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©2013 Cengage Learning. All Rights Reserved.
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LO1 What is accounting? How is accounting
information used?
Accounting:
LO2 What are the goals of generally accepted
accounting principles?
Decision Making by the
Numbers
LO3 What are the key elements of the major
financial statements?
LO4 What are methods stakeholders can use
to obtain useful insights from a
company’s financial statements?
LO5 What is the role of managerial accounting
and what are the various cost concepts
identified by managerial accountants?
LO6 How does the budget process help
managers plan, motivate and evaluate
their organization’s performance?
2
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Accounting: Who Needs It?
Managers
Stockholders
Employees
Creditors
What other groups would be interested
in accounting information?
3
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© The Studio Dog/Photodisc/Getty Images
Accounting: Who does it?
What Accountants Do:





Public Accountants
Forensic Accountants
Management Accountants
Internal Auditors
Government Accountants
Accountants require expertise



©Digital Vision/Jupiterimages
Certified Public Accountant (CPA) Certification
 150-semester hours of college
 Rigorous Exam
 Direct Work Experience in accounting
Certified Management Accountant (CMA)
Certified Fraud Examiners
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4
copied
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Financial Accounting
• Financial accounting is the branch of accounting
that addresses the needs of external stakeholders
 Stockholders
 Creditors
 Government Regulators
• Financial accounting includes financial statements
to provide broad information
5
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Role of the Financial Standards
Accounting Board
Generally Accepted
Accounting Principles (GAAP) –
accounting standards that
are used in the preparation
of financial statements
Financial Accounting
Standards Board (FASB) –
private self-regulated board that
establishes and enforces GAAP
Through GAAP,
the FASB aims to
ensure that financial
statements are:
• Relevant
• Reliable
• Consistent
• Comparable
6
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He Madoff With How Much?
• Madoff was convicted for perpetrating
the biggest investment fraud in U.S.
history
 Rich and Famous
 Charitable organizations
 Billions of dollars vanished
• Forensic Accountants helped with the
case
 Like CSI or Law & Order
 Forensic accountants have impressive
credentials
AP Images/Kathy Willens
Source: "Meet Irving Picard, the Lawyer With the Toughest Task in the World," by Vivek Ahuja, December 7, 2010, Financial News website: http://www.efinancialnews.com/story/2010-12-07/madoff-irving-picard; "Half of Madoff Losses Recovered After $7
Billion Settlement," by Josh Nathan-Kazis, The Jewish Daily Forward website: http://www.forward.com/articles/134060/; "Accounting Sleuths on the Trail of Madoff Money," by Rob Scherer, December 22, 2008, Christian Science Monitor website:
http://www.csmonitor.com/2008/1222/p01s01-usec.htm; "Post-Madoff, Forensic Accountants Seeing Increase in Business," Shareholders Foundation website:
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7
or
Ethics in Accounting
• Accounting scandals rocked American business in the
late 1990s
Enron
 Tyco
 WorldComm
 Adelphia

• CEOs and top executives landed in jail
• The scandals were a wake-up call to the profession
• State boards began passing ethics related requirements
Source: “Scandal Sheet,” CBS Marketwatch website: http://www.marketwatch.com/news/features/scandal_sheet.asp; “Corporate Scandal Sheet,” Citizen Works website: http://www.citizenworks.org/enron/corp-scandal.php; “The Corporate Scandal Sheet,”
by Penelope Patsuris, Forbes, August 26, 2002, http://www.forbes.com/2002/07/25/accountingtracker.html.
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8
or
Financial Statements: Read All About Us
Financial accounting includes three basic financial
statements:
 Balance Sheet
 Income Statement
 Statement of Cash Flows
Corporations with publicly held stock must publish
annual reports with all three statements.
9
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The Balance Sheet:
What We Own and How We Got It
Balance Sheet – summarizes a firm’s financial position at
a specific point in time
Assets –
things of
value that
the firm owns
Liabilities –
indicates what
the firm owes to
non-owners
Owner’s
Equity –
the claims owners
have against
their firm’s
assets
Assets = Liabilities + Owner’s Equity
10
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The Balance Sheet for Bigbux
11
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The Income Statement:
So, How Did We Do?
Income Statement – summarizes a firm’s operations over a
given period of time in terms of profit and loss
Revenue–
the increase in
the amount of
assets the firm
earns
Expenses –
the cash the firm
spends or other
assets it uses to
generate
revenue
Net Income –
the profit or loss
the firm earns
Revenue – Expenses = Net Income
12
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Income Statement for Bigbux
13
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Statement of Cash Flows:
Show Me the Money
Cash flowing into and out of the firm
Operations
Investing
Financing
Increases and decreases
Total amount of cash on hand
Stakeholders want to know if there is adequate cash to
pay workers, creditors, suppliers and IRS.
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14
or
Bigbux’s Statement of Cash Flows
15
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Other Statements: What Happens to the
Owner’s Stake?
Statement of Retained Earnings – reports
how retained earnings have changed
Stockholder’s Equity Statement – reports
how net income and dividends affect retained
earnings
16
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Interpreting Financial Statements:
Digging Beneath the Surface
It’s important to view financial statements and:
 The Independent Auditor’s Report
 Notes to Financial Statements
 Comparative Statements
17
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© The Studio Dog/Photodisc/Getty Images
The Independent Auditor’s Report:
A Necessary Stamp of Approval
• Publicly traded corporations are
required to have a CPA firm
perform an external audit
 Rigorous Process
 Check figures and methods
 Physical Counts
• The auditor will issue an
unqualified, qualified or adverse
opinion
© Fuse/Jupiterimages
18
• Auditors must be independent
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Google’s External Auditor’s Opinion
19
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GAAP or IFRS?
• The International Financial Reporting
Standards (IFRS) govern key U.S. partners
• The differences complicate processes for
U.S. firms
• GAAP has been working with IASB to
reduce differences
 Negotiation has been long and complex
©Dieter Spannknebel/Photodisc/ Jupiterimages
 Significant changes are coming to U.S.
standards
Source: "FASB and IASB Rejigger Convergence Plans," by Michael Cohn, Accounting Today website: http://www.accountingtoday.com/news/FASB-IASB-Rejigger-Convergence-Plans-56116-1.html; "IFRS: Current Situation and Next Steps," PricewaterhouseCoopers website: http://www.pwc.com/us/en/issues/ifrs-reporting/transition-to-ifrs-status.jhtml; "Compromise Reached for
Financial Instruments; Revenue Recognition and Leases Less Certain," by Matthew G. Lamoreaux, Journal of Accountancy website: http://www.journalofaccountancy.com/Web/20113797.htm; "IFRS and US GAAP Similarities and Differences," PricewaterhouseCoopers website:
http://www.pwc.com/us/en/issues/ifrs-reporting/assets/ifrs-simdif_book-final-2010.pdf
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or
Checking Out the Notes to Financial
Statements: What’s in the Fine Print?
Additional information may be required to explain
the numbers, and notes can be very revealing:
 Can be many pages…
 Additional information about operations
 Clarify and supplement numbers
 Explain accounting methods or changes
 Detail status of lawsuits
Another important section: Management’s
Discussion and Analysis
21
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Looking for Trends in
Comparative Statements
• The SEC requires publicly traded companies
to provide comparative financial statements

2-3 years of figures side-by-side

View changes over a period of time

Trace what has happened to key assets and liabilities
• Comparative analysis is a form of horizontal
analysis
22
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Inside Intelligence: The Role of
Managerial Accounting
• Managers rely on information to make
important decisions
 Measuring and assigning costs
 Developing budgets
• Management accounting systems are a
huge source of competitive advantage
23
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Managerial Accounting vs.
Financial Accounting
24
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Types of Costs
Implicit costs–
Out-of-pocket costs
opportunity costs;
– also called explicit
not monetary but
costs; actual
what is given up
expenditures.
Payments made to
suppliers, workers
Fixed costs– do not
and rent for office
changes with levels of
space
production
Variable costs– rise and
vary when the firm
produces goods and
services
©ColorBlind Images/Blend Images/Jupiterimages
25
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Cost Concepts: A Cost for All Reasons
• Determine the most desirable mix of products
• Identify areas where efficiency is lagging
• Measure costs and assign to products
• Cost is the value of what is given up in exchange for
something else
• Managerial accountants work with different kinds of
costs
26
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Budget: Planning for Accountability
• Outline how resources will be used to meet goals
• Translates goals into measurable quantities and
identify resources
• Communication and coordination among
managers and employees
• Motivate achievement
of goals
• Monitor progress
©unique pic/Cultura/Jupiterimages
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or
Preparing the Budget:
Top-Down or Bottom-Up?
Top-down budgeting – top management
prepares the budget with little or no input from
middle and supervisory managers
Bottom-up or participatory budgeting - allows
middle and supervisory managers to actively
participate in the creation of the budget
28
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Developing the Key Budget Components:
One Step at a Time
Operating Budgets identify
sales and production goals.
• Sales Budget
• Production Budget
• Direct Labor Budget
Master Budget –
brings together all
of the budgets to
Financial Budgets focus on the
represent the
firm’s financial objectives.
overall plan
• Cash Budget
• Capital Budget
29
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Development of the Master Budget
30
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8
Looking Back
• What is accounting? How is accounting information used?
• What are the goals of generally accepted accounting principles?
• What are the key elements of the major financial statements?
• What are methods stakeholders can use to obtain useful insights from a company’s financial
statements?
• What is the role of managerial accounting and what are the various cost concepts identified by
managerial accountants?
• How does the budget process help managers plan, motivate and evaluate their organization’s
performance?
31
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