© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 1
Basic Accounting Basic Accounting ConceptsConcepts
© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 2
What Is Accounting?What Is Accounting?
FinancialFinancialAccountingAccountingFinancialFinancial
AccountingAccountingManagementManagementAccountingAccounting
ManagementManagementAccountingAccounting
CommunicationCommunication
Mea
surin
gM
easu
ring
InterpretingInterpreting
Decision MakingDecision Making
© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 3
What Accountants What Accountants DoDo
What Accountants What Accountants DoDo
Tax Tax AccountingAccounting
Tax Tax AccountingAccounting
BookkeepingBookkeepingBookkeepingBookkeeping
FinancialFinancialAnalysisAnalysis
FinancialFinancialAnalysisAnalysis
Cost Cost AccountingAccounting
Cost Cost AccountingAccounting
© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 4
Ten Most Important Ten Most Important Accounting SkillsAccounting Skills
• AnalyticalAnalytical
• Problem solvingProblem solving
• InterpersonalInterpersonal
• ListeningListening
• CommunicationCommunication
• LeadershipLeadership
• Decision makingDecision making
• Time managementTime management
• TeamworkTeamwork
• ComputerComputer
© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 5
Types of Types of AccountantsAccountants
PrivatePrivate PublicPublic
InternalAudit
InternalAudit
CPACMA
CPACMA
ExternalAudit
ExternalAuditCPACPA
© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 6
Typical Finance Typical Finance DepartmentDepartment
Vice PresidentManufacturingVice PresidentManufacturing
Vice PresidentFinance
Vice PresidentFinance
Vice PresidentSales
Vice PresidentSales
PresidentPresident
Board ofDirectorsBoard ofDirectors
ControllerControllerTreasurerTreasurer
Director of CapitalBudgeting
Director of CapitalBudgeting
Credit ManagerCredit
ManagerInventoryManagerInventoryManager
CostAccounting
CostAccounting
TaxDepartment
TaxDepartment
FinancialAccountingFinancial
Accounting
© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 7
Accounting RulesAccounting Rules
Generally AcceptedGenerally AcceptedAccounting PrinciplesAccounting Principles
(GAAP)(GAAP)
InternationalInternationalAccounting StandardsAccounting Standards
(IAS)(IAS)
Financial AccountingFinancial AccountingStandards BoardStandards Board
(FASB)(FASB)
Securities andSecurities andExchange CommissionExchange Commission
(SEC)(SEC)
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Sarbanes-Oxley ActSarbanes-Oxley Act
DisadvantagesDisadvantages
Investor ProtectionInvestor Protection
Authority of AuditorsAuthority of Auditors
Conflict of InterestConflict of Interest
Corporate AccountabilityCorporate Accountability
Enforcement IssuesEnforcement Issues
ImplementationImplementation
Cost of ComplianceCost of Compliance
Reporting RequirementsReporting Requirements
AdvantagesAdvantages
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Fundamental Fundamental Accounting ConceptsAccounting Concepts
Accounting Equation
Double-EntryBookkeeping
Matching Principle
© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 10
Accounting EquationAccounting EquationOwner’s Equity:
Accounting Equation:
Assets = Liabilities + Owner’s Equity
Assets – Liabilities = Owner’s Equity
© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 11
Maintaining BalanceMaintaining Balance
Matching Matching PrinciplePrinciple
Matching Matching PrinciplePrinciple
CashCashBasisBasis
CashCashBasisBasis
AccrualAccrualBasisBasis
AccrualAccrualBasisBasis
Double-EntryDouble-EntryBookkeepingBookkeepingDouble-EntryDouble-EntryBookkeepingBookkeeping
ExpensesExpensesExpensesExpensesRevenuesRevenuesRevenuesRevenues
LiabilitiesLiabilitiesLiabilitiesLiabilitiesAssetsAssetsAssetsAssets
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How Are Financial Statements How Are Financial Statements Used?Used?
© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 13
Understanding Understanding Financial StatementsFinancial Statements
Income StatementIncome StatementIncome StatementIncome Statement
Balance SheetBalance SheetBalance SheetBalance Sheet
Cash-Flow StatementCash-Flow StatementCash-Flow StatementCash-Flow Statement
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The Balance SheetThe Balance Sheet
Statement of Financial PositionStatement of Financial Position
Assets Liabilities Owners’ Equity
CalendarYear
FiscalYear
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The Income StatementThe Income Statement
RevenuesRevenues
Cost of Goods SoldCost of Goods Sold
Operating ExpensesOperating Expenses
Net Operating IncomeNet Operating Income
Net Income After TaxesNet Income After Taxes
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Cash-Flow Cash-Flow StatementStatement
InvestmentsInvestments
OperationsOperations
FinancingFinancing
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Analyzing Analyzing Financial StatementsFinancial Statements
Trend AnalysisTrend Analysis Ratio AnalysisRatio Analysis
Uncover Business ShiftsUncover Business Shifts
Consider ExtraordinaryCircumstances
Consider ExtraordinaryCircumstances
Consider MoreThan One Ratio
Consider MoreThan One Ratio
Check Specific DataCheck Specific Data
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Types of Financial Types of Financial RatiosRatios
ProfitabilityProfitabilityProfitabilityProfitability
ActivityActivityActivityActivity
LiquidityLiquidityLiquidityLiquidity
LeverageLeverageLeverageLeverage
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Profitability RatiosProfitability RatiosReturn on Sales =
Net Income
Net Sales
Return on Equity =Net Income
Total Owner’s Equity
Earnings per Share =Net Income
Average Shares Outstanding
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Liquidity RatiosLiquidity RatiosWorking Capital =
Current Assets –
Current Liabilities
Current Ratio =Current Assets
Current Liabilities
Quick Ratio =Current Assets – Liabilities
Current Liabilities
© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 21
Activity RatiosActivity Ratios
Inventory Turnover =Cost of Goods SoldAverage Inventory
Receivables Turnover =Sales
Average Accounts Receivable