Busn 101 Chapter 17 Accounting & Financial Information
Goals • Accounting Professions • Accounting & Financial Statements and Reports • Accounting Cycle • Accounting Vs. Bookkeeping • Computers in Accounting • Financial Statements & Ratio Analysis
Accounting Professions • Financial Accounting (CPA or other) • Accountants inside the business that creating financial statements, reports and other useful information so that people outside the business can use the information to make decisions • Tax Accounting (CPA or EA) • Accounting that prepares tax returns that comply with tax law, and tax strategies • Auditing (CPA or CIA) • Accountants that look at business’s internal accounting and issues reports about the credibility of the internal accounting (Internal or External) • Independent Audit • Evaluation and unbiased opinion about the accuracy (credibility) of a company’s reports
Accounting Professions • Managerial Accounting (CMA or other) • Accountants inside a business that provide useful information and analysis to managers inside the business so they can make decisions • Private Accountant • Works for a single entity • Public Accountant • Provides accounting services to many entities for a fee • Government or Not-for-profit accounting • Accounting system for an entity whose purpose is not to generate a profit, but to serve ratepayers, taxpayers, and others according to a duly approved budget
Accounting Rules • Generally accepted accounting principles (GAAP) • The rules or guidelines used for carrying out the accounting process • Who creates the rules? • Voters Congress SEC PCAOB FASB GAAP
Why do we want to learn Accounting? • Language of Business
Why is accounting important? • Accounting is the language of business • You cannot run a business without knowing basic accounting • You cannot run a business without knowing how to read and interpret financial statements
Double-entry accounting • The system by which each business transaction is recorded in at least two accounts and the accounting equation is kept in balance • Example: Buy Paper for Printer: • 1st Account = Cash • 2nd Account = Paper Expense (Supplies Expense)
What Is Accounting • Definition Accounting: • The recording, classifying, summarizing, and interpreting of financial events and transactions to provide management and other interested parties the information they need to make good decisions • Process of analyzing, classifying, recording, summarizing, and interpreting business transactions in financial or monetary terms
Financial Statements and Reports: • The end result of financial accounting • The accounting numbers summarized for a particular period in a way that provides useful information • Financial Statements provide useful information that can be used as is or used after analyzing to then make business decisions • Example: Promotion expense too high, lower it • Financial Statements and Reports can be annual, quarterly, monthly, daily, or other time periods
Financial Statements: • Income Statement • What is your profit for the period? • Revenues – Expenses = Net Income or Loss • Balance Sheet • Account balances on the last day or the period • Statement of Cash Flows • Cash flows in and out for three areas: • Operations • Investment • Financing • Other Reports…
How Accounting works (Accounting Cycle) • Analyze source documents • Invoices, loan documents, etc. • Record Transactions in Journal • Journal is the book of original entry (data entered here first) • Post to information in Journal to Ledgers • Ledgers are listings of all individual accounts such as Cash or Rent Expense and the transactions and balances for the period • Trial Balance • Prove that everything balances for the period (DR = CR) • Prepare Financial Statements • IS, BS, SOCF, more… • Analyze Financial Statements • Make decisions from the Financial Statements
Accounting Vs. Bookkeeping • There is not an exact distinction between bookkeeping & accounting • In General: • Bookkeeping • Systematic recording of business transactions in financial terms • Accounting • Create accounting system, audit accounting system, or create official reports
Fundamental Accounting Equation • A = L + OE • Assets = Liabilities + Owner’s Equity Items owned Amounts owed to creditors Owner’s investment Accounting Is Fun!
Define Asset • Asset • Cash, properties, and other things of value owned by an economic unit or business entity • Provides (probable) future economic benefits Accounting Is Fun!
Identify Assets • Examples of assets: • Cash • Trucks • Buildings • Land • Shoes in a shoe store (Inventory) • Kites in a kite store (Inventory) • Accounts Receivable • The amount owed to you or the business Accounting Is Fun!
Define Accounts Receivable • Accounts Receivable • An account used to record the amounts owed by charge customers • The business has legal claims against charge customers • A/R = Holding Tank for future receipt of cash Accounting Is Fun!
Assets • Current Assets • Assets that can be converted to cash within 1 year (Cash, Inventory, AR) • Fixed Assets (Long-term Assets) • Long lived assets like Buildings, Equipment and Land • Intangible Assets • No physical form (Patents, Trademarks, Goodwill) Accounting Is Fun!
Define Liability • Liability • Debts or amounts owed to creditors • (Probable) sacrifice of future economic benefits • In one word: • Debt Accounting Is Fun!
Identify Liabilities • Examples of Debts/Liabilities • Accounts Payable account • Buy goods/services on credit • Receive a bill, but don’t pay until later • Buy supplies from a store, but pay for them later • Notes Payable • Long or short-term loans (liabilities) • Bonds Payable • Long-term loans (liabilities) Accounting Is Fun!
Define Accounts Payable • Accounts Payable • A liability account used for short-term liabilities or charge accounts, usually due within thirty days • A/P = Holding Tank for cash the business will pay out later Accounting Is Fun!
Define Owner’s Equity • The owner’s right to or investment in the business • Assets – Liabilities = Owners’ Equity • A – L = OE Accounting Is Fun!
Identify Owner’s Equity • What is left over for the owner after all the debts have been paid • Remember: Creditors must be paid before the owner’s are paid Accounting Is Fun!
Retained Earnings • All Net Income (Profit) from Firm’s history that has not been paid back to owners Accounting Is Fun!
Fundamental Accounting Equation Suppose the total value of the assets is $26,000 and the business entity does not owe any amount against the assets. Accounting Is Fun!
Fundamental Accounting Equation • Suppose the total value of the assets consists of a truck that costs $23,000. The owner invested $11,000 in the truck and borrowed 12,000 from the bank. Accounting Is Fun!
Determine Owner’s Equity Ms. Burns has $9,000 invested in her travel agency, and the agency owes creditors $2,000. Accounting Is Fun!
Determine Owner’s Equity Mr. Shea owns an auto lube shop. His business has assets of $36,000 and it owes creditors $5,000. Accounting Is Fun!
Determine Owner’s Equity Mr. Stan’s insurance agency has assets of $32,000; his investment (his equity) amounts to $20,000. Accounting Is Fun!
Define Revenues • The amounts a business earns • Examples • Fees earned for performing services • Sales of merchandise • Rent income, and interest income • May take the form of cash, credit card receipts, or accounts receivable (charge accounts) Accounting Is Fun!
Identify Revenue Accounts • Fees Earned for performing services • Sales Income from selling merchandise • Rent Income for the use of property • Interest Income for lending money • Credit Sales where cash will be received at a later time • Example: Home Depot sells lumber to a customer and lets the customer pay later Accounting Is Fun!
Define Expenses • The costs that relate to earning revenue (the costs of doing business) • Examples • Wages • Rent • Interest • Advertising • May be paid in cash, immediately or at a future time (accounts payable) Accounting Is Fun!
Identify Expense Accounts • Wages Expense for labor performed • Rent Expense for the use of property • Interest Expense for the use of money • Advertising Expense • Expense incurred but not paid: • Example: Received a bill for a newspaper ad you took out last week • Cash will be paid at a later time Accounting Is Fun!
Depreciation Expense • The systematic write-off of the cost of a tangible asset over its estimated life • Annual Straight Line Depreciation = • (Cost – Salvage Value)/(Estimated Life in Years) • Annual Straight Line Depreciation = • (20,000-5000)/6 = 2500 Accounting Is Fun!
Cost Of Goods Sold (COGS) & Gross Profit • COGS = the cost of the item sold, such as the shoe or the boomerang or the car • Sales Price = Price tag • Gross Profit = Sales Price - COGS Accounting Is Fun!
Performance Measures • Different measure on the classified income statement tell us different things: • Gross profit: • How profitable the company is after only subtracting COGS • Common measure used to compare companies (GP%) • Operating income: • How profitable the company is from its ordinary operations, before any “other revenue/expenses” • Common measure used in estimating future profitability • Net income: • The bottom line • Profit for the period Accounting Is Fun!
Calculate Net Sales Accounting Is Fun!
Calculate COGS Accounting Is Fun!
Calculate Gross Profit Accounting Is Fun!
Calculate Income From Operations Accounting Is Fun!
Calculate Other Income & Expenses Accounting Is Fun!
Calculate Net Income Accounting Is Fun!
Current Assets • Cash and any other assets or resources that are expected to be realized in cash or to be sold or consumed during the normal operating cycle* of the business • One year, if the normal operating cycle is less than twelve months • Listed on balance sheet in the order of liquidity (how quickly can it be converted to cash): • Cash • N/R (current) • A/R • Inventory • Prepaid items (supplies, prepaid insurance) Accounting Is Fun!
Calculate Current Assets Accounting Is Fun!
Fixed Assets (Plant And Equipment) • Long-lived assets that are held for use in the production or sale of other assets or services • Also called fixed assets • Order on Balance Sheet: • Rank according to length of life • Longest life first Accounting Is Fun!
Calculate Plant & Equipment (Fixed Assets) & Total Assets Accounting Is Fun!
Current Liabilities • Debts that will become due within the normal operating cycle of a business • Usually within one year • Normally paid from current assets • Listed on balance sheet in the order they will be paid off: • N/P • Mortgage payable (current portion) • A/P • Wages payable • Unearned revenue Accounting Is Fun!