Ch16-IntrotoBusiness

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UnderstandingAccounting and

Financial Statements

Chapter 16



Explain the functions and importance

of accounting, and identify the three

basic activities involving accounting.

Describe the roles played by public,management, government and not-for-

profit accountants.

Identify the foundations of the

accounting system, including GAAP

and the role of the Financial Accounting Standards Board (FASB).

Outline the steps in the accounting

cycle, and define double-entry

bookkeeping and the accounting

equation.

Explain the functions and major

components of the four principal financial

statements: the balance sheet, the

income statement, the statement of

owner’s equity, and the statement of

cash flows.

Discuss how financial ratios are used to

analyze a company’s financial strengths

and weaknesses.

Describe the role of budgets in abusiness.

Outline accounting issues facing global

business and the move toward one set

of worldwide accounting rules.

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Accounting is the process of measuring, interpreting, and

communicating financial information to support internal and

external business decision making.





• Financing activities provide necessary funds tostart a business and expand it after it beginsoperating.

• Invest ing activities provide valuable assetsrequired to run a business.

• Operat ing activities focus on selling goods and

services, but they also consider expenses asimportant elements of sound financialmanagement.



• Publ ic Accountants

– Provide accounting services toindividuals or business firms for a fee

• Management A ccountants

– Provide timely, relevant, accurate, andconcise information that executives

can use to operate their firms

• Government and Not-for-Prof i t

Accountants



• Generally accepted accounting principles (GAAP) encompass the

conventions, rules, and procedures for determining acceptable

accounting practices at a particular time.

• Financial Accounting Standards Board (FASB) is primarilyresponsible for evaluating, setting, or modifying GAAP in the U.S.

• Sarbanes-Oxley Act responded to cases of accounting fraud.

– Created the Public Accounting Oversight Board, which sets audit

standards and investigates and sanctions accounting firms that certify the

books of publicly traded firms.

– Senior executives must personally certify that the financial information

reported by the company is correct.

– Resulted in increase in demand for accountants.

http://www.fasab.gov/accepted.html

http://www.fasb.org/

http://www.fasb.org/

http://www.fasab.gov/accepted.html



Accoun t ing process - set of activities involved in

converting information about transactions

into financial statements.



• Assets - anything of value owned or leased by a business.

• Liabi l i ty - claim against a firm’s assets by a creditor.

• Owner’s equity - all claims of the proprietor, partners, or

stockholders against the assets of a firm, equal to the excess of

assets over liabilities.

• Basic accoun t ing equation - relationship that states that

assets equal liabilities plus owners’ equity.

• Doub le-entry boo kkeeping - process by which accounting

transactions are entered; each individual transaction always has

an offsetting transaction.



• Simplifies the accounting process by automating data entry and

calculations.

• Available products are customized for businesses of different sizes.

– Entrepreneurs and small businesses use: QuickBooks, Peachtree,and BusinessWorks.

– Larger firms use larger scale software packages like: Computer

Associates, Oracle, and SAP.

• Software that handles accounting information for internationalbusinesses is another option. Offers different country

information/language.

• Some systems offer web-based packages for small and

medium businesses.

http://quickbooks.intuit.com/

http://www.peachtree.com/

http://www.blytheco.com/businessworks/default.asp

http://www.ca.com/

http://www.ca.com/

http://www.oracle.com/

http://www.sap.com/

http://www.sap.com/

http://www.oracle.com/

http://www.ca.com/

http://www.ca.com/

http://www.blytheco.com/businessworks/default.asp

http://www.peachtree.com/

http://quickbooks.intuit.com/



Balance sheet - statement of a firm’s financial

position—what it owns and the claims against its

assets—at a particular point in time.

Photograph of firm’s assets together with its liabilities

and owner’s equity

Follows the accounting equation





Income Statement - financial record of a company’s

revenues and expenses, and profits over a period of

time.

Firm’s financial performance in terms of revenues,

expenses, and profits over a given time period.

Reports profit or loss.

Focus on revenues and costs associated with

revenues.





Statement of Owner’s Equity - is designed to show

the components of the change in equity from the end

of one fiscal year to the end of the next.

Begins with the amount of equity shown on the

balance sheet.

Net income is added, and cash dividends paid toowners are subtracted.





Statement of cash flows - a firm’s cash receipts and

cash payments that presents information on its

sources and uses of cash.

Accrual accounting - method that records revenue

and expenses when they occur, not necessarily when

cash actually changes hands.





Ratio analysis - tool for measuring a firm’s liquidity, profitability,

and reliance on debt financing, as well as the effectiveness of

management’s resource utilization.



Ac id-test (or qu ick)

ratio measures the

ability of a firm to meet

its debt payments onshort notice.

Cash and equivalents

+ short-term investments

+ accounts receivable

Total current liabilities

Curren t ratio compares

current assets to current

liabilities.

Total current assets

Total current liabilities



Inventory turnover

ratio indicates the

number of times

merchandise moves

through a business.

Net sales

Average of inventory

Total asset turnover ratio

indicates how much in

sales each dollar investedin assets generates.

Net sales

Average of total assets



Prof i tabi l i ty rat ios measure the organization’s overall financial

performance by evaluating its ability to generate revenues in excess of

operating costs and other expenses.



• Leverage ratios measure the extent to which a firm relies on

debt financing.

• Total liabilities to total assets ratio > 50 percent indicates that a

firm is relying more on borrowed money than owners’ equity.



• Budget - planning and control tool that reflects a

firm’s expected sales revenues, operating

expenses, and cash receipts and outlays.

• Management estimates of expected sales, cash

inflows and outflows, and costs.

• Budgets are a financial blueprint that serves as a

financial plan.

• Cash budg et - tracks the firm’s cash inflows and

outflows.





• Internat ional Ac cou nting Standards Comm ittee (IASC)

promotes worldwide consistency in financial reporting practices.

In 2001, became the Internat ional Ac countin g Standards

Board (IASB ). Internat ional Financ ial Report in g Standards

(IFRS) are the standards .

• Exchange Rates - ratio at which a country’s currency can be

exchanged for other currencies.

• Consolidated financial statements must reflect gains and lossesdue to changes in exchange rates.

• Can have significant impact on financial statement.

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