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Electronic Presentation by Douglas Cloud

Pepperdine University

FINANCIAL FINANCIAL ACCOUNTINGACCOUNTING

WARREN REEVE

FOR FUTURE BUSINESS LEADERS

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Task Force Clip Art Task Force Clip Art included in this electronic included in this electronic presentation is used with presentation is used with

the permission of New the permission of New Vision Technology of Vision Technology of

Nepean Ontario, Canada.Nepean Ontario, Canada.

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The Role of Accounting in Business

Chapter 1

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1. Describe the types and forms of businesses, business strategies, value chains, and stakeholders.

2. Describe the three business activities of financing, investing, and operating.

3. Define accounting and its role in business.4. Describe and illustrate the basic financial statements and how

they interrelate.5. Describe eight basic accounting concepts underlying financial

reporting.6. Describe and illustrate how horizontal analysis can be used to

evaluate a company’s performance.

Learning GoalsLearning Goals

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

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1Learning GoalLearning Goal

Describe the types and forms of businesses, business strategies, value chains, and stakeholders.

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ProductProductGeneral Motors Automobiles, trucks, vansGeneral Mills Breakfast cerealsBoeing Jet aircraftNike Athletic shoesCoca-Cola BeveragesSony Stereos, televisions, radios

Manufacturing Business`Manufacturing Business`

Types of Businesses

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Merchandising BusinessMerchandising Business

ProductProductWal-Mart General merchandiseToys”R”Us ToysBarnes & Noble BooksBest Buy Consumer electronicsAmazon. Com Books

Types of Businesses

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ProductProductDisney EntertainmentDelta Air Lines TransportationMarriott Hotels Hospitality and lodgingMerrill Lynch Financial adviceSprint Telecommunication

Service BusinessService Business

Types of Businesses

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There are three forms of business

organizations

Proprietorship Partnership Corporation

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A proprietorship is owned by one

individual.

Advantages• Ease in organizing• Low cost of organizing

Disadvantage• Limited source of

financial resources• Unlimited liability

Doug’s

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A partnership is owned two or

more individuals.

Advantages• More financial

resources than a proprietorship.

• Additional management skills.

Disadvantage• Unlimited liability.

Doug and Max’s

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A corporation is organized under state or federal statutes as a separate legal entity.

Advantage• The ability to obtain

large amounts of resources issuing stocks.

Disadvantage• Double taxation.

D & M Inc.

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70%

10%

20%

ProprietorshipPartnershipCorporation

Total Companies

Business Ownership in AmericaBusiness Ownership in America

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Business StrategyBusiness Strategy

A business strategy is an integrated set of plans and actions designed to enable

the business to gain an advantage over its competitors, and to maximize profits.

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Differential StrategyUnder a differential strategy, a business

designs and produces a product or service that possess unique

attributes or characteristics for

which customers are willing to pay a premium price.

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Business StakeholdersBusiness Stakeholders

A business stakeholder is a person or entity that has an interest in the economic

performance and well-being of a business.

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STAKEHOLDERS

Internal:Stockholders ManagersEmployees

External:SuppliersCustomersStockholders

Business StakeholdersBusiness Stakeholders

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Business StakeholdersBusiness StakeholdersBusiness

StakeholdersInterest in the

Business ExamplesCapital market Providers of major Banks, owners, stakeholder financing for the stockholders

businessProduct or service Buyers of products Customers and market stakeholders or services and vendors suppliers

to the businessGovernment Collect taxes and fees Federal, state, and stakeholder from the business and city governments

its employeesInitial stakeholders Individuals employed Employees and

by the business managers

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2Learning GoalLearning Goal

Describe the three business activities of financing, investing, and operating.

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Financing ActivitiesFinancing Activities

Financing activities involve obtaining funds to begin and operate a business.

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Financing ActivitiesFinancing Activities

Businesses seek financing by:borrowing

issuing shares of ownership

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Financing ActivitiesFinancing Activities

A liability is a legal obligation to repay the amount borrowed according to the

terms of the borrowing agreement.

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Financing ActivitiesFinancing ActivitiesSamples of Liabilities

• Accounts payable: When a business buys a service or product on service.

• Bonds payable: When a business borrows money by issuing bonds.

• Interest payable: Any interest that is due on a note or a bond.

• Note payable: When a business issues commercial paper or borrows on a line of credit.

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Financing ActivitiesFinancing Activities

A business may also finance its operations by issuing shares of stock. The basic type of stock

is called common stock.

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Investing ActivitiesInvesting Activities

Investing activities involve the selection and management of long-term resources that will be used to develop, produce, and sell goods and services.

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Investing ActivitiesInvesting Activities

Assets are resources that the business

owns or otherwise under its legal

control and available for use in the future.

What are assets?

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Investing ActivitiesInvesting Activities

When the business sells merchandise or services to a

customer, the right to collect is an accounts receivable.

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Operating ActivitiesOperating Activities

Revenue is the increase in assets

from selling products or services. Revenue

is often identified according to their

source, such as Rent Revenue.

What is revenue?

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Operating ActivitiesOperating Activities

An expense is a decrease in assets or

an increase in liabilities from producing and

delivering goods or providing services that constitute the primary operating activities of

an organization.

What is an expense?

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Revenues

- Expenses

= Net Income

Operating ActivitiesOperating Activities

= Net Loss

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Define accounting and its role in business.3

Learning GoalLearning Goal

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What is accounting?What is accounting?

Accounting is an information system that provides reports to

stakeholders about the economic activities and condition of a business.

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Major objectives of Major objectives of financial accountingfinancial accounting

1. To report the financial condition of a business at a point in time.

2. To report changes in the financial condition of a business over a period of time.

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Describe and illustrate the basic financial statements and how they interrelate.

4Learning GoalLearning Goal

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Income StatementIncome Statement

An income statement is a summary of the revenue and the expenses for a specific period of time.

Objective:Objective:Reports Reports

change in change in financial financial conditioncondition

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Income StatementIncome StatementHershey Foods Corporation

Income StatementFor the Year Ended December 31, 2001

(in thousands)

Revenues:Sales $4,557,241

Expenses:Cost of sales $2,665,566Selling and administrative 1,269,964Other expenses 209,077Interest 69,093Income taxes 136,385 4,350,085

Net income $ 207,156

Note that the time period for the

statement is in the heading.

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Retained Earnings StatementRetained Earnings Statement

The retained earnings statement reports changes in

financial condition due to changes in retained earnings.

Objective:Objective:Reports Reports

change in change in financial financial conditioncondition

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Retained Earnings StatementRetained Earnings Statement

Hershey Foods CorporationRetained Earnings StatementFor the Year Ended December 31, 2001

(in thousands)

Retained earnings, January 1, 2001 $2,702,927Add net income $207,156Less dividends 154,750Increase in retained earnings 52,406Retained earnings, December 31, 2001 $2,755,333From the

income statement

Again, note the time period

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Balance SheetBalance Sheet

The balance sheet reports the financial condition as

of a point in time.

Objective:Objective:Reports Reports financial financial conditioncondition

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Balance SheetBalance Sheet

Assets = (Claims) Rights to the Assets

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Balance SheetBalance Sheet

Assets = LiabilitiesStock-

holders’ Equity

+

The rights of creditors

The rights of the stockholders

The The Accounting Accounting EquationEquation

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Balance SheetBalance SheetHershey Foods Corporation

Balance SheetDecember 31, 2001

(in thousands)

AssetsCash $ 134,147Accounts receivable 361,726Inventories 512,134Prepaid expenses 62,595Property, plant, and equipment 1,534,901Intangibles 429,128Other assets 212,799Total assets $3,247,430

ContinuedContinued

Note that the date is a specific point

in time

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LiabilitiesAccounts payable $ 133,049Accrued liabilities 462,901Notes and other debt 1,245,939Income taxes 258,337

Total liabilities $2,100,226

Stockholders’ EquityCapital stock $ 183,213Retained earnings 2,755,333Repurchased stock and other equity items (1,791,342)

Total stockholders’ equity $1,147,204Total liabilities and stockholders’ equity $3,247,430

Matches total assetsMatches total assets

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Statement of Cash FlowsStatement of Cash Flows

The statement of cash flows reports the changes in financial condition due

to the changes in cash during a period.

Objective:Objective:Reports Reports

change in change in financial financial conditioncondition

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Statement of Cash FlowsStatement of Cash Flows

Three categories on the statement of cash flow are:1. Operating activities2. Investing activities3. Financing activities

1-46Hershey Foods CorporationStatement of Cash Flows

For the Year Ended December 31, 2001(in thousands)

Net cash flows from operating activities $ 706,405Cash flows from investing activities:

Investments in property, plant, and equipment $(187,029)Proceeds from sale of property, plant, and equipment 63,042

Net cash flows used in investing activities $(123,987)Cash flows from financing activities:

Cash receipts from financing activities, including debt $ 30,589Dividends paid to stockholders (154,750)Repurchase of stock (40,322)Other, including repayment of debt (315,757)

Net cash flows used in financing activities $(480,240)Net increase in cash during 2001 $ 102,178Cash as of January 1, 2001 31,969Cash as of December 31, 2001 $ 134,147

Note the time period

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Describe eight basic accounting concepts underlying financial reporting.5

Learning GoalLearning Goal

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The The business entity conceptbusiness entity concept limits the economic data in limits the economic data in the accounting system to the accounting system to

data related directly to the data related directly to the activities of the business.activities of the business.

The cost concept determines the amount initially entered into the accounting records for

purchases.

Accounting ConceptsAccounting Concepts

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Accounting ConceptsAccounting Concepts

A business normally expects to continue operating for an indefinite period of time. This is known as the

going concern concept.Under the matching concept, revenues for a period are matched

with the expenses incurred in generating the revenue.The objectivity concept requires

that entries in the accounting records and the data reported on financial statements be based on

objective evidence.

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Accounting ConceptsAccounting Concepts

The unit of measure concept requires that all economic data be

recorded in dollars.Financial statements should contain all relevant data a reader needs to

understand the financial condition and performance of a business. This is the adequate disclosure concept.

The accounting period concept is the process in which accounting

data are recorded and summarized in financial statements.

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Financial History of Financial History of a Businessa Business

DEC. 31

2003

Balance Sheet Dec. 31, 2003

Income statement for the

year ended December 31,

2003

Next slide

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Financial History of Financial History of a Businessa Business

DEC. 31

2004

Balance Sheet Dec. 31, 2004

Income statement for the

year ended December 31,

2004

Next slide

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Financial History of Financial History of a Businessa Business

DEC. 31

2005

Balance Sheet Dec. 31, 2005

Income statement for the

year ended December 31,

2005

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Describe and illustrate how horizontal analysis can be used to analyze and evaluate a company’s performance.

6Learning GoalLearning Goal

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Horizontal AnalysisHorizontal AnalysisHershey Foods Corporation

Income StatementFor the Year Ended December 31, 2001 and 2000

(in thousands)

Sales $4,557,241 $4,220,976 $336,265Cost of sales 2,665,566 2,471,151 194,415Gross profit $1,891,675 $1,749,825 $141,850Selling and admin. expenses 1,269,964 1,127,175 142,789Operating income before taxes $ 621,711 $ 622,650 $ (939)

2001 2000 Amount Percent

$336,265$4,220,976

8.0%

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Horizontal AnalysisHorizontal AnalysisHershey Foods Corporation

Income StatementFor the Year Ended December 31, 2001 and 2000

(in thousands)

Sales $4,557,241 $4,220,976 $336,265Cost of sales 2,665,566 2,471,151 194,415Gross profit $1,891,675 $1,749,825 $141,850Selling and admin. expenses 1,269,964 1,127,175 142,789Operating income before taxes $ 621,711 $ 622,650 $ (939)

2001 2000 Amount Percent

$194,415$2,471,151

8.0%7.9%

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Horizontal AnalysisHorizontal AnalysisHershey Foods Corporation

Income StatementFor the Year Ended December 31, 2001 and 2000

(in thousands)

Sales $4,557,241 $4,220,976 $336,265Cost of sales 2,665,566 2,471,151 194,415Gross profit $1,891,675 $1,749,825 $141,850Selling and admin. expenses 1,269,964 1,127,175 142,789Operating income before taxes $ 621,711 $ 622,650 $ (939)

2001 2000 Amount Percent8.0%7.9%8.1%

12.7%

(0.2)%

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The End

Chapter 1Chapter 1

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