Nickels McHugh McHugh

1. Nickels Cover Nickels McHugh McHugh

2. Chapter Understanding Financial Information and Accounting 18 18-2

3. Importance ofFinancial Information • Definition- Accounting • Audiences • Managers • Government • Investors, Suppliers & Creditors

4. The Accounting System

5. The Influence ofAccounting Information Managers- Financial reports pinpoint problems/opportunities Government- assists with tax collection Investors, Suppliers, & Creditors- provides a means to analyze business

6. Managerial Accounting Inside Organization C.M.A. Financial Accounting Annual Report Private Accountant Public Accountant C.P.A. Auditing Tax Accounting Government & Not-for-profit Accounting Areas of Accounting

7. Top BusinessUses of Accountants

8. Types of Accountants Public • Auditing • Tax Consulting & Compliance • Management Consulting Private • Management Accounting • Government Accounting • Academia

9. Services Growthin Accounting Accounting & Auditing 2.9% Taxes 13.1% Management Consulting 117.7%

10. “Cooking the Books” • Early Recognition of Revenue • Late Recognition of Expense • Inadequate Reserves for Bad Debts, Returns, & Liabilities • Changing Inventory Valuation Methods- 1 Time Boost to Income • Phony Transactions With Partnerships Courtesy of B. Lilly- De Anza College

11. Steps to Control Accounting Practices Source: USA Today, “Snapshots”, Section B, pg. 1, March 26, 2003

12. Bookkeeping Start of Accounting Record/Journalize Accounting Analyze Recommend Bookkeeping vs. Accounting

13. Steps In The Accounting Cycle Record Transactions in Journals Analyze Source Documents Post Journal Entries to Ledger Prepare Financial Statements Analyze Financial Statements Take a Trial Balance

14. Computers & Accounting • Tool Not Decision Maker • Simplification • Accounting Packages • Up-To-the-Minute Information • Less Monotony

15. Financial Statements • Balance Sheet- Statement of Financial Position • Income Statement- Statement of Revenues & Expenses • Statement of Cash Flows – Statement of Cash Receipts & Disbursements

16. Accounting Equation = Assets Liabilities + Owner’s Equity Owned = Owed + Owner’s Claims $213,000 + $826,000 $613,000 =

17. Fiberrific’sBalance Sheet (Assets) Fiberriffic, Inc. Period ending 12/31/04 Assets Current Assets Cash $ 15,000 Accounts Receivable 200,000 Notes Receivable 50,000 Inventory 335,000 Total Current Assets $600,000 Fixed Assets Land $ 40,000 Buildings (net) 110,000 Equipment & Vehicles (net) 40,000 Furniture & Fixtures (net) 16,000 Total Fixed Assets $206,000 Intangible Assets Goodwill $ 20,000 Total Intangible Assets $ 20,000 Total Assets $826,000

18. Fiberrific’s Balance Sheet(Liabilities & Owner’s Equity) Fiberiffic, Inc. Period ending 12/31/04 Liabilities & Owners’ Equity Current Liabilities Accounts Payable $ 40,000 Notes Payable 8,000 Accrued Taxes & Salaries 240,000 Total Current Liabilities $288,000 Long-term Liabilities Notes Payable $ 35,000 Bonds Payable 290,000 Total Long-term Liabilities $325,000 Total Liabilities $613,000 Owners’ Equity Common Stock (1M shares) $100,000 Retained Earnings 113,000 Total Owners’ Equity $213,000 Total Liabilities & Owners’ Equity $826,000

19. Fiberrific’s Income Statement Fiberiffic, Inc. Period Ending 12/31/04 Revenue Net Sales $ 700,000 Cost of Goods Sold Beginning Inventory $ 200,000 Net Purchases $ 440,000 Cost of Goods $ 640,000 Less: Ending Inventory - $ 230,000 Less: Cost of Goods Sold - $ 410,000 Gross Profit (Gross Margin) $ 290,000

20. Fiberrific’s Income Statement(cont’d) Gross Profit $290,000 Operating Expenses Selling Expenses Salaries $ 90,000 Advertising & Supplies $ 20,000 Total Selling Expenses $ 110,000 General Expenses Office Salaries $ 67,000 Depreciation $ 1,500 Insurance $ 1,500 Rent $ 28,000 Utilities $ 12,000 Miscellaneous $ 2,000 Total General Expenses $ 112,000 Less: Total Operating Expenses - $ 222,000 Net Income (Profit) Before Taxes $ 68,000 Less: Income Tax Expenses - $ 19,000 Net Income (Profit) After Taxes $ 49,000

21. FiberrificStatement of Cash Flow Net Cash Flow from Operations $ 52,000 Net Cash Flows from Investments ( 6,000) Net Cash Flow from Financing (19,000) Net Change in Cash & Equivalents $ 27,000 Beginning Cash Balance ( 2,000) Ending Cash Balance $ 25,000 =========

22. Applying Accounting Knowledge in Business • Depreciation • Inventory Valuation • FIFO- First In First Out • LIFO- Last In First Out

23. Sarbanes-Oxley Timeline

24. Liquidity Ratios Current Ratio Current Assets Current Liabilities Quick (Acid-Test) Ratio Cash + Marketable Securities + Receivables Current Liabilities

25. Current Ratio- Fiberrific $600,000 $288,000 = 2.08

26. Quick (Acid-Test) Ratio $265,000 $288,000 = 0.92

27. Debt to Equity Ratio Total Liabilities Owners’ Equity $613,000 $213,000 = 287%

28. Profitability Ratios Profitability = Operating Success Return on Sales Earnings Per Share Net Income Net Sales Net Income # Common Shares Return on Equity Net Income Owners’ Equity

29. Profitability Ratios Return on Sales $ 49,000 = 7% $700,000 Return on Equity $ 49,000 = 23% $213,000 Earnings per Share $ 49,000 = $.049 1,000,000

30. Activity Ratios Inventory Turnover Cost of Goods Sold Avg. Inventory Inventory Turnover $410,000 = 1.9 $215,000

31. How to Read aCorporate Annual Report • Read management’s discussion of changes in operations. Try to identify strengths or weaknesses. • Review the firm’s consolidated balance sheet. (Its assets, liabilities, and owners’ equity.) • Analyze the Income Statement. Look beyond the year. (Sales drops can spell trouble.) • Review the statement of changes in cash flows. • Review auditor’s opinion.