Accounting

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WEEK 12:
ACCOUNTING CONCEPTS
BUSN 102 – Özge Can
Understanding Accounting
17-2

Accounting
 Measuring,
interpreting, and communicating
financial information to support internal and
external decision-making
 Cost
accounting, tax accounting, financial
analysis, forensic accounting
Understanding Accounting
17-3

Financial Accounting:
 The
area of accounting concerned with preparing
financial information for users outside the
organization

Management Accounting:
 The
area of accounting concerned with preparing
data for use by managers within the organization
What Accountants Do?
4





Record economic activities (bookkeeping)
Prepare financial statements
Analyze and interpret financial information
Prpepare financial forecasts and budgets
Prepare tax returns
Private Accountants
17-5

Private Accountants
 In-house
accountants employed by organizations
and businesses other than a public accounting
firm (corporate accountants)

Certified Public Accountants (CPAs)
 Professionally
licensed accountants who meet
certain requirements for education and
experience and who pass a comprehensive
examination
Public Accountants
17-6

Public
Accountants
 Professionals
who
provide accounting
services to other
businesses and
individuals for a fee

Audit
 Formal
evaluation of
the fairness and
reliability of a client’s
financial statements
Typical Finance Department:
17-7
The Rules of Accounting
17-8

GAAP (Generally Accepted Accounting
Practices)
 Standards
and practices used by publicly held
corporations in the United States and a few other
countries in the preparation of financial
statements; on course to converge with IFRS
The Rules of Accounting
17-9

External Auditors
 Independent
accounting firms that provide
auditing services for public companies

International Financial Reporting
Standards (IFRS)
 Accounting
standards and practices used in many
countries outside the United States
Fundamental Accounting Concepts
17-10

Assets:
 Any

things of value owned or leased by a business
Liabilities:
 Claims

against a firm’s assets by creditors
Owners’ Equity:
 The
portion of a company’s assets that belongs to
the owners after obligations to all creditors have
been met
Fundamental Accounting Concepts
17-11

Accounting Equation
 The
basic accounting equation, stating that
assets equal liabilities plus owners’ equity
Example:
12


A company has the following assets: (1) Fixed assets
worth $30,000 and (2) investments worth $6,000.
The company's total liabilities amount to $25,000.
What is the owner's equity of this company?
Fundamental Accounting Concepts
17-13

Double-Entry Bookkeeping
A
method of recording financial transactions that
requires a debit entry and credit entry for each
transaction to ensure that the accounting
equation is always kept in balance
Fundamental Accounting Concepts
17-14

Matching Principle
 The
fundamental principle requiring that
expenses incurred in producing revenue be
deducted from the revenues they generate during
an accounting period
Two Bases of Accounting:
17-15

Accrual Basis
 An
accounting
method in which
revenue is recorded
when a sale is made
and an expense is
recorded when it is
incurred

Cash Basis
 An
accounting
method in which
revenue is recorded
when payment is
received and an
expense is recorded
when cash is paid
17-16

Depreciation
 An
accounting procedure for systematically
spreading the cost of a tangible asset over its
estimated useful life
The Accounting Cycle:
17-17
1.
2.
3.
4.
5.
6.
7.
8.
Perform transactions
Analyze and record transactions in a journal
Post journal entries to the ledger
Prepare a trial balance
Make adjusting entries, as needed
Prepare an adjusted trial balance
Prepare financial statements
Close the books for the accounting period
Three Financial Statements:
17-18



Balance Sheet
Income Statement
Statement of Cash Flows
Balance Sheet
17-19

Balance Sheet
A
statement of a firm’s
financial position on a
particular date; also
known as a statement of
financial position
Balance Sheet
17-20

Current Assets
 Cash
and items that
can be turned into
cash within one year

Fixed Assets
 Assets
retained for
long-term use, such
as land, buildings,
machinery, and
equipment
 Property,
plant, and
equipment
Balance Sheet
17-21

Current Liabilities
 Obligations
that
must be met within a
year

Long-Term
Liabilities
 Obligations
that fall
due more than a
year from the date of
the balance sheet
Balance Sheet
17-22

Retained Earnings
 The
portion of shareholders’ equity earned by the
company but not distributed to its owners in the
form of dividends
Income Statement
17-23

Income Statement
A
financial record of a
company’s revenues,
expenses, and profits
over a given period of
time
 Profit
and loss
statement
Income Statement
17-24

Expenses
 Costs
created in the process of generating
revenues

Net Income
 Profit
earned or loss incurred by a firm,
determined by subtracting expenses from
revenues
Income Statement
17-25

Cost of Goods Sold
 The
cost of producing or acquiring a company’s
products for sale during a given period

Gross Profit (Gross Margin)
 The
amount remaining when the cost of goods
sold is deducted from net sales
Income Statement
17-26

Operating Expenses
 All
costs of operation that are not included under
cost of goods sold
 General expenses - selling expenses

EBITDA
 Earnings
before interest, taxes, depreciation, and
amortization
Statement of Cash Flows
17-27

Statement of Cash
Flows
A
statement of a
firm’s cash receipts
and cash payments
that presents
information on its
sources and uses of
cash
Analyzing Financial Staments
28
Trend analysis
 Ratio analysis


Types of financial ratios:
 Profitability
ratios
 Liquidity ratios
 Activity ratios
 Leverage (debt) ratios
Profitability Ratios
17-29

Return on Sales
 The
ratio between
net income after
taxes and net sales
 Profit
margin

Return on Equity
 The
ratio between
net income after
taxes and total
owners’ equity
Profitability Ratios
17-30

Earnings per Share
A
measure of a firm’s profitability for each share
of outstanding stock, calculated by dividing net
income after taxes by the average number of
shares of common stock outstanding
Liquidity Ratios
17-31

Working Capital
 Current
assets
minus current
liabilities

Current Ratio
A
measure of a
firm’s short-term
liquidity, calculated
by dividing current
assets by current
liabilities
Liquidity Ratios
17-32

Quick Ratio
A
measure of a firm’s short-term liquidity,
calculated by adding cash, marketable securities,
and receivables, then dividing that sum by current
liabilities
 Acid-test ratio
Activity Ratios
17-33

Inventory Turnover Ratio
A
measure of the time a company takes to turn its
inventory into sales, calculated by dividing cost of
goods sold by the average value of inventory for a
period
Activity Ratios
17-34

Accounts Receivable Turnover Ratio
A
measure of the time a company takes to turn its
accounts receivable into cash, calculated by
dividing sales by the average value of accounts
receivable for a period
Leverage (Debt) Ratios
17-35

Debt-to-Equity Ratio
A
measure of the extent to which a business is
financed by debt as opposed to invested capital,
calculated by dividing the company’s total
liabilities by owners’ equity

Debt-to-Assets Ratio
A
measure of a firm’s ability to carry long-term
debt, calculated by dividing total liabilities by total
assets
Assignment #3 (Due: Next Week)
36



Written Group Assignment
Research online and find 1) the balance sheet
(“bilanço”) and 2) income statement (“gelir
tablosu”) of a Turkish or foreign/international
company for the year 2012.
Examine these two statements carefully in order to
understand the financial situation of the company.
==== >
Assignment #3 (Due: Next Week)
37

After providing a copy of the two financial
statements in the paper, answer the following
questions:
1. What are the amount of assets, liabilities and
stockholders’ equity of the company?
2. Did the company show a profit in 2012? What is the
sales revenue? What are their largest cost and
expense items?
3. Overall, do you think this company financialy doing
good? How do you understand this?
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