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LINK BETWEEN BUSINESS & ACCOUNTING (1 of 2) PowerPoint PPT Presentation


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LINK BETWEEN BUSINESS & ACCOUNTING (1 of 2). Learning objectives Definition of accounting Why accounting is important to business Using financial reports to make decisions. LINK BETWEEN BUSINESS & ACCOUNTING (2 of 2). The accounting equation Basic financial statements

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LINK BETWEEN BUSINESS & ACCOUNTING (1 of 2)

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©2006 Prentice Hall, Inc.


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LINK BETWEEN BUSINESS & ACCOUNTING(1 of 2)

  • Learning objectives

  • Definition of accounting

  • Why accounting is important to business

  • Using financial reports to make decisions

©2006 Prentice Hall, Inc.


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LINK BETWEEN BUSINESS & ACCOUNTING(2 of 2)

  • The accounting equation

  • Basic financial statements

  • Financial statement analysis

  • Business risk, control, and ethics

©2006 Prentice Hall, Inc.


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Learning Objectives(1 of 2)

  • Define accounting and explain why accounting information is important

  • Identify the people who use accounting information and how financial accounting standards are determined

©2006 Prentice Hall, Inc.


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Learning Objectives(2 of 2)

  • Explain the contents of the four basic financial statements

  • Explain financial statement analysis and the use of ratio analysis

  • Recognize the risks associated with being in business and how to control those risks

©2006 Prentice Hall, Inc.


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Definition of Accounting

  • Accounting

    • The process of identifying, measuring, and communicating financial business information to various users

  • Transaction

    • A business activity that results in an economic exchange between a business entity and an outside partner

©2006 Prentice Hall, Inc.


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Why Accounting Is Important to Business

  • What does a business do?

  • Accounting information needed to operate a firm

©2006 Prentice Hall, Inc.


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What does a business do?

  • For-profit businesses provide goods and services to make a profit for its owners

    • Profit is the value a business creates or adds to products or services it sells

  • Not-for-profit organizations provide goods and services solely to help people

  • A business may create its own goods and services or sell somebody else’s

©2006 Prentice Hall, Inc.


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Accounting Information Needed to Operate a Firm (1 of 2)

  • Accounting in the News – HealthSouth

    • What does “cooking the books” mean?

    • How and why did HealthSouth cook the books?

  • Accounting information system

    • Provide a firm with information needed to plan, implement and evaluate its activities

©2006 Prentice Hall, Inc.


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Accounting Information Needed to Operate a Firm (2 of 2)

  • Revenue

    • Amount a business earns from goods and services it provides

  • Expenses

    • Cost of providing goods and services to earn revenue

  • Profit

    • Difference between revenues & expenses

    • Value created by a business

©2006 Prentice Hall, Inc.


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Using Financial Reports to Make Decisions

  • Accounting information needs for pre-opening business decisions

  • Operating cycle

  • Internal and external financial statement users

©2006 Prentice Hall, Inc.


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Accounting Information Needs for Pre-opening Business Decisions

  • What accounting information is needed to make these pre-opening decisions?

    • How to finance the business

    • Form of business

    • How much to produce

    • Which suppliers to use

    • How much to charge

    • How much to pay for advertising

©2006 Prentice Hall, Inc.


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Operating Cycle(1 of 2)

  • Sequence of business activities for an accounting period

    • Getting cash

    • Using cash to purchase inputs

    • Changing inputs into products &/or services

    • Providing products/services to customers

    • Collecting cash from customers

©2006 Prentice Hall, Inc.


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Operating Cycle(2 of 2)

Starts with cash;

Ends with more cash

Collect cash from customers

Purchase

inventory

Make sales to customers

  • Accounting Period

    • Any length of time a company uses to evaluate its performance

©2006 Prentice Hall, Inc.


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Internal and External Financial Statement Users

  • Internal users

  • External users

  • Certified public accountants (CPAs)

  • Setting rules for financial reporting

©2006 Prentice Hall, Inc.


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Internal Users

  • Management is the primary internal user of accounting information

  • Management accounting provides information for management

  • No specific rules or regulations for internal information

  • Information may not be available to external users

©2006 Prentice Hall, Inc.


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Eternal Users(1 of 2)

  • Financial statements

    • Financial accounting

      • Communicates accounting information to external users

    • Reports financial position of a firm

    • Specific rules and regulations govern how information is reported

©2006 Prentice Hall, Inc.


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Eternal Users(2 of 2)

  • Types of external users

    • Government

    • Creditors

    • Potential investors

    • Vendors, customers, and employees

©2006 Prentice Hall, Inc.


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Certified Public Accountants (CPAs)

  • Perform a variety of accounting services

  • Only people who can perform an audit

  • Requirements to be a CPA

    • Education requirements

    • Pass CPA exam

    • Work experience & other requirements

©2006 Prentice Hall, Inc.


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Setting Rules for Financial Reporting(1 of 2)

  • Generally Accepted Accounting Principles (GAAP)

    • Rules governing financial statements

  • Securities and Exchange Commission (SEC)

    • Monitor financial reporting of public companies

©2006 Prentice Hall, Inc.


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Setting Rules for Financial Reporting(2 of 2)

  • Financial Accounting Standards Board (FASB)

    • Set accounting standards

  • Public Companies Accounting Oversight Board (PCAOB)

    • Oversee auditors of public companies

©2006 Prentice Hall, Inc.


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The Accounting Equation(1 of 4)

  • Assets = Claims

    • Claims of creditors and owners

  • Assets = Liabilities + Owners’ Equity

  • Assets

    • Economic resources owned by a business

    • Will generate future value for the business

    • Receivable denotes an asset account

      • Stuff you own

©2006 Prentice Hall, Inc.


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The Accounting Equation(2 of 4)

  • Liabilities

    • Amounts the business owes to creditors

    • The company’s debts

    • Payable denotes a liability

      • Stuff you owe to creditors

©2006 Prentice Hall, Inc.


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The Accounting Equation(3 of 4)

  • Owners’ equity

    • Owners’ claims to the company’s assets

      • Stuff you owe to the owners

      • Residual interest

        • Assets – Liabilities = Owners’ Equity

    • Also called shareholders’ equity or stockholders’ equity

      • Owners of a corporation

        • Shareholders or stockholders

©2006 Prentice Hall, Inc.


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The Accounting Equation(4 of 4)

  • Calculate retained earnings:

©2006 Prentice Hall, Inc.


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Basic Financial Statements(1 of 2)

  • Monetary unit assumption

    • Only information that can be expressed in terms of money is included in U.S. financial statements

  • Account

    • Items grouped together for the accounting records

©2006 Prentice Hall, Inc.


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Basic Financial Statements(2 of 2)

  • Balance sheet

  • Income statement

  • Statement of changes in owners’ equity

  • Statement of cash flows

  • Relationship among the financial statements

  • Financial statement question

©2006 Prentice Hall, Inc.


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Balance Sheet

  • Financial position of a company at a specific point in time

    • Reports assets, liabilities, and owners’ equity

  • Owners’ equity

    • Contributed Capital

      • Common Stock

    • Retained Earnings

©2006 Prentice Hall, Inc.


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Income Statement

  • Shows revenues and expenses for a specific accounting period

  • Net profit or net income

    • When revenues > expenses

  • Net loss

    • When revenues < expenses

©2006 Prentice Hall, Inc.


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Statement Of Changes InOwners’ Equity

  • Summarizes +s & -s for owners’ equity accounts for an accounting period

  • Statement of retained earnings

    • Only summarizes activity in retained earnings account

      • Increases from net income

      • Decreases from net loss

      • Decrease from payment of dividends

        • Distributions of earnings to owners

©2006 Prentice Hall, Inc.


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Statement Of Cash Flows(1 of 2)

  • Summarizes cash receipts and cash disbursements for an accounting period

  • Not the same as net income

    • Income measured when it is earned

    • Expenses measured when incurred

    • Timing of cash flow does not affect when to report income & expenses

©2006 Prentice Hall, Inc.


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Statement Of Cash Flows(2 of 2)

  • Operating activities

    • Transactions resulting from primary business activities

  • Investing activities

    • Purchase and sale of long-term assets

      • Not purchase and sale of inventory

  • Financing activities

    • Transactions with long-term creditors, and owners

©2006 Prentice Hall, Inc.


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Relationship Among Financial Statements (1 of 2)

  • Prepare income statement to determine net income

    • Revenue – Expenses = Net Income

  • Net income needed to compute retained earnings on Stmt. of Stockholders’ Equity

    • Contributed Capital

    • Retained Earnings

©2006 Prentice Hall, Inc.


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Relationship Among Financial Statements (2 of 2)

  • Ending balance in equity accounts needed to prepare balance sheet

  • Cash balance from balance sheet needed to prepare statement of CF

©2006 Prentice Hall, Inc.


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Financial Statement Question

  • Identify the effect on net income

  • Identify the cash flows as operating, investing or financing activities

  • Purchase equipment.

  • Pays for ad in newspaper.

  • Earns revenue by providing services.

  • Repays principle of loan to bank.

  • Pays dividends to shareholders.

©2006 Prentice Hall, Inc.


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Financial Statement Analysis(1 of 2)

  • Comparisons across time periods and between companies

  • Ratio analysis

    • Using ratios to analyze a firm’s past performance and forecast future performance

©2006 Prentice Hall, Inc.


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Financial Statement Analysis(2 of 2)

  • Financial analyst

    • Gather financial information

    • Analyze financial information

    • Make recommendations to their clients

  • Where do financial analyst’s get their information?

©2006 Prentice Hall, Inc.


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Business Risk, Control, and Ethics(1 of 3)

  • Risk

    • Exposure to potential injury or loss

    • What are some business risks?

  • Reasons most small businesses fail

    • Lack of management systems

    • Lack of vision and purpose by the principles

    • Lack of financial planning and review

©2006 Prentice Hall, Inc.


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Business Risk, Control, and Ethics (2 of 3)

  • Ethics in financial reporting and Sarbanes Oxley Act of 2002

    • Increase investor confidence

    • Establishes for corporate governance

    • Make corporations’ internal controls more effective

    • Increase understanding of financial reporting

©2006 Prentice Hall, Inc.


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Business Risk, Control, and Ethics (3 of 3)

  • Audits

    • Examination of a company’s financial statements by independent CPAs

    • Provide assurance that financial statements are fairly presented

    • Allows investors to rely on the information provided in the financial statements

    • Audit opinion

©2006 Prentice Hall, Inc.


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©2006 Prentice Hall, Inc.


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