Business Essentials PDF: The Role of Accountants and Accounting Information

Topic 8 The Role of Accountants and Accounting Information & Managing Business...

Topic 8 The Role of Accountants and Accounting Information & Managing Business Finances Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-1 Publishing as Prentice Hall  Learning Objectives 1. Explain the role of accountants and distinguish between financial accounting and managerial accounting. 2. Explain how the accounting equation is used 3. Describe the three basic financial statements and show how they reflect the activity and financial condition of a business. Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-2 Publishing as Prentice Hall  Learning Objectives 5. Explain the concept of the time value of money and the principle of compound growth, and discuss the characteristics of common stock. 6. Describe the role of securities markets and identify the major stock exchanges and stock markets Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-3 Publishing as Prentice Hall  What Is Accounting? Accounting – comprehensive system for collecting, analyzing, and communicating financial information Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-4 Publishing as Prentice Hall Who Uses Accounting Information? Business managers use it to develop goals and plans, set budgets, and evaluate future prospects. Employees and unions use it to plan for and receive compensation benefits. Investors and creditors use it to estimate returns to stockholders, determine growth prospects, and decide whether a firm is a good credit risk. Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-5 Publishing as Prentice Hall Who Uses Accounting Information? Tax authorities use it to plan for tax inflows, determine the tax liabilities of individuals and businesses, and ensure that correct amounts are paid on time. Government regulatory agencies rely on it to fulfill their duties toward the public. Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-6 Publishing as Prentice Hall Financial versus Managerial Accounting Financial Managerial Accounting (Management) Accounting field of accounting field of accounting that concerned with serves internal users of external users of a a company’s financial company’s financial information information Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-7 Publishing as Prentice Hall  The Accounting Equation Accounting Equation – Assets = Liabilities + Owners’ Equity – used by accountants to balance data for the firm’s financial transactions at various points in the year Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-8 Publishing as Prentice Hall  The Accounting Equation Asset – any economic resource expected to benefit a firm or an individual who owns it Liability – debt owed by a firm to an outside organization or individual Owners’ Equity – amount of money that owners would receive if they sold all of a firm’s assets and paid all of its liabilities Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-9 Publishing as Prentice Hall  Financial Statements Financial Statement – any of several types of reports summarizing a company’s financial status to stakeholders and to aid in managerial decision making – balance sheet, income statement, statement of cash flows Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-10 Publishing as Prentice Hall  Balance Sheets Balance Sheet – financial statement that supplies detailed information about a firm’s assets, liabilities, and owners’ equity Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-11 Publishing as Prentice Hall Google’s Balance Sheet Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-12 Publishing as Prentice Hall  Balance Sheet Current Asset Fixed Asset asset that can or will be asset with long-term converted into cash use or value, such as within a year land, buildings, and equipment Liquidity Depreciation ease with which an accounting method for asset can be converted distributing the cost of into cash an asset over its useful life Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-13 Publishing as Prentice Hall  Balance Sheet Intangible Asset nonphysical asset, such as a patent or trademark, that has economic value in the form of expected benefit Goodwill amount paid for an existing business above the value of its other assets Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-14 Publishing as Prentice Hall  Balance Sheet Current Liability Long-Term Liability Long-Term Liability debt that must be paid debt that is not due for within one year at–least debt one that is not due year for at least one year Accounts Payable Retained Earnings (Payables) – earnings retained by current liability a firm for its use rater consisting of bills owed than paid out as to suppliers dividends Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-15 Publishing as Prentice Hall  Balance Sheet Owners’ Equity (shareholders’ equity) broken down into paid-in capital and retained earnings. Paid-in capital is money invested by owners. Retained earnings are net profits kept by a firm rather than paid out as dividend payments to stockholders. Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-16 Publishing as Prentice Hall  Income Statements Income Statement (Profit-and-Loss Statement): – financial statement listing a firm’s annual revenues and expenses so that a bottom line shows annual profit or loss – revenues, cost of revenues, operating expenses, and net income Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-17 Publishing as Prentice Hall Google’s Income Statement Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-18 Publishing as Prentice Hall  Income Statements Revenues funds that flow into a business from the sale of goods or services Cost of Goods Sold costs of obtaining materials for making the products sold by a firm during the year. Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-19 Publishing as Prentice Hall  Income Statements Gross Profit preliminary, quick-to-calculate profit figure calculated from the firm’s revenues minus its cost of revenues (the direct costs of getting the revenues). Operating Expenses costs, other than the cost of revenues, incurred in producing a good or service Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-20 Publishing as Prentice Hall  Income Statements Operating Income gross profit minus operating expenses Net Income (Net Profit, Net Earnings) gross profit minus operating expenses and income taxes Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-21 Publishing as Prentice Hall  Statements of Cash Flows Financial statement describing a firm’s yearly cash receipts and cash payments It shows the effects on cash of three aspects of a business: 1. Operating activities 2. investing activities 3. Financing activities Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-22 Publishing as Prentice Hall Google’s Statement of Cash Flows Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-23 Publishing as Prentice Hall  The Budget: An Internal Financial Statement Budget – detailed statement of estimated receipts and expenditures for a future period of time Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-24 Publishing as Prentice Hall  Ch 17 Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-25 Publishing as Prentice Hall The Time Value of Money and Compound Growth Time Value Of Money – principle that invested money grows, over time, by earning interest or some other form of return Compound Growth – compounding of interest over time—with each additional time period, interest returns accumulate Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-26 Publishing as Prentice Hall  Common Stock Investments Stock – portion of ownership of a corporation Common Stock – most basic form of ownership, including voting rights on major issues, in a company. Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-27 Publishing as Prentice Hall  Stock Values Stock values are usually expressed in two different ways: as (1) market value and (2) book value. 1. Market Value – current price of a share of stock in the stock market 2. Book Value – value of a common stock expressed as the firm’s owners’ equity divided by the number of common shares Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-28 Publishing as Prentice Hall  Dividends Dividend – payment to shareholders, on a per-share basis, out of the company’s earnings – Dividend payments are optional and variable; the corporation’s board of directors decides whether and when a dividend will be paid, as well as the amount that is best for the future of the company and its shareholder. Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-29 Publishing as Prentice Hall  The Business of Trading Securities Securities – stocks, bonds, and mutual funds representing secured, or asset-based, claims by investors against issuers. Securities Markets – markets in which stocks and bonds are sold. Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-30 Publishing as Prentice Hall  Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-31 Publishing as Prentice Hall  The Business of Trading Securities Primary Securities Market – market in which new stocks and bonds are bought and sold by firms and governments Secondary Securities Market – market in which existing (not new) stocks and bonds are sold to the public Initial Public Offering (IPO) – first sale of a company’s stock to the general public Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-32 Publishing as Prentice Hall  Tracking the Market Using Stock Indexes Market Index – statistical indicator designed to measure the performance of a large group of stocks or track the price changes of a stock market Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-33 Publishing as Prentice Hall  The risk–return relationship Risk-Return (Risk-Reward) Relationship – principle that safer investments tend to offer lower returns, whereas riskier investments tend to offer higher returns (rewards) Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-34 Publishing as Prentice Hall  Angel Investors and Venture Capital Angel Investors – outside investors who provide new capital for firms in return for a share of equity ownership Venture Capital – private funds from wealthy individuals seeking investment opportunities in new growth companies Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-35 Publishing as Prentice Hall  Sale of Corporate Bonds Corporate Bond – formal pledge obligating the issuer (the company) to pay interest periodically and repay the principal at maturity. Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-36 Publishing as Prentice Hall  Sale of Corporate Bonds Characteristics of Corporate Bonds Bond Indenture – legal document containing complete details of a bond issue Maturity Date (Due Date) – future date when repayment of a bond is due from the bond issuer (borrower) Copyright©©2017 Copyright 2012Pearson PearsonEducation, Education,Ltd. Inc. 15-37 Publishing as Prentice Hall