Understanding Accounting and Financial Statements: Insights for Business Decision Making

1. Managing Technology and information Chapter 16 – part 1 Understanding Accounting and Financial Statements

2. Users of Accounting Information • People both inside and outside and organization rely on accounting information to help them make business decisions • Accounting—practice of measuring, interpreting, and communicating financial information to support internal and external business decision making. • Accounting is sometimes called “The language of business”

3. Users of Accounting Information

4. Business Activities That Involve Accounting • Accountants contribute important information to help managers deal with the competitive and economic environments • They help others to understand, predict, and react to the technological, regulatory, and social and cultural environments • Accounting plays a key role in: • Financing • Investing • Operating

5. Business Activities That Involve Accounting • Public accountant: provides accounting services to individuals or business firms for a fee • Management accountant: accountant employed by a business other than a public accounting firm • Responsible for collecting and recording financial transactions, and preparing and interpreting financial statements used by the firm’s managers

6. Business Activities That Involve Accounting • Certified Public Accountants (CPA) - accountants who met specified educational and experiential requirements and passed a comprehensive examination on accounting theory and practice. • Other Certifications— • Certified Management Accountants • Certified Internal Auditor

7. Business Activities That Involve Accounting • Government and Not-for-Profit accountants—work for federal, state, and local governments or not-for-profit organizations—perform professional services similar to those of management accountants • Instead of an emphasis on measuring profit or loss, they concern themselves with determining how efficiently the organizations accomplish their objectives

8. The Accounting Process

9. The Accounting Process • The Accounting Equation • Asset—anything of value owned or leased by a business. • Liability—claim against a firms assets by a creditor. • Owner’s equity—all claims of the proprietor, partners, or stockholders, against the assets of a firm, equal to the excess of assets over liabilities.

10. The Accounting Process • The Accounting Equation • Relationship that states that assets equal liabilities plus owner’s equity. Assets = Liabilities + Owner’s Equity

11. Financial Statements • The Balance Sheet • Balance sheet—statement of a firm’s financial position - what it owns and the claims against its assets - at a particular point in time. • Similar to a photograph of the firm’s assets together with its liabilities and owners’ equity at a specific moment in time

14. In Class • In small groups develop one side of the following debate: • Should a new gaming company share all its financial information with all employees? • JMK example

15. In Class • Generate a balance sheet for a new local Dairy Queen from the following • it owns 4 ice cream makers at $4K each • it rents a building for $3K per month • it owns a delivery new delivery truck $40K • it has a loan at the bank for $300K • all money it borrowed was used to buy the truck, ice cream makers, or is in the bank

16. In Class • To the Dairy Queen example, what are the changes to the balance sheet if: • it also owes $10K to the DQ franchisor • it is two years later and the capital has depreciated and is only worth half of what it was bought for • it has inventory of $2K in cream and flavoring