Chapter 13
Understanding
Principles of
Accounting
PowerPoint Presentation by Charlie Cook
Copyright © 2005 Prentice Hall, Inc.
All rights reserved.
Key Topics
• The role of public and private accountants
• The CPA vision project
• The accounting equation and double-entry
accounting
• Basic financial statements
• Key financial ratios
• Accounting in international businesses
Copyright © 2005 Prentice Hall, Inc. All rights reserved.
13–2
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
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13–3
Accountants and Their Responsibilities
• Controller:
 Managers all of a firm’s accounting activities
• Types of Accounting
 Financial Accounting
 Managerial Accounting
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13–4
Accountants and Their Responsibilities
• Certified public accountants (CPAs)
 Auditing and GAAP
 Tax services
 Management advisory services
• Non-certified public accountants
• Private accountants
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13–5
The CPA Vision Project
• Identifying issues
for the future
• Global forces as
drivers of change
• Recommendations
• A new direction
 Core services
 Core competencies
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13–6
Key Tools of the Accounting Trade
• Accounting Equation
 Assets = Liabilities + Owners’ Equity
 Assets – Liabilities = Owners’ Equity
• Double-Entry Accounting
 Every transaction affects two accounts
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13–7
Financial Statements
Balance
Sheets
Income
Statements
Statements
of Cash
Flows
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13–8
Statements of Cash Flows
Cash flows from:
Operations
Investing
Financing
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13–9
Reporting Standards and Practices
• Generally Accepted Accounting Practices
(GAAP)
 Revenue Recognition
 Matching
 Full Disclosure
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13–10
Analyzing Financial Statements
Solvency
Ratios
Profitability
Ratios
Activity
Ratios
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13–11
Short Term Solvency Ratios
Current Ratio:
Current Assets
Current Liabilities
Working Capital:
Current Assets – Current Liabilities
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13–12
Long-term Solvency Ratios
Debt to Owners’ Equity Ratio:
Debt
Owners’ Equity
Leverage:
The ability to finance an investment
through borrowed funds
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13–13
Profitability and Activity Ratios
Return on Equity:
Net Income
Total Owners' Equity
Net Income
Earnings Per Share:
Inventory Turnover Ratio:
# of Shares Outstanding
Cost of Goods Sold
Average Inventory
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13–14
International Accounting
Foreign
Currency
Exchange
International
Accounting
Standards
International
Transactions
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13–15
Chapter Review
• Explain the role of accountants, public and private
• Discuss the CPA Vision Project
• Explain the accounting equation and double-entry
accounting
• Describe the three basic financial statements
• Explain how key financial ratios can help analyze
the financial strength of a business
• Explain some of the special issues facing
accountants at firms that do international business
Copyright © 2005 Prentice Hall, Inc. All rights reserved.
13–16