CH8-Financial Information and Accounting Concepts.pptx

Business in Action: Thriving in the Digital Enterprise Ninth Edition, Global Edition Chapter 15 Financial Information and Accounting Concepts Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Learning Objectives (1 of 2) 15.1 Define accounting, and describe the roles of private and public...

Business in Action: Thriving in the Digital Enterprise Ninth Edition, Global Edition Chapter 15 Financial Information and Accounting Concepts Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Learning Objectives (1 of 2) 15.1 Define accounting, and describe the roles of private and public accountants. 15.2 Describe the accounting equation, and explain the purpose of double-entry bookkeeping and the matching principle. 15.3 Identify the major financial statements, and explain how to read a balance sheet. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Learning Objectives (2 of 2) 15.4 Explain the purpose of the income statement and the statement of cash flows. 15.5 Explain the purpose of ratio analysis, and list the four main categories of financial ratios. 15.6 Explain why businesses would be interested in blockchain and other distributed ledger technologies. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Understanding Accounting (1 of 2) Accounting – Measuring, interpreting, and communicating financial information to support internal and external decision making Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Understanding Accounting (2 of 2) 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 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Private Accountants (1 of 2) Bookkeeping – Recordkeeping; the clerical aspect of accounting Private accountants – In-house accountants employed by organizations and businesses other than a public accounting firm – Also called corporate accountants, managerial accountants, and cost accountants Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Private Accountants (2 of 2) Controller – The highest-ranking accountant in a company, responsible for overseeing all accounting functions Certified public accountants (CPAs) – Professionally licensed accountants who meet certain requirements for education and experience, and who pass a comprehensive examination Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Exhibit 15.1 Typical Finance Department Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Public Accountants 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 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Fundamental Accounting Concepts 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 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. The Accounting Equation Accounting equation – The basic accounting equation, stating that assets equal liabilities plus owners’ equity Assets  Liabilities Owners’ equity Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Double-Entry Bookkeeping and the Matching Principle (1 of 4) 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 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Double-Entry Bookkeeping and the Matching Principle (2 of 4) Matching principle – The fundamental principle requiring that expenses incurred in producing revenue be deducted from the revenues they generate during an accounting period Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Double-Entry Bookkeeping and the Matching Principle (3 of 4) 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 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Double-Entry Bookkeeping and the Matching Principle (4 of 4) Depreciation – An accounting procedure for systematically spreading the cost of a tangible asset over its estimated useful life Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Using Financial Statements: The Balance Sheet Balance sheet – A statement of a firm’s financial position on a particular date – Also known as a statement of financial position Fiscal year – Any 12 consecutive months used as an accounting period Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Exhibit 15.2 The Accounting Cycle Copyright © 2020 Pearson Education Ltd. All Rights Reserved. The Accounting Cycle 1. Perform transactions 2. Analyze and record transactions in a journal 3. Post journal entries to the ledger 4. Prepare a trial balance 5. Make adjusting entries, as needed 6. Prepare an adjusted trial balance 7. Prepare financial statements 8. Close the books for the accounting period Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Exhibit 15.3 Balance Sheet for Computer Central Services (1 of 2) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Exhibit 15.3 Balance Sheet for Computer Central Services (2 of 2) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Balance Sheet (1 of 3) 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 (also referred to as property, plant, and equipment) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Balance Sheet (2 of 3) 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 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Balance Sheet (3 of 3) Retained earnings – The portion of shareholders’ equity earned by the company but not distributed to its owners in the form of dividends Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Using Financial Statements: Income and Cash Flow Statements (1 of 4) Income statement – A financial record of a company’s revenues, expenses, and profits over a given period of time – Also known as a profit and loss statement Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Using Financial Statements: Income and Cash Flow Statements (2 of 4) 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 – Referred to as the bottom line Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Exhibit 15.4 Income Statement for Computer Central Services Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Using Financial Statements: Income and Cash Flow Statements (3 of 4) Cost of goods sold – The cost of producing or acquiring a company’s products for sale during a given period Gross profit – The amount remaining when the cost of goods sold is deducted from net sales – Also known as gross margin Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Using Financial Statements: Income and Cash Flow Statements (4 of 4) Operating expenses – All costs of operation that are not included under cost of goods sold EB I T D A – Earnings before interest, taxes, depreciation, and amortization Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Statement of Cash Flows 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 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Exhibit 15.5 Statement of Cash Flows for Computer Central Services Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Profitability Ratios (1 of 2) Return on sales – The ratio between net income after taxes and net sales – Also known as the profit margin Return on equity – The ratio between net income after taxes and total owners’ equity Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Profitability Ratios (2 of 2) 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 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Liquidity Ratios (1 of 2) 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 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Liquidity Ratios (2 of 2) 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 – Also known as the acid-test ratio Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Activity Ratios (1 of 2) 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 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Activity Ratios (2 of 2) 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 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Leverage, or Debt, Ratios (1 of 2) 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 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Leverage, or Debt, Ratios (2 of 2) Debt-to-assets ratio – A measure of a firm’s ability to carry long-term debt, calculated by dividing total liabilities by total assets Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Thriving in the Digital Enterprise: Distributed Ledgers and Blockchain Distributed ledger – Method of verifying and recording transactions that replaces the individual ledgers of market participants with a shared ledger that everyone can access Blockchain – A type of distributed ledger in which each new transaction is captured in a “block,” which is then appended to the previous block in a continuous chain Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Applying What You’ve Learned (1 of 2) 1. Define accounting, and describe the roles of private and public accountants. 2. Explain the impact of accounting standards such as GAAP and the Sarbanes-Oxley Act on corporate accounting. 3. Describe the accounting equation, and explain the purpose of double-entry bookkeeping and the matching principle. 4. Identify the major financial statements, and explain how to read a balance sheet. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Applying What You’ve Learned (2 of 2) 5. Explain the purpose of the income statement and the statement of cash flows. 6. Explain the purpose of ratio analysis, and list the four main categories of financial ratios. 7. Explain why businesses would be interested in blockchain and other distributed ledger technologies. Copyright © 2020 Pearson Education Ltd. All Rights Reserved.