LINK BETWEEN BUSINESS & ACCOUNTING (1 of 2)

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

LINK BETWEEN BUSINESS & ACCOUNTING (1 of 2)