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Accounting and Financial Management

Accounting and Financial Management. Chapter 7. Chapter 7 Objectives. After studying this chapter, you will be able to: Discuss how managers and outsiders use financial information Describe what accountants do Summarize the impact of the Sarbanes-Oxley Act

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Accounting and Financial Management

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  1. Accounting and Financial Management Chapter 7 ©2007 Prentice Hall

  2. Chapter 7 Objectives After studying this chapter, you will be able to: • Discuss how managers and outsiders use financial information • Describe what accountants do • Summarize the impact of the Sarbanes-Oxley Act • State the basic accounting equation and explain the purpose of double-entry bookkeeping and the matching principle ©2007 Prentice Hall

  3. Chapter 7 Objectives, cont. • Differentiate between cash basis and accrual basis accounting • Explain the purpose of the balance sheet and identify its three main sections • Explain the purpose of the income statement and statement of cash flows • Explain the purpose of ratio analysis and list the four main categories of financial ratios • Identify the responsibilities of a financial manager ©2007 Prentice Hall

  4. Communication Financial Accounting Management Accounting Measuring Interpreting Decision Making Understanding Accounting ©2007 Prentice Hall

  5. Bookkeeping Cost Accounting Tax Accounting Financial Analysis What Accountants Do ©2007 Prentice Hall

  6. Ten Most Important Accounting Skills • Analytical • Problem solving • Interpersonal • Listening • Communication • Leadership • Decision making • Time management • Teamwork • Computer ©2007 Prentice Hall

  7. Private Public CPA CMA Internal Audit CPA External Audit Types of Accountants ©2007 Prentice Hall

  8. The Big Four • Deloitte & Touche • Ernst & Young • KPMG • Price Waterhouse Coopers ©2007 Prentice Hall

  9. The Arthur Anderson Scandal • Deliberate deception by corporate clients • Changes in accounting practices • Conflict of interests • Overly aggressive business practices ©2007 Prentice Hall

  10. Generally Accepted Accounting Principles (GAAP) Financial Accounting Standards Board (FASB) International Accounting Standards (IAS) Securities and Exchange Commission (SEC) The Rules of Accounting ©2007 Prentice Hall

  11. Authority of Auditors Implementation Conflict of Interest Cost of Compliance Investor Protection Enforcement Issues Corporate Accountability Reporting Requirements Sarbanes-Oxley Act Advantages Disadvantages ©2007 Prentice Hall

  12. Owner’s Equity: Assets – Liabilities = Owner’s Equity Accounting Equation: Assets = Liabilities + Owner’s Equity The Accounting Equation ©2007 Prentice Hall

  13. Double-Entry Bookkeeping • Debit • Credit ©2007 Prentice Hall

  14. Matching Principle • Accrual basis • Cash basis ©2007 Prentice Hall

  15. How Are Financial Statements Used? ©2007 Prentice Hall

  16. Understanding Financial Statements • Balance Sheet • Income Statement • Statement of Cash Flows ©2007 Prentice Hall

  17. The Balance Sheet Assets Current Assets Fixed Assets Liabilities and Shareholder’s Equity Current Liabilities Long-Term Liabilities Shareholder’s Equity ©2007 Prentice Hall

  18. Revenues Gross Sales – Returns and Allowances Cost of Goods Sold Beginning Inventory + Purchases – Cost of Goods – Ending Inventory Operating Expenses Selling Expenses + General Expenses Net Operating Income Gross Profit + Other Income – Operating Expenses Net Income After Taxes Net Income Before Taxes – Income Taxes The Income Statement ©2007 Prentice Hall

  19. Statement of Cash Flows Operations Investments Financing ©2007 Prentice Hall

  20. Analyzing Financial Statements Trend Analysis Ratio Analysis Uncover Business Shifts Consider Extraordinary Circumstances Consider More Than One Ratio Check Specific Data ©2007 Prentice Hall

  21. Types of Financial Ratios ©2007 Prentice Hall

  22. Return on Sales = Net Income Net Sales Return on Equity = Net Income Total Owner’s Equity Earnings per Share = Net Income Average Shares Outstanding Profitability Ratio ©2007 Prentice Hall

  23. Current Ratio = Current Assets Current Liabilities Quick Ratio = Current Assets - Liabilities Current Liabilities Liquidity Ratio Working Capital = Current Assets - Current Liabilities ©2007 Prentice Hall

  24. Activity Ratios Inventory Turnover = Cost of Goods Sold Average Inventory Receivables Turnover = Sales Average Accounts Receivable ©2007 Prentice Hall

  25. Debt to Equity = Total Liabilities Total Equity Debt to Total Assets = Total Liabilities Total Assets Leverage (Debt) Ratio ©2007 Prentice Hall

  26. Develop and Implement a Financial Plan • Amount of funds • Sources of funds • Uses of funds Monitor Cash Flow • Cash • Inventory • Receivables and payables Develop a Budget • Financial control • Capital investments • Capital budgeting Understanding Financial Management ©2007 Prentice Hall

  27. Financial Management Length of Term Cost of Capital Debt or Equity ©2007 Prentice Hall

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