Ferrell Hirt Ferrell
M: Business
nd
2 Edition
FHF
Accounting and Financial
Statements
FHF
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
Accounting
The recording, measurement, and interpretation of
financial information, often used in making business
decisions
•
After the 2008-2009 financial crisis and recession,
international accounting boards reexamined fair value
accounting rules
• A difficult and contentious science
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GAAP
• Generally accepted accounting principles.
SEC
• Securities & Exchange Commission provides
oversight
Accounting Terms
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Types of Accounting
Public Accountant
• An independent professional who provides
accounting services to the public (individuals or
firms) for a fee
• CPA (Certified Public Accountant)
Private Accountant
• An accountant employed by a corporation,
government agency, or other organization
• Can be CPAs or CMAs (Certified Management
Accountant)
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Forensic Accounting
Analyzing financial data in search of fraudulent
entries or financial misconduct
• Can help uncover money laundering, terrorist
activity
• Marital and family law
• A growth area for public accountants
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Accounting or Bookkeeping?
Bookkeeping
• Often (mistakenly) used interchangeably with accounting
• The routine day-to-day recording of business transactions
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What Does a Job in Accounting Involve?
• Much more than number crunching
• Requires an in-depth understanding of the industries in which your
clients are involved
• Transparency and open communication are essential
✴ Ernst & Young is a global accounting and financial advisory firm
✴ 144,000 employees
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✴ Concern for ethics, social responsibility and the environment
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Uses of Accounting
Internal
• Managerial accounting: internal use of accounting
statements by managers in planning and directing
activities
• Cash flow is management’s greatest concern
• Accounting helps management prepare a budget
External
• The annual report for owners and potential investors
• Obtaining credit
• Filing taxes
• As a gauge of performance
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Uses of Accounting Information
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The Accounting Equation
ASSETS
Things of
value that a
firm owns
=
LIABILITIES
A firm’s debts and
obligations
+
OWNER’S EQUITY
The difference between a
firm’s assets and its
liabilities
The relationship between assets, liabilities, and owners’ equity FHF
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Double-Entry Bookkeeping
A system of recording and classifying business transactions in separate
accounts in order to maintain the balance of accounting equation
ASSETS
=
LIABILITIES
+
OWNER’S EQUITY
$325 = $-700+$1,025
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The Accounting Cycle
• Examine source documents
• Record transactions
• Post transactions
• Prepare financial statements
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The Accounting Cycle
The end results of the accounting process are a series
of financial statements
• Income statement
• Balance sheet
• Statement of cash flows
Financial statements are provided to:
• Stockholders and potential investors
• Creditors
• Government agencies
• Internal Revenue Service
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The Income Statement
A financial report that shows an organization’s
profitability over a period of time
• Month
• Quarter
• Year
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Key Terms
Revenue
• Cost of goods sold
• Gross income
Expenses
• Selling, general & administrative
• R&D, engineering
• Interest
• Depreciation
Net income
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John’s Pizza Income Statement
December 31, 2009
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The Balance Sheet
A “snapshot” of an organization’s financial
position at a given moment
• Presents an accumulation of all the company’s
transactions since it began
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Key Balance Sheet Terms
Assets
• Current assets
• Accounts receivable
Liabilities
• Accounts payable
• Accrued expenses
Owner’s equity
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John’s Pizza Balance Sheet
December 31, 2009
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Statement of Cash Flow
Explains how the company’s cash changed from
the beginning of the accounting period to the end
• Three categories:
✴ Cash from (used for) operating activities
✴ Cash from (used for) investing activities
✴ Cash from (used for) financing activities
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Ratio Analysis
• Profitability ratios
• Asset utilization ratios
• Liquidity ratios
• Debt utilization ratios
• Per share data
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Profitability Ratios
Profit Margin
=
Net Income/ Sales
Return on Assets
=
Net Income/ Assets
Return on Equity
=
Net Income/ Equity
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Asset Utilization Ratios
Current Turnover
=
Sales/ Receivables
Inventory Turnover
=
Sales/ Inventory
Total Asset Turnover
=
Sales/ Total Assets
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Liquidity Ratios
Current Ratio
=
Current Assets/ Current
Liabilities
Quick Ratio
=
Current Assets - Inventory/
Current Liabilities
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Debt Utilization Ratios
Debt to Total Assets
=
Total Debt/ Total
Assets
Times Interest
Earned
=
Income Before Interest
& Taxes/ Interest
Expense
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Per Share Data
Earnings per Share
=
Net Income/ Number of
Shares Outstanding
Dividends per share
=
Total Dividends Paid/
Number Shares Outstanding
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Industry Analysis
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