1 Accounting Information for Business Decisions
Living in the Information Age Data Communication News Commentary Facts Access
Living in the Information Age Data Communication News Timeliness Independence Freedom-of-Expression Commentary Facts Access
is a system that information that is Influence of Accounting Accounting Identifies Records Relevant Communicates Reliable to help users make better decisions. Comparable
Business Profit Amounts earned from selling products or services Costs incurred with sales Amounts earned from sales less expenses incurred
Exh. 1.1 Nike’s Profit Breakdown
Return and Risk The lower the risk of our investment, the lower is our expected return. Amount of uncertainty about the return we expect to earn Profit Investment Return $ Risk ?
Source: The Wall Street Journal Returns for Bonds with Different Risks Bonds are written promises by organizations to repay amounts loaned to them with interest.
Exh. 1.3 Focus of Accounting • Identifying & Measuring • Recording • Reporting & Analyzing
Help set Setting Accounting Rules Unions AICPA Lenders Securities and Exchange Commission Investors Politicians Accountants Others All Provide input to Financial Accounting Standards Board Generally Accepted Accounting Principles
Accounting and Technology Reduces time, effort and cost of recordkeeping. Improves clerical accuracy. Changes the way we store, process and summarize large masses of data. Technology
Business Sally’s Grocery Partnership Corporation Proprietorship Forms of Organization Law Offices
Nonbusiness Government Nonprofit Private Forms of Organization
Exh. 1.4 Characteristics of Business Organizations * * Proprietorships and partnerships set up as LLC’s can limit their liability.
Corporation Owners of a corporation are called shareholders (or stockholders). When a corporation issues only one class of stock, we call it common stock (or capital stock).
Exh. 1.5 Activities in Organizations • Financing Activities • Owner financing (equity) • Nonowner financing (liabilities) Planning Planning Financing
Exh. 1.5 Activities in Organizations • Investing Activities • Buying resources (assets) • Selling resources (assets) Planning Planning Investing Financing
Exh. 1.5 Activities in Organizations • Operating activities • Aimed at selling products and services • Result in sales and expenses Planning Planning Investing Financing Operating
Exh. 1.7 Balance Sheet A balance sheet reports on investing and financing activities. It lists amounts for assets, liabilities, and equity at a point in time. The relationship is reflected in the Balance Sheet equation: Assets = Liabilities + Equity
Exh. 1.7 Income Statement An income statement reports on operating activities. It lists sales (revenues), costs, and expenses over a period of time. The relationship is expressed: Net Income = Revenues - Expenses
Exh. 1.7 Statement of Retained Earnings This statement reports changes in the retained earnings of the business over a period of time. It includes changes due to net income and any dividends paid to shareholders.
Exh. 1.7 Statement of Cash Flows The statement of cash flows reports on cash flows for operating, investing, and financing activities over a period of time.
Exh. 1.8 Users of Accounting Information Managerial Accounting is aimed at Internal Users Financial Accounting is aimed at External Users Lenders Shareholders Governments Labor Unions External Auditors Customers Managers Officers Internal Auditors Sales Staff Budget Officers Controllers
Research & Development Purchasing Human Resources Production Distribution Marketing Servicing Exh. 1.9 Internal Operating Functions Accounting Services
Ethics Ethics and Social Responsibility Beliefs that separate right from wrong Often coincide with laws Accepted standards of good and bad behavior
Exh. 1.10 Guidelines for Ethical Decision Making Make Ethical Decision Identify Ethical Concerns Analyze Options Use personal ethics to recognize an ethical concern. Consider all good and bad consequences. Choose the best option after weighing all consequences.
Social Responsibility • Donations to nonprofit organizations • Programs to reduce pollution • Programs to improve worker and consumer safety • Paid time off for workers
Exh. 1.11 Selected Opportunities in Accounting • Preparation • Statement Analysis • Auditing • Regulatory • Consulting • Planning • Criminal Investigation Financial Managerial Taxation Accounting-related • General Accounting • Cost Accounting • Budgeting • Consulting • Controller • Treasurer • Strategy • Preparation • Planning • Regulatory • Investigations • Consulting • Lenders • Consultants • Analysts • Traders • Managers • Directors • Underwriters • Planners • Appraisers • FBI Investigations
Accounting Specializations • Certified Public Accountant (CPA) • Certified Management Accountant (CMA) • Certified Internal Auditor (CIA) • Chartered Financial Analyst (CFA)
Return on Investment (ROI) = Net income ÷ Avg. total assets ROI is viewed as an indicator of operating efficiency.
Typical Ratios Used in Decision Analysis • Current ratio • Acid-test ratio • A/R turnover • Inventory turnover • Days’ sales uncollected • Days’ sales in inventory • Total asset turnover Solvency Profitability Market Prospects Liquidity & Efficiency • Debt ratio • Equity ratio • Pledged assets to secured liabilities • Total asset turnover • Profit margin ratio • Gross margin ratio • Return on total assets • Return on common stockholders’ equity • Book value per common share • Basic earnings per share • Price-earnings ratio • Dividends yield