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CHAPTER 8: Accounting. DECISION MAKING BY THE NUMBERS. Market Information. How can you tell how well you are doing? Measure individual transactions Put them all together – How much “stuff” (acquired wealth) do you have Where did it come from? (assets = liabilities + owners equity)

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chapter 8 accounting

CHAPTER 8: Accounting

DECISION MAKING BY THE NUMBERS

market information
Market Information
  • How can you tell how well you are doing?
    • Measure individual transactions
    • Put them all together –
      • How much “stuff” (acquired wealth) do you have
      • Where did it come from? (assets = liabilities + owners equity)
      • How much new wealth are you creating with it?(revenue - expense = profit)
  • Goal of business: To create wealth
  • Competing for transactions in the market
financial statements the main output of financial accounting
FINANCIAL STATEMENTS: THE MAIN OUTPUT OF FINANCIAL ACCOUNTING
  • Financial accounting includes three basic financial statements:
    • Balance Sheet
      • assets: value of the stuff the organization controls
      • liabilities: debt claims against the stuff
      • owners’ equity: owners’ claims against the stuff
    • Income Statement
      • revenues ($ coming in)
      • expenses ($ going out)
    • Statement of Cash Flows
  • Corporations with publicly held stock must publish annual reports with all three statements
balance sheet what we own and how we got it
BALANCE SHEET: WHAT WE OWN AND HOW WE GOT IT

Assets =

Liabilities + Owner’s Equity

Balance Sheet – summarizes a firm’s financial position at a specific point in time.

Liabilities –

indicates what

the firm owes to

non-owners

Assets –

things of

value that

the firm owns

Owner’s

Equity –

the claims owners

have against

their firm’s

assets

stuff claims against stuff
Stuff & claims against stuff
  • Stuff
  • Car $4,000
  • Claims against stuff
  • Dave (owner) $3,000
  • Becky (loan) $1,000
stuff claims against stuff1
Stuff & claims against stuff
  • Stuff
  • House $140,000
  • Claims against stuff
  • Bank (debt) $115,000
  • Dave (owner) $ 25,000
stuff claims against stuff2
Stuff & claims against stuff
  • Stuff
  • Car $4,000
  • Claims against stuff
  • Dave (owner) $3,000
  • Becky (debt: 6 mo) $1,000
  • Stuff
  • House $140,000
  • Claims against stuff
  • Bank (debt) $115,000
  • Dave (owner) $ 25,000
snap shot the balance sheet
Snap shot: The Balance Sheet

Assets(stuff)

  • car 4,000
  • house 140,000
  • total144,000

Liabilities and Owners Equity

  • short term liabilities (becky) 1,000
  • long term liabilities (bank) 115,000
  • equity (car and house) 28,000
  • total144,000

$

$

foundation accounting numbers
Balance Sheet

AssetsCash Accounts Receivable

Inventory Total Current Assets

Plant & Equipment Accumulated Depreciation

Total Fixed Assets

Total Assets

12/31/07

26.8%

16.1%

11.3%

54.2%

69.1%

-23.2%

45.8%

100.0%

Foundation & Accounting Numbers

$5,593

$3,353

$2,353

$11,299

$14,400

($4,848)

$9,552

$20,852

foundation accounting numbers1
Foundation & Accounting Numbers
  • Liabilities & owner's equity

Accounts Payable

Current Debt

Long Term Debt

Total Liabilities

Common Stock

Retained Earnings

Total Equity

Total Liability & Owner’s Equity

$2,855

$0

$5,200

$8,055

$2,313

$10,485

$12,798

$20,852

13.7%

0.0%

24.9%

38.6%

11.1%

50.3%

61.4%

100.0%

the income statement how did we do
THE INCOME STATEMENT: HOW DID WE DO?

Income Statement – summarizes a firm’s operations over a given period of time in terms of profit and loss.

Revenue – Expenses =

Net Income

Expenses –

the cash the firm

spends or other

assets it uses to

generate

revenue

Revenue–

the increase in

the amount of

assets the firm

earns

Net Income –

the profit or loss

the firm earns

statement of cash flows show me the money
STATEMENT OF CASH FLOWS: SHOW ME THE MONEY
  • Cash flowing into and out of the firm
    • Operations
    • Investing
    • Financing
  • Increase and decrease from all three sources
  • Total amount of cash on hand
  • Stakeholders want to know if there is adequate cash to pay workers, creditors, suppliers and IRS
additional financial statements
ADDITIONAL FINANCIAL STATEMENTS

Statement of Retained Earnings – reports how retained earnings have changed.

Stockholder’s Equity Statement – reports how net income and dividends affect retained earnings.

sarbanes oxley act of 2002
SARBANES-OXLEY ACT OF 2002
  • Commonly referred to as SOX
  • Banned relationships between CPA firms that might create conflict of interest
  • Created Public Company Accounting Oversight Board (PCOAB)
beyond the statements
BEYOND THE STATEMENTS

Horizontal Analysis – compares information in a firm’s financial statement over a period of 2 years or more.

Vertical Analysis – expresses items on the balance sheet and income statement as a percentage of a key value.

Ratio Analysis – compares selected items by computing percentages, rates or proportions.

managerial accounting inside intelligence
MANAGERIAL ACCOUNTING: INSIDE INTELLIGENCE
  • Reports and analysis for informed business decisions
    • Product Costing
      • Accurate measure and analysis of costs
      • Activity Based Costing (ABC)
incremental analysis
INCREMENTAL ANALYSIS
  • Make parts or buy from supplier?
  • Repair equipment or buy new?
  • Perform repairs or outsource?
  • Eliminate or sell product line/business?

Evaluates the financial impact of different alternatives

in a decision-making situation.

incremental analysis decision
INCREMENTAL ANALYSIS DECISION

An electronics firm produces high definition LCD televisions at a rate of 10,000 per month. It currently makes its own speaker sets for the televisions.

A supplier offers to sell the firm similar speakers at a cost of $23 per television. The firm could lower costs by buying the speakers, $23 is less than $26. Right?