Why Do We Need Accounting?
• Accounting:– Recording, classifying,
summarizing, and interpreting financial data
– Helps us to gauge how well the firm is performing and to report this
Types of Accounting
• Managerial– Measures cost and budget
information
• Financial – Preparation for external
users– FASB
• Financial Accounting Standards Board
• GAAP
• Auditing
• Tax
• Government
Becoming an Accountant
• Bachelor’s in Accounting
• CPA, CIA, CMA
• Forensic accounting
• Faster than average job growth– Sarbanes-Oxley Act
• Public Company Accounting Oversight Board
• Median salary: $51,000
The Accounting Cycle
Enter transactionsinto journals
Transfer transactionsto ledger
Prepare atrial balance
Create financialstatements
Read and analyzefinancials
The Financial Statements
• Balance Sheet– Snapshot of what the firm owns
• Income Statement– Revenue versus costs over a period of time
• Statement of Cash Flows– Inflow and outflow of cash over period of time
The Balance Sheet
• Assets:– Current Assets– Fixed Assets– Intangible Assets
• Liabilities– Accounts payable, notes payable, bonds payable
• Owners’ Equity
The Income Statement
• Revenue– Monies earned by the firm
• Cost of Goods Sold– Production, raw materials, storage, piecerate labor– FIFO versus LIFO
• Operating Expenses
• Net Profit – Retained Earnings
Statement of Cash Flows
• Separated into Cash Flows from Operations, Investing, and Financing
• Operations– Sales, COGS, expenses, purchases, bills, taxes,
interest paid and received
• Investing– New equity, equipment
• The Importance of Cash
Ratios
• Help to compare year to year and compare your firm to others of different sizes
• Liquidity – how fast could you cover your debt?– Current ratio
• Can also do working capital (CA-CL)
– Quick ratio
Current AssetsCurrent Liabilities
Current Assets - Inventory Current Liabilities
Ratios
• Leverage– Debt-to-equity– Why it’s important to keep this level
• Profitability– Profit margin– Earnings per share– Return on equity
Long-Term DebtOwners Equity
Net Profit Sales
Net Profit # Shares Outstanding
Net Profit Owners Equity