Principle of Accounting &
Finance
What Is Accounting?
A comprehensive system for collecting,
analyzing and communicating financial
information
Users of accounting information:
Business managers
Employees and unions
Investors and creditors
Tax authorities
Government regulatory agencies
The Nature of Accounting
The recording, measurement, and
interpretation of financial information,
often used in making business
decisions.
Did You Know?
Corporate fraud costs are estimated at $600
billion annually.
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
Is it Accounting or Bookkeeping?
Bookkeepers are responsible for obtaining
and recording the information that
accountants require to analyze a firm’s
financial position
Accountants are not only trained to record
financial information, but to understand,
interpret, and even develop the sophisticated
accounting systems necessary to classify and
analyze complex financial information
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
The Accounting Cycle
1.
2.
3.
4.
Examining source documents
Recording transactions
Posting transactions
Preparing financial statements
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Types of Accountants
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
CPA or a CMA (Certified Management Accountant)
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
Accountants and Their
Responsibilities
Controller:
Managers all of a
firm’s accounting
activities
Types of Accounting
Financial Accounting
Managerial
Accounting
Accountants and Their
Responsibilities
Certified public accountants (CPAs)
Auditing and GAAP (Generally Accepted
Accounting Principles)
Tax services
Management advisory services
Non-certified public accountants
Private accountants
The CPA Vision Project
Identifying issues for
the future
Global forces as
drivers of change
Recommendations
A new direction
Core services
Core competencies
The Users of Accounting Information
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Uses of Accounting Information
Internal uses:
Managerial
accounting
Cash flow
Budget
External uses:
Reporting financial
performance to
outsiders
Filing income taxes
Obtaining credit
Reporting to
stockholders
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Internal Accounting Information
Management
Plan and set goals
Organize
Lead and motivate
Control
Lenders & suppliers
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Evaluate credit risks
External Accounting Information
Stockholders and
Potential Investors
Evaluate soundness
of investments
Government
Agencies
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Confirm tax liabilities
Confirm payroll
Deductions
Approve new issues
of stocks and bonds
Key Tools of the Accounting Trade
Accounting Equation
Assets = Liabilities + Owners’ Equity
Assets – Liabilities = Owners’ Equity
Double-Entry Accounting
Every transaction affects two accounts
The Accounting Equation
The relationship between assets,
liabilities, and owners’ equity
Assets
Things of
value that a
firm owns
=
Liabilities
+
A firm’s
debts and
obligations
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
Owners’ Equity
The difference
between a firm’s
assets and its
liabilities
Double-Entry Bookkeeping
A system of recording and classifying
business transactions in separate accounts in
order to maintain the balance of the
accounting equation
Assets =
$325
=
Liabilities
+ Owners’ Equity
$325
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
The Accounting Process
The accounting equation
Double-entry bookkeeping
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Equivalent Terms in Accounting
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The Accounting Equation and DoubleEntry Bookkeeping for Anna’s Flowers
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Financial Statements
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
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
Financial Statements
Balance
Sheets
Income
Statements
Statements
of Cash
Flows
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
Liabilities
Current assets
Accounts receivable
Accounts payable
Accrued expenses
Owner’s equity
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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 Income Statement Terms
Revenue
Expenses
Cost of goods sold
Gross income
Selling, general & administrative
R&D, engineering
Interest
Depreciation
Net income
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
Anna’s Flowers Income Statement
December 31, 2005
Revenues:
Net Sales:
$123,850
Consulting:
73,850
Total Revenues
$197,700
Expenses:
Cost of Goods Sold
$ 72,600
Selling Expenses:
37,700
General & Admin.
18,400
Other expenses
5,600
Total Expenses
$134,300
Net Income
$ 63,400
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
The Statement of Cash Flow
Explains how the company’s cash
changed from the beginning of the
accounting period to the end
Three categories:
1.
2.
3.
Cash from (used for) operating activities
Cash from (used for) investing activities
Cash from (used for) financing activities
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
Statements of Cash Flows
Cash flows from:
Operations
Investing
Financing
GAAP
Generally Accepted Accounting
Principles (GAAP)
Manufacturing firms, service providers, and
nonprofit organizations each use a different
set of accounting principles or rules upon
which the accounting profession has
agreed
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Reporting Standards and
Practices
Generally Accepted Accounting
Practices (GAAP)
Revenue Recognition
Matching
Full Disclosure
Analyzing Financial
Statements
Solvency
Ratios
Profitability
Ratios
Activity
Ratios
Analyzing Financial Statements
with Ratio Analysis
Profitability ratios
Asset utilization
ratios
Liquidity ratios
Debt utilization
ratios
Per share data
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
Short Term Solvency Ratios
Current Ratio:
Current Assets
Current Liabilities
Working Capital:
Current Assets – Current Liabilities
Long-term Solvency Ratios
Debt to Owners’Debt
Equity
Ratio:
Owners’ Equity
Leverage:
The ability to finance an investment
through borrowed funds
Profitability and Activity Ratios
Net Income
Total Owners' Equity
Return on
Equity:
Earnings Per Share:
Inventory Turnover Ratio:
Net Income
# of Shares Outstanding
Cost of Goods Sold
Average Inventory
Profitability Ratios
Profit margin
=
Net income
Sales
Return on
assets
=
Net income
Assets
Return on
equity
=
Net income
Equity
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
Asset Utilization Ratios
Receivables
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 of shares outstanding
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
International Accounting
Foreign
Currency
Exchange
International
Accounting
Standards
International
Transactions
Satu
Leading Accounting Firms
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
Anna’s Flowers Balance Sheet December 31,
2005
Assets:
Current Assets:
Cash:
Accounts Receivable
Merchandise Inventory
Total Assets:
Property & Equipment
Equipment
Office Building
Total Prop. & Equip.
Total Assets:
Liabilities & Owner’s Equity
Current Liabilities
Acct’s Payable
Total Current Liabilities
Long-term Liabilities
Mortgage Payable
Total Liabilities
Owner’s Equity:
Anna Rodriguez, Capital
Total Liabilities & Owner’s Equity
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
$17,850
10,200
73,850
$12,600
8,750
$36,800
11,050
84,900
$121,700
12,600
23,600
36,200
$121,700
85,500
Anna’s Flowers Annual Budget for
2005
Sales Consulting
January
6,500
5,000
February
6,000
6,000
March
5,800
6,200
April
6,100
6,500
May
7,000
6,800
June
8,100
7,600
July
8,600
7,800
August
6,900
8,000
September
6,700
8,700
October
5,900
9,000
November
5,000
8,500
December
4,500
8,000
Annual
$123,850 $73,850
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved
Total
11,500
12,000
12,000
12,600
13,800
15,700
16,400
14,900
15,400
14,900
13,500
12,500
$197,700
Industry Analysis
Dua
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