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Wednesday morning. Accounting. Accounting. Accounting -- Recording, classifying, summarizing and interpreting of financial events and transactions in an organization to provide interested parties needed financial information.

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  • Accounting -- Recording, classifying, summarizing and interpreting of financial events and transactions in an organization to provide interested parties needed financial information.
  • Outside parties - like employees, owners, creditors, unions, investors and the government - make use of a firm’s accounting information
financial accounting
Financial Accounting
  • Financial Accounting -- Financial information and analyses are generated for people primarily outside the organization. Outside users are interested in these questions:
    • Is the organization profitable?
    • Is it able to pay its bills?
    • How much debt does it owe?
  • Annual Report -- A yearly statement of the financial condition, progress, and expectations of the firm.
    • American Eagle, Disney
how to read an annual report
  • Key things to watch for and read:
    • Management’s discussion and analysis of operations
    • Balance sheet
    • Income statement
    • Statement of cash flows
    • Auditor’s opinion
managerial accounting
Managerial Accounting
  • Managerial Accounting --Provides information and analysis to managers inside the organization to assist them in decision making.
  • Managerial accounting is involved with:
    • Costs of production
    • Costs of marketing
    • Preparation and control of budgets
    • Minimizing tax liabilities
public vs private accountants
Public vs. Private Accountants
  • Private Accountants -- Work in a single firm, government agency, or nonprofit organization.
  • Public Accountants -- Provide accounting services to individuals or businesses.
  • Certified Public Accountants (CPAs) -- Accountants who have passed a series of examinations established by the American Institute of Certified Public Accountants (AICPA) and met a states requirements for education and experience.
  • Auditing -- Reviewing and evaluating the information used to prepare a company’s financial statements.
  • Independent Audit -- An evaluation and unbiased opinion about the accuracy of a company’s financial statements.
  • Certified Internal Auditors (CIAs) -- Accountants who have a bachelor’s degree and two years of experience in internal auditing and pass an exam administered by the Institute of Internal Auditors.
specialized accountants
Specialized Accountants
  • Tax Accountants -- Accountants trained in tax law and are responsible for preparing tax returns or developing tax strategies.
  • Forensic Accountants -- When a company is suspected of fraud or other accounting wrongdoings a court will commission a forensic accountant to search for foul play. Forensic accountants look for proof a company is “cooking the books.” Please note that this is not the role of the public accountants.
the accounting cycle
The Accounting Cycle
  • Accounting Cycle -- A six-step procedure that results in the preparation and analysis of the major financial statements.
  • Generally Accepted Accounting Principles
    • the standard framework of guidelines for financial accounting used in any given jurisdiction; GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements.
  • Bookkeeping -- The recording of business transactions. Bookkeepers divide a firm’s transactions into meaningful categories and post them into a record book or computer program called a journal.
    • Use of double entry bookeeping
  • Ledger -- A specialized accounting book or program where all information is in one place.
  • Trial Balance -- A summary of all the information in the account ledgers.
cash vs accrual accounting
Cash vs. Accrual Accounting
  • Revenue Recognition
    • An exchange of goods or services at an agreed upon price with payment or promise of payment
      • Accounts receivable, unearned revenue
  • Matching
    • Matching expenses with the revenue it helped to generate; matching expenses to the time period when they are incurred
      • inventory/cost of goods sold, accounts payable, prepaid expenses
financial statements
Financial Statements
  • Financial Statement -- A summary of all the financial transactions that have occurred over a particular period.
  • Key financial statements of business are:
    • Balance sheet
    • Income statement
    • Statement of cash flows
the fundamental accounting equation
The Fundamental Accounting Equation
  • Fundamental Accounting Equation -- The basis for the balance sheet.
  • The equation must always be balanced and includes the formula:
    • Assets = Liabilities + Owners Equity
  • Assets -- Economic resources owned by a firm. Items can be tangible or intangible.
  • Liquidity -- Ease with which assets can be converted into cash.
classifying assets
Classifying Assets
  • Current Assets -- Items that can or will be converted to cash within one year.
  • Fixed Assets -- Long-term assets that are relatively permanent such as land, buildings, or equipment.
  • Intangible Assets -- Long-term assets that have no physical form but do have value such as patents, trademarks, and goodwill.
classifying liabilities
Classifying Liabilities
  • Liabilities -- What the business owes to others - its debts.
  • Accounts Payable -- Current liabilities a firm owes for merchandise or services purchased on credit.
  • Notes Payable -- Short or long-term liabilities a business promises to pay by a certain date.
  • Bonds Payable -- Long-term liabilities that the firm must pay back.
owners equity
Owners’ Equity
  • Owners’ Equity -- The owners’ share of the business: assets (what they own) minus liabilities (what they owe).
  • Consists of:
    • Paid-in Capital – amount of funds directly invested in the business by its owners
    • Retained Earnings -- Accumulated earnings from the firm’s profitable operations that are reinvested in the business.
the income statement
The Income Statement
  • Income Statement -- The financial statement that shows a firm’s bottom line - that is, its profit after costs, expenses, and taxes.
  • Net Income/Net Loss -- The revenue left over or depleted.
the multi step income statement
The Multi-Step Income Statement
  • The formula for the multi-step income statement:
    • Revenue
    • Minus Cost of Goods Sold
    • Equals Gross Profit
    • Minus Operating Expenses
    • Equals Net Income before Taxes (Operating Income)
    • Minus Taxes
    • Equals Net Income or Net Loss
income statement accounts
Income Statement Accounts
  • Revenues is the monetary value a firm received for goods sold, services rendered or other payments.
    • Recall revenue recognition
  • Cost of Goods Sold (or Manufactured) -- Measures the cost of merchandise the firms sells or the cost of raw materials and supplies it used in producing items for resale.
    • Recall matching
  • Gross Profit -- How much a firm earned by buying (or making) and selling merchandise.
income statement accounts cont d
Income Statement Accounts, cont’d
  • Operating Expenses -- Expenses a firm incurs in selling goods and services such as rent, salaries and supplies.
  • Depreciation -- The systematic write-off of the cost of a tangible asset over its estimated useful life.
statement of cash flows
Statement of Cash Flows
  • The purpose is to provide info about the sources and uses of cash during a particular time period
  • content and organization
    • operating activities: generally, any activities that enter into the determination of net income
    • investing activities: transactions involved in the acquisition or disposition of non-current assets (sale or purchase of non-current assets, sales or purchases of other company’s securities, collecting or giving a loan to a third party)
    • financing activities: transactions involving the company’s debt or equity (selling or acquiring company’s own stock, issuing or repaying long-term debt, payment of dividends)
    • There are two different ways to prepare the operating section of the SCF, the direct and indirect method;
understanding cash flow
Understanding Cash Flow
  • Cash is the lifeblood of any business
  • Managing cash flow is a key consideration of a business and can be particularly challenging for small and seasonal businesses.
example of the accounting cycle
Example of the Accounting Cycle
  • Glorian Portrait
    • Transaction worksheet
    • Income Statement
      • Retained Earnings
    • Balance Sheet
    • Statement of Cash Flows
financial statement analysis
Financial Statement Analysis
  • FSA - The assessment of a firm’s financial condition using calculations and financial ratios developed from the firm’s financial statements. Sometimes referred to as ratio analysis
  • The ratios do not exist in a vacuum
  • By themselves, they do not provide much meaning
  • They need to be compared to something:
    • Trends over time
    • Key competitors
    • Industry averages
fsa cont d
FSA, cont’d
  • The ratios can be broken down into
    • Profitability
    • Short-term financial position (liquidity)
    • Long-term financial position (leverage/financial structure)
    • Efficiency/effectiveness
  • Yahoo Finance and WSJ as sources of ratio analysis
    • American Eagle (Yahoo), American Eagle (WSJ)
international accounting issues
International Accounting Issues
  • Multinational companies must adapt their accounting reporting to the rules of multiple countries.
  • Many countries have adopted International Financial Reporting Standards (IFRS) and are pushing to make them standard.
  • The U.S. Securities & Exchange Commission believes there should be such a standard.
timeline for the us move to ifrs
Timeline for the US move to IFRS
  • 2008: SEC offers proposed timeline
  • 2009: 110 large companies have the option of using IFRS
  • 2011: SEC assesses progress of IFRS
  • 2013: Final decision on the move to IFRS
  • 2014: Large public companies will be required to report in IFRS (pending SEC decision)
  • 2016: All companies will be required to report in IFRS (pending SEC decision)