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The Role Of
Accounting In Business
Chapter Objectives
1.
2.
3.
4.
5.
Stakeholders
•“…parties who are
interested in the activities of
the business because they’re
affect by them…
Fields of Accounting
# Management Accounting – provides information
to decision makers inside the organization to help
operate the business
# Financial Accounting – furnishes information to
individuals and groups inside/outside the
organization to assess the firm’s financial
performance
Define accounting and identify uses of its
information
Understand the three basic financial statements
Understand cash-basis vs. accrual
Evaluate a company’s performance
Discuss career opportunities in accounting and
its future
Accounting
• “…measuring and summarizing
business activities, interpreting
financial statements, and
communicating the results to
management and other decision
makers.”
Management Accounting
• “…provides… reports… tailored
to the needs
of individual
managers… (in a) relevant,
accurate, timely… format… (to
aid) in making decisions.”
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Financial Accounting
Statements
•Income Statement
•Balance Sheet
•Statement of Cash Flows
Users Of
Accounting Information
Owners &
Managers
Government
Agencies
Other Users
Investors &
Creditors
Generally Accepted Accounting
Principles
The Functions
of Financial Statements
Income Statement – Shows sales/expenses and if
made a profit
Balance Sheet – Indicates assets/liabilities and amount
invested in company
Statement of Cash Flows – Shows how much cash in
and out of firm
Stress-Buster
StressIncome Statement
Income Statement
¾Revenues and Expenses
¾Cost of Goods Sold
¾Operating
O
ti E
Expenses
¾Gross Profit
¾Net Income
Proposed
Income Statement #1
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Proposed
Income Statement #2
Breakeven Analysis
• “…total sales revenue must exactly
equal all your expenses…”
$ Fixed Costs
$ Variable Costs
$ Contribution Margin
$ Breakeven Point In Units
Proposed
Income Statement #3
Per Unit
Balance Sheet
• “…tells what you have (and where it
came from) at a specific point in
time…”
¾ Assets – Business resources
¾ Liabilities – Debts owed to outside entities
¾ Owner’s Equity – Amount invested
Accounting Equation
Stress-Buster
StressBalance Sheet
• Assets = Liabilities + Owner’s Equity
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Stress-Buster
StressBalance Sheet #2
Accrual Accounting
• “…accountant records a transaction
when it occurs…”
‰Account Receivable
‰Account Payable
‰Inventory
Classified Balance Sheet
College Shop
Balance Sheet
& Assets
& Current- Convert to cash within a year
& Long-Term- Intend to hold for more than a year
' Liabilities
' CurrentCurrent Pay off within a year
' Long-Term- Not due for more than a year
College Shop
Income Statement
End-of
Endof--Year
Balance Sheet
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Statement Of Cash Flows
Cash Flow Statement
• “…tells… where cash came from and
where it went.”
Activities::
Activities
•Operating
•Investing
•Financing
Comparative
Income Statement
Income Statement With
Vertical Percentage Analysis
Ratio Analysis
Gross Profit Margin
%Profit Margin
%Management Efficiency
• Gross Profit
• Margin
•=
• Gross Profit
• Sales
%Management Effectiveness
%Financial Condition
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Net Profit Margin
• Net Profit
• Margin
•=
• Net Profit
• Sales
Inventory Turnover
• Inventory
• Turnover
•=
• Sales
• Inventory
Current Ratio
• Current
•=
• Ratio
Comparative Balance Sheet
• Current Assets
• Current Liabilities
Return On Assets
• Return On
• Assets
•=
• Net Profit
• Total Assets
Debt--ToDebt
To-Equity
• Total Debt
• to Equity
•=
• Total Liabilities
• Total Equity
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Interest Coverage
Interest
Coverage
=
Operating Income
Interest Expense
Challenges To
Accounting Profession
1Arthur Andersen
1Enron
1Sarbanes-Oxley Act
1Public Accounting Oversight Board
Basic Things to Succeed
Good profit on each item
Move inventory
G d return
Good
t
on iinvestment
t
t
Watch cash
Careers In Accounting
‰ “People Profession”
‰ Skills
• Analytical
• Interpersonal
• Communication
‰ Job Prospects
• Certified Public Accountants- Audits
• Private Accountants- Controller
• Certified Management Accountants
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