Wednesday morning
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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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Wednesday morning

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Wednesday morning

Wednesday morning




  • 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

The accounting system

The Accounting System

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.

Wednesday morning


  • 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)

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