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chapter
Business Essentials, 7th EditionEbert/Griffin
© 2009 Pearson Education, Inc.
The Role of Accounts and Accounting Information
Instructor Lecture
PowerPoints PowerPoint Presentation prepared by Carol Vollmer Pope Alverno College
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.
© 2009 Pearson Education, Inc. 2
After reading this chapter, you should be able to:1. Explain the role of accountants and distinguish between the
kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
2. Explain how the accounting equation is used.3. Describe the three basic financial statements and show how
they reflect the activity and financial condition of a business.4. Explain the key standards and principles for reporting
financial statements.
L E A R N I N G O B J E C T I V E SL E A R N I N G O B J E C T I V E S
© 2009 Pearson Education, Inc.
After reading this chapter, you should be able to:
5. Describe how computing financial ratios can help users get more information from financial statements to determine the financial strengths of a business.
6. Discuss the role of ethics in accounting.
L E A R N I N G O B J E C T I V E S (cont’d)L E A R N I N G O B J E C T I V E S (cont’d)
© 2009 Pearson Education, Inc.
What’s in It for Me?
• By understanding this chapter’s discussion of accountants, their methods, and their responsibilities, you’ll benefit in three ways:
1. If you’re thinking about starting your own business, you’ll discover your obligations for reporting your firm’s financial status
2. As an employee or union member, you’ll see how to evaluate your company’s financial condition and its prospects for the future
3. As an interested citizen, you’ll learn about accounting ethics and regulatory requirements for maintaining public trust in the business system
© 2009 Pearson Education, Inc.
What Is Accounting?• Accounting Defined:
– A comprehensive system for collecting, analyzing and communicating financial information
– Bookkeeping: the recording of transactions
• Users of Accounting Information:– Business managers– Employees and unions– Investors and creditors– Tax authorities– Government regulatory agencies
© 2009 Pearson Education, Inc.
Who Are Accountants and What Do They Do?• Controller
– Manages all of a firm’s accounting activities
• Types of Accounting Systems– Financial Accounting
• Concerned with external information users—the firm’s external stakeholders
• Prepares income statements, balance sheets, and other financial reports published for shareholders and the public
– Managerial (Management) Accounting• Serves internal users (managers) by providing information to make
departmental decisions, monitor projects, and plan future activities
© 2009 Pearson Education, Inc.
Who Are Accountants and What Do They Do? (cont’d)
• Certified Public Accountants (CPAs)– Licensed, offer services to the public
• Auditing (GAAP)• Tax services• Management advisory services
• Non-certified Public Accountants• Private Accountants
– Work exclusively for a firm as accountants
• Management Accountants– Certified management accountant (CMA)
© 2009 Pearson Education, Inc.
Who Are Accountants and What Do They Do? (cont’d)
• Forensic Accountants– Assist in the investigation of business and financial issues
that may have application in a court of law– Investigative Accounting
• Identifying financial evidence that may be pertinent• Analyzing financial evidence• Presenting accounting conclusions and their legal implications
– Litigation Support• Certified fraud examiner: A specialty area within forensic
accounting
© 2009 Pearson Education, Inc.
The CPA Vision Project
• Redefining the role of the accountant for today’s world economy
• Identifying issues for the future• Global forces as drivers of change• Recommendations• A new direction
– Core services– Core competencies
© 2009 Pearson Education, Inc.
TABLE 14.1 Core Competencies for Accounting
© 2009 Pearson Education, Inc.
Federal Restrictions on CPA Services and Financial Reporting: Sarbox
• Sarbanes-Oxley Act of 2002 (Sarbox)– Enacted to restore public trust in corporate accounting
practices as a direct response to corporate financial abuses
– Restricts non-audit services that CPAs can provide
• Sarbox Compliance Requirements– CFOs and CEOs must pledge that the company’s finances
are correct and face severe penalties for noncompliance– Whistleblowers must be protected
© 2009 Pearson Education, Inc.
TABLE 14.2 Selected Provisions of the Sarbanes-Oxley Act
© 2009 Pearson Education, Inc.
The Accounting Equation
• The Accounting Equation– Assets = Liabilities + Owners’ Equity– Assets – Liabilities = Owners’ Equity (or Net Worth)
• Asset– Any economic resource that is expected to benefit a firm
or an individual who owns it
• Liability– A debt that the firm owes to an outside party
• Owners’ Equity– Money that owners would receive if they sold all of a
company’s assets and paid all of its liabilities© 2009 Pearson Education, Inc.
Financial Statements
• Balance Sheets– Supply detailed information about:
• Assets– Current assets: Cash/assets that can be converted into cash
within a year– Fixed assets: Capital that has long-term use or value– Intangible assets: Patents, trademarks, copyrights, etc.
• Liabilities– Current liabilities: Debts that must be paid within one year,
including accounts payable– Long-term liabilities: Debts not due for at least a year
• Owners’ Equity– Paid-in (invested) capital– Retained earnings (net profits)
© 2009 Pearson Education, Inc.
FIGURE 14.1 Google’s Balance Sheet
© 2009 Pearson Education, Inc.
Financial Statements (cont’d)
• Income Statement (Profit and Loss Statement)– Its description of revenues and expenses results in a figure
showing the firm’s annual profit or loss• Revenues: The funds that flow into a business from the sale of
goods or services
• Cost of revenues: Shows the costs of obtaining the revenues from other companies during the year
• Cost of goods sold: Costs of obtaining materials to make products sold during the year
• Gross profit: Considers revenues and cost of revenues from the income statement
• Operating expenses: Resources that must flow out of a company if it is to earn revenues
© 2009 Pearson Education, Inc.
FIGURE 14.2 Google’s Income Statement
© 2009 Pearson Education, Inc.
Financial Statements (cont’d)
• Statements of Cash Flows– Describes yearly cash receipts and cash payments
• Cash Flows from Operations: Concerns main operating activities: cash transactions involved in buying and selling goods and services
• Cash Flows from Investing: Net cash used in or provided by investing
• Cash Flows from Financing: Net cash from all financing activities
• The Budget– A detailed report on estimated receipts and expenditures
for a future period of time
© 2009 Pearson Education, Inc.
FIGURE 14.3 Google’s Statements of Cash Flows
© 2009 Pearson Education, Inc.
FIGURE 14.4 Perfect Posters’ Sales Budget
© 2009 Pearson Education, Inc.
Financial Statements Review
Balance SheetBalance SheetAssets – Liabilities = Owners’ EquityAssets – Liabilities = Owners’ Equity
Balance SheetBalance SheetAssets – Liabilities = Owners’ EquityAssets – Liabilities = Owners’ Equity
Income StatementIncome StatementRevenues – Expenses = Profit (or Loss)Revenues – Expenses = Profit (or Loss)
Income StatementIncome StatementRevenues – Expenses = Profit (or Loss)Revenues – Expenses = Profit (or Loss)
Statement of Cash FlowsStatement of Cash FlowsCash In and Cash OutCash In and Cash Out
Statement of Cash FlowsStatement of Cash FlowsCash In and Cash OutCash In and Cash Out
BudgetBudgetEstimate – Actual = VarianceEstimate – Actual = Variance
BudgetBudgetEstimate – Actual = VarianceEstimate – Actual = Variance
© 2009 Pearson Education, Inc.
Reporting Standards and Practices
• Generally Accepted Accounting Principles (GAAP)– Revenue recognition: Formal recording and
reporting of revenues at the appropriate time– Full disclosure
• Financial statements should not include just numbers but should also furnish management’s interpretations and explanations of those numbers so that users can better understand information in the statements
© 2009 Pearson Education, Inc.
Current Current Assets Assets
Current Current LiabilitiesLiabilities
Solvency Ratios
Current Ratio:
Short-Term
Leverage:Leverage: The ability to finance an investment The ability to finance an investment through borrowed fundsthrough borrowed funds
© 2009 Pearson Education, Inc.
Solvency Ratios
Debt to Owners’ Equity Ratio:
DebtDebt
Owners’ EquityOwners’ Equity
Long-Term
© 2009 Pearson Education, Inc.
Profitability and Activity Ratios
Return on Equity:
Earnings Per Share:Earnings Per Share:
Net IncomeNet Income
Total Owners' EquityTotal Owners' Equity
Inventory Turnover Ratio:Inventory Turnover Ratio:Cost of Goods SoldCost of Goods Sold
Average InventoryAverage Inventory
Net IncomeNet Income
# of Shares Outstanding# of Shares Outstanding
© 2009 Pearson Education, Inc.
Bringing Ethics into the Accounting Equation
• Why Accounting Ethics?– To maintain public confidence in business
institutions, financial markets, and the products and services of the accounting profession
• AICPA’s Code of Professional Conduct– Maintained and enforced by the AICPA– The AICPA identifies six ethics-related areas with
which accountants must comply to maintain certification
© 2009 Pearson Education, Inc.
TABLE 14.3 Overview of the Code of Ethics for CPAs
© 2009 Pearson Education, Inc.
TABLE 14.4 Examples of Unethical and Illegal Accounting Actions
© 2009 Pearson Education, Inc.
Key Terms
accountingaccounting equationaccounting information system (AIS)accounts payable (payables)activity ratioassetauditbalance sheetbookkeepingbudgetCertified Fraud Examiner (CFE)certified management accountant
(CMA)
certified public accountant (CPA)code of professional conductcontrollercore competencies for accountingcost of goods soldcost of revenuescurrent assetcurrent liabilitycurrent ratiodebtdepreciationearnings per sharefinancial accounting
© 2009 Pearson Education, Inc.
Key Terms (cont’d)
financial statementfixed assetforensic accountingfull disclosuregenerally accepted accounting
principles (GAAP)goodwillgross profitincome statement (profit-and-loss
statement)intangible assetleverageliabilityliquidity
© 2009 Pearson Education, Inc.
long-term liabilitymanagement accountantmanagement advisory servicesmanagerial (management) accountingnet income (net profit, net earnings)operating expensesoperating incomeowners’ equitypaid-in capitalprivate accountantprofitability ratioretained earnings
Key Terms (cont’d)
revenue recognitionrevenuesSarbanes-Oxley Act of 2002 (Sarbox)short-term solvency ratiosolvency ratiostatement of cash flowstax services
© 2009 Pearson Education, Inc.