 Net Purchases                                             $ 209,150.00
 Add Freight In                                                7,000.00
 Delivered Cost of Purchases                                              216,150.00
 Goods Available for Sale                                               $ 271,650.00
 Less Merchandise Inventory, Dec. 31, 2002                                 53,400.00
 Cost of Goods Sold:                                                                   218,250.00
Gross Profit                                                                         $ 55,460.00
                                        Accounting Is Fun!                                  41
    Calculate Income From Operations


Gross Profit                                                             $ 55,460.00
Operating Expenses:
  Wages Expense                                            $ 28,270.00
  Advertising Expense                                         3,900.00
  Rent Expense                                                8,400.00
  Store Supplies Expense                                        300.00
  Insurance Expense                                             615.00
  Depreciation Expense, Store Equipment                       6,395.00
  Total Operating Expenses                                                 47,880.00
Income From Operations                                                      7,580.00




                                      Accounting Is Fun!                      42
               Calculate Other Income &
                       Expenses

Gross Profit                                                              $ 55,460.00
Operating Expenses:
  Wages Expense                                            $ 28,270.00
  Advertising Expense                                         3,900.00
  Rent Expense                                                8,400.00
  Store Supplies Expense                                        300.00
  Insurance Expense                                             615.00
  Depreciation Expense, Store Equipment                       6,395.00
  Total Operating Expenses                                                  47,880.00
Income From Operations                                                       7,580.00
Other Income:
  Investment Income                                        $   3,900.00
Other Expenses:
  Investment Expenses                                               250      3,650.00



                                      Accounting Is Fun!                       43
                 Calculate Net Income

Gross Profit                                                              $ 55,460.00
Operating Expenses:
  Wages Expense                                            $ 28,270.00
  Advertising Expense                                         3,900.00
  Rent Expense                                                8,400.00
  Store Supplies Expense                                        300.00
  Insurance Expense                                             615.00
  Depreciation Expense, Store Equipment                       6,395.00
  Total Operating Expenses                                                  47,880.00
Income From Operations                                                       7,580.00
Other Income:
  Investment Income                                        $   3,900.00
Other Expenses:
  Investment Expenses                                               250      3,650.00
Net Income                                                                $ 11,230.00

                                      Accounting Is Fun!                       44
                                     Bay Air Tools
                                    Balance Sheet
                                  December 31, 2002
                     Assets
Current Assets:
  Cash                                                              $ 5,400.00
  Accounts Receivable                                                14,100.00
  Merchandise Inventory                                             103,400.00
  Store Supplies                                                        390.00
  Prepaid Insurance                                                   2,900.00
  Total Current Assets                                                             $126,190.00
Plant & Equipment:
  Land                                                              $105,000.00
  Building                                          $ 190,000.00
    Less Accumulated Depreciation                      125,000.00     65,000.00
  Shop Equipment                                    $ 43,900.00
    Less Accumulated Depreciation                       31,200.00     12,700.00
  Trucks                                            $ 34,500.00
    Less Accumulated Depreciation                       12,750.00     21,750.00
  Total Plant & Equipment                                                           204,450.00
Total Assets                                                                       $330,640.00

                   Liabilities
Current Liabilities:
  Mortgage Payable (Current Portion)                                $ 20,200.00
  Accounts Payable                                                     47,500.00
  Wages Payable                                                         1,270.00
  Unearned Rent Revenue                                                 4,500.00
  Total Current Liabilities                                                        $ 73,470.00
Long-Term Liabilities
  Mortgage Payable                                                                  127,500.00
Total Liabilities                                                                  $200,970.00

                   Owner's Equity
M.R. Short, Capital                Accounting Is   Fun!                             129,670.00   45
Total Liabilities & Owner's Equity                                                 $330,640.00
                   Current Assets
• Cash and any other assets or resources that are
  expected to be realized in cash or to be sold or
  consumed during the normal operating cycle* of
  the business
   * One year, if the normal operating cycle is less than
     twelve months
• Listed on balance sheet in the order of liquidity
  (how quickly can it be converted to cash):
   –   Cash
   –   N/R (current)
   –   A/R
   –   Inventory
   –   Prepaid items (supplies, prepaid insurance)



                             Accounting Is Fun!             46
          Calculate Current Assets
                              Bay Air Tools
                              Balance Sheet
                            December 31, 2002
                   Assets
Current Assets:
 Cash                                             $     5,400.00
 Accounts Receivable                                   14,100.00
 Merchandise Inventory                                103,400.00
 Store Supplies                                           390.00
 Prepaid Insurance                                      2,900.00
 Total Current Assets                                              $126,190.00




                             Accounting Is Fun!                          47
      Fixed Assets (Plant And
            Equipment)
• Long-lived assets that are held for use in
  the production or sale of other assets or
  services
  – Also called fixed assets
• Order on Balance Sheet:
  – Rank according to length of life
     • Longest life first



                            Accounting Is Fun!   48
  Calculate Plant & Equipment (Fixed
        Assets) & Total Assets
                                       Bay Air Tools
                                      Balance Sheet
                                    December 31, 2002
                    Assets
Current Assets:
  Cash                                                                  $     5,400.00
  Accounts Receivable                                                        14,100.00
  Merchandise Inventory                                                     103,400.00
  Store Supplies                                                                390.00
  Prepaid Insurance                                                           2,900.00
  Total Current Assets                                                                    $126,190.00
Plant & Equipment:
  Land                                                                      $105,000.00
  Building                                         $      190,000.00
    Less Accumulated Depreciation                          125,000.00         65,000.00
  Shop Equipment                                   $       43,900.00
    Less Accumulated Depreciation                           31,200.00         12,700.00
  Trucks                                           $       34,500.00
    Less Accumulated Depreciation                           12,750.00         21,750.00
  Total Plant & Equipment            Accounting Is Fun!                                    204,450.00
                                                                                                49
Total Assets                                                                              $330,640.00
              Current Liabilities
• Debts that will become due within the normal
  operating cycle of a business
  – Usually within one year
• Normally paid from current assets
• Listed on balance sheet in the order they will be
  paid off:
  –   N/P
  –   Mortgage payable (current portion)
  –   A/P
  –   Wages payable
  –   Unearned revenue



                        Accounting Is Fun!        50
        Calculate Current Liabilities

                  Liabilities
Current Liabilities:
 Mortgage Payable (Current Portion)                        $ 20,200.00
 Accounts Payable                                             47,500.00
 Wages Payable                                                 1,270.00
 Unearned Rent Revenue                                         4,500.00
 Total Current Liabilities                                                $ 73,470.00




                                      Accounting Is Fun!                        51
        Long-Term Liabilities
• Debts payable over a comparatively long
  period
  – Usually more than one year
• For sole-proprietorship only LTL:
  – Mortgage payable (LT portion)
• Terms Used:
  – Notes Payable and Bonds Payable


                   Accounting Is Fun!       52
            Calculate Total Liabilities &
                 Owner’s Equity

                    Liabilities
Current Liabilities:
  Mortgage Payable (Current Portion)                      $ 20,200.00
  Accounts Payable                                           47,500.00
  Wages Payable                                               1,270.00
  Unearned Rent Revenue                                       4,500.00
  Total Current Liabilities                                              $ 73,470.00
Long-Term Liabilities
  Mortgage Payable                                                        127,500.00
Total Liabilities                                                        $200,970.00

                   Owner's Equity
M.R. Short, Capital                                                       129,670.00
Total Liabilities & Owner's Equity                                       $330,640.00

                                     Accounting Is Fun!                         53
                     Liquidity
• “How quickly an asset can be
  converted to cash”
• The ability of an asset to be quickly turned into
  cash, either by selling it or by putting it up as
  security for a loan
   – Banks want to know if the firm can make its interest
     payments
   – Managers want to know if they have enough money
     to pay the bills and buy assets
   – Cash is queen! (Cash is king)

                        Accounting Is Fun!                  54
  Current Assets & Current Liabilities

• Current assets (CA)
  – Get cash soon
• Current liabilities (CL)
  – Pay cash soon
• Short term cash management
  measures (liquidity measures):
  1. Working capital
  2. Current ratio
                 Accounting Is Fun!      55
          Liquidity Measures:
• Current Ratio
  – A firm’s current assets divided by its current
    liabilities
     • Because of the division, the number can be used
       to compare with other companies
  – Portrays a firm’s short-term debt-paying ability
     • Ability to pay current liabilities with current assets
• CA/CL = Current Ratio


                        Accounting Is Fun!                      56
         Liquidity Measures:
• Working Capital
  – A firm’s current assets less its current
    liabilities
  – The amount of capital a firm has available to
    use or to work with during a normal operating
    cycle
• CA – CL = Working Capital


                   Accounting Is Fun!           57
Computers in Accounting

• Accounting is not done by hand any more.
• Accounting is done with computer programs such
  as QuickBooks, Peachtree or custom made
  computer programs




                                                   58
Statement Of Cash Flows & Ratio Analysis

• See Excel 




                                           59
Accounting Professions
• Financial Accounting
• Tax Accounting
• Auditing
• Managerial Accounting
• Private Accountant
• Public Accountant
• Government or Not-for-profit
  accounting
                                 60
Accounting & Financial Statements and
Reports
• Accounting is the language of Business
• You must know some accounting to work in a
  business field
• Financial Statements are the end result of Financial
  Accounting and provide useful information to
  Business Decision Makers
• Financial Statements:
 ▫ IS
 ▫ BS
 ▫ SOCF
                                                    61
Accounting Cycle

1. Analyze source documents
2. Record Transactions in Journal
3. Post to information from Journal to
   Ledgers
4. Trial Balance
5. Prepare Financial Statements
6. Analyze Financial Statements

                                         62
Accounting Vs. Bookkeeping

• Bookkeeping involves recording transactions
• Accounting involves creating reports, creating the
  accounting systems, auditing the accounting
  systems, planning tax strategies




                                                       63
Computers in Accounting

• Accounting is not done by hand anymore.
• Computer programs like QuickBooks are used for
  the procedural side of bookkeeping and accounting




                                                  64
Ratio Analysis

• Ratio analysis is one means used to analyze
  financial statements in order to see the health of a
  company




                                                         65

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:3
posted:6/27/2011
language:English
pages:65