Business in Business in Action 7e Action 7e Bovée/ThillBovée/Thill

Business in Business in Action 7e Action 7e Bovée/ThillBovée/Thill

Financial Financial Information andInformation and

Accounting Accounting ConceptsConcepts

Chapter 17Chapter 17

Learning Objectives

1. Define accounting and describe the roles of private and public accountants

2. Explain the impact of accounting standards such as GAAP and the Sarbanes-Oxley Act on corporate accounting

3. Describe the accounting equation and explain the purpose of double-entry bookkeeping and the matching principle

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Learning Objectives

4. Identify the major financial statements and explain how to read a balance sheet

5. Explain the purpose of the income statement and the statement of cash flows

6. Explain the purpose of ratio analysis and list the four main categories of financial ratios

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Understanding Accounting

• Accounting Measuring, interpreting, and communicating

financial information to support internal and external decision-making

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Understanding Accounting

• Financial Accounting The area of accounting concerned with

preparing financial information for users outside the organization

• Management Accounting The area of accounting concerned with

preparing data for use by managers within the organization

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Private Accountants

• Private Accountants In-house accountants employed by

organizations and businesses other than a public accounting firm

Also called corporate accountants

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Private Accountants (cont.)

• Controller The highest-ranking accountant in a company,

responsible for overseeing all accounting functions

• Certified Public Accountants (CPAs) Professionally licensed accountants who meet

certain requirements for education and experience and who pass a comprehensive examination

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Public Accountants

• Public Accountants Professionals who

provide accounting services to other businesses and individuals for a fee

• Audit Formal evaluation

of the fairness and reliability of a client’s financial statements

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Typical Finance DepartmentExhibit 17.1

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The Rules of Accounting

• GAAP (Generally Accepted Accounting Practices) Standards and practices used by publicly held

corporations in the United States and a few other countries in the preparation of financial statements; on course to converge with IFRS

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The Rules of Accounting

• External Auditors Independent accounting firms that provide

auditing services for public companies

• International Financial Reporting Standards (IFRS) Accounting standards and practices used in

many countries outside the United States

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Sarbanes-Oxley

• Sarbanes-Oxley The informal name of comprehensive

legislation designed to improve integrity and accountability of financial information

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Fundamental Accounting Concepts

• Assets Any things of value owned or leased by a business

• Liabilities Claims against a firm’s assets by creditors

• Owners’ Equity The portion of a company’s assets that belongs to the

owners after obligations to all creditors have been met

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The Accounting Equation

• Accounting Equation The basic accounting equation, stating that

assets equal liabilities plus owners’ equity

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Double-Entry Bookkeeping and The Matching Principle (cont.)

• Depreciation An accounting procedure for systematically

spreading the cost of a tangible asset over its estimated useful life

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Using Financial Statements: The Balance Sheet

• Balance Sheet A statement of a firm’s financial position on a

particular date; also known as a statement of financial position

• Fiscal Year Any 12 consecutive months used as an

accounting period

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The Accounting Cycle

1. Perform transactions

2. Analyze and record transactions in a journal

3. Post journal entries to the ledger

4. Prepare a trial balance

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The Accounting Cycle (cont.)

5. Make adjusting entries, as needed

6. Prepare an adjusted trial balance

7. Prepare financial statements

8. Close the books for the accounting period

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Balance Sheet

• Current Assets Cash and items that

can be turned into cash within one year

• Fixed Assets Assets retained for

long-term use, such as land, buildings, machinery, and equipment

also referred to as property, plant, and equipment

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Balance Sheet (cont.)

• Current Liabilities Obligations that

must be met within a year

• Long-Term Liabilities Obligations that fall

due more than a year from the date of the balance sheet

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Balance Sheet (cont.)

• Retained Earnings The portion of shareholders’ equity earned by

the company but not distributed to its owners in the form of dividends

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Using Financial Statements:Income and Cash Flow Statements

• Income Statement A financial record of a company’s revenues,

expenses, and profits over a given period of time

also known as a profit and loss statement

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Using Financial Statements:Income and Cash Flow Statements (cont.)

• Expenses Costs created in the process of generating

revenues

• Net Income Profit earned or loss incurred by a firm,

determined by subtracting expenses from revenues

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Using Financial Statements:Income and Cash Flow Statements (cont.)

• Cost of Goods Sold The cost of producing or acquiring a

company’s products for sale during a given period

• Gross Profit The amount remaining when the cost of

goods sold is deducted from net sales also known as gross margin

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Using Financial Statements:Income and Cash Flow Statements (cont.)

• Operating expenses All costs of operation that are not included

under cost of goods sold.

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Using Financial Statements:Income and Cash Flow Statements (cont.)

• EBITDA Earnings before interest, taxes, depreciation,

and amortization.

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Statement of Cash Flows

• Statement of cash flows A statement of a firm’s cash receipts and

cash payments that presents information on its sources and uses of cash.

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Profitability Ratios

• Earnings Per Share A measure of a firm’s profitability for each

share of outstanding stock, calculated by dividing net income after taxes by the average number of shares of common stock outstanding

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Liquidity Ratios

• Working Capital Current assets

minus current liabilities

• Current Ratio A measure of a

firm’s short-term liquidity, calculated by dividing current assets by current liabilities

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Liquidity Ratios (cont.)

• Quick Ratio A measure of a firm’s short-term liquidity,

calculated by adding cash, marketable securities, and receivables, then dividing that sum by current liabilities

Also known as the acid-test ratio

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Activity Ratios

• Inventory Turnover Ratio A measure of the time a company takes to

turn its inventory into sales, calculated by dividing cost of goods sold by the average value of inventory for a period

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