Business Fundamentals - Chapter 11

Business Essentials Tenth Canadian Edition Chapter 11 Understanding Accounting Copyright © 2023 Pearson Canada Inc. 11 - 1 Learning Objectives (1 of 2) Explain the role of accountants, dis...

Business Essentials Tenth Canadian Edition Chapter 11 Understanding Accounting Copyright © 2023 Pearson Canada Inc. 11 - 1 Learning Objectives (1 of 2) Explain the role of accountants, distinguish between the three traditional professional accounting designations in Canada, and understand the new unified role of the Canadian Chartered Professional Accounting (CP A) designation. Explain how the accounting equation is used. Describe three basic financial statements (and show how they reflect the activity and financial condition of a business) and understand the key standards and principles for reporting financial statements. Explain how computing financial ratios can help investors and other stakeholders interpret information from financial statements to determine the financial strengths of a business. Discuss the role of ethics in accounting. Describe the evolving role of the modern accountant. Copyright © 2023 Pearson Canada Inc. 11 - 2 Learning Objectives (2 of 2) JHVE Photo/Shutterstock Copyright © 2023 Pearson Canada Inc. 11 - 3 What Is Accounting? (L O 11.1) (1 of 8) Accounting – a comprehensive system for collecting, analyzing, and communicating financial information Bookkeeping – recording accounting transactions Accounting Information System (AI S) – organized procedure for identifying, measuring, recording, and retaining financial information Copyright © 2023 Pearson Canada Inc. 11 - 4 What Is Accounting? (L O 11.1) (2 of 8) Users of Accounting Information Business managers Employees and unions Investors and creditors Taxing authorities Government regulatory Even though Samsung and Apple (whose headquarters is pictured here) compete in the smartphone market, they use agencies different accounting standards, with Apple using GAA P and Samsung using (the now more standard approach) IFR S. Droneandy/Shutterstock Copyright © 2023 Pearson Canada Inc. 11 - 5 What Is Accounting? (L O 11.1) (3 of 8) Controller head of the AI S ensures that the accounting system provides the reports and statements needed for planning, controlling and decision-making Tacar/Shutterstock activities may need different types of accounting specialists Christian Delbert/AP Images Copyright © 2023 Pearson Canada Inc. 11 - 6 What Is Accounting? (L O 11.1) (4 of 8) Financial Accounting – keeps external parties informed about the firm’s financial condition Managerial Accounting – directed at internal parties (managers) – provides information to facilitate planning, forecasting, and decision-making Copyright © 2023 Pearson Canada Inc. 11 - 7 What Is Accounting? (L O 11.1) (5 of 8) Professional Accountants chartered accountants (C A) certified general accountants (CG A) certified management accountants (CM A) Unification Chartered Professional Accountant (CPA) Copyright © 2023 Pearson Canada Inc. 11 - 8 What Is Accounting? (L O 11.1) (6 of 8) Copyright © 2023 Pearson Canada Inc. 11 - 9 What Is Accounting? (L O 11.1) (7 of 8) Private Accountants hired as salaried employees duties cover day-to-day accounting needs small business may have just one large business may have area specialists (i.e. budgeting, taxation, accounts payable etc.) Copyright © 2023 Pearson Canada Inc. 11 - 10 What Is Accounting? (L O 11.1) (8 of 8) The Accounting Cycle Figure 11.1 The accounting cycle Copyright © 2023 Pearson Canada Inc. 11 - 11 International Accounting Standards (L O 11.1) (1 of 2) International Accounting Standards Board (I AS B) – members in over 80 countries – goal is to eliminate differences in financial reporting from country to country – I AS B statements include an income statement, balance sheet and a statement of cash flows Copyright © 2023 Pearson Canada Inc. 11 - 12 International Accounting Standards (L O 11.1) (2 of 2) International Financial Reporting Standards (I FR S) – Standard accounting rules developed by the (I AS B) – Used by publicly accountable enterprises and private government enterprises Accounting Standard For Private Enterprises (ASP E) – Standard accounting rules that can be used by private businesses in Canada in preparing financial reports. Copyright © 2023 Pearson Canada Inc. 11 - 13 The Accounting Equation (L O 11.2) (1 of 2) Asset – anything of economic value owned by a firm or individual Liability – any debt owed by a firm or an individual Owners’ Equity – any positive difference between a firm’s assets and liabilities Copyright © 2023 Pearson Canada Inc. 11 - 14 The Accounting Equation (L O 11.2) (2 of 2) Alfio Roberto Silvestro/123R F Thanks to smartphones, financial information is now much more accessible wherever you might be located. Copyright © 2023 Pearson Canada Inc. 11 - 15 Financial Statements (L O 11.3) (1 of 8) Double-Entry Bookkeeping System all transactions are entered in two ways, showing how they impact assets and liabilities the accounting equation is always kept in balance Copyright © 2023 Pearson Canada Inc. 11 - 16 Financial Statements (L O 11.3) (2 of 8) Financial statements reflect the activity and financial condition of a company – Balance Sheets – Income Statements – Statements of Cash Flow Rawpixel.com/Shutterstock Copyright © 2023 Pearson Canada Inc. 11 - 17 Financial Statements (L O 11.3) (3 of 8) Balance Sheets – provide detailed information about the accounting equation factors ▪ Assets ▪ Liabilities ▪ owner’s equity – show a firm’s financial condition at one point in time Copyright © 2023 Pearson Canada Inc. 11 - 18 Financial Statements (L O 11.3) (4 of 8) Current Assets Cash and assets that can be converted into cash within the year Accounts receivable – amounts owed to the firm by customers Inventory – cost of merchandise acquired for sale but not yet sold At the end of its accounting period, this pharmaceuticals company will subtract the cost of Prepaid expenses making the goods that it sells from the revenues it receives from sales. The difference will be its gross – supplies on hand and rent profit (or gross margin). (other bills) paid for coming Traimak/123R F period Copyright © 2023 Pearson Canada Inc. 11 - 19 Financial Statements (L O 11.3) (5 of 8) Fixed Assets: have a long-term use or value Land Buildings Machinery depreciation: distributing the cost of a major asset over its lifetime, deducted yearly Copyright © 2023 Pearson Canada Inc. 11 - 20 Financial Statements (L O 11.3) (6 of 8) Intangible Assets: non-physical assets with economic value (difficult to calculate) – patents – trademarks – franchise fees – copyrights Goodwill: the amount paid for an existing business beyond the value of its other assets Copyright © 2023 Pearson Canada Inc. 11 - 21 Financial Statements (L O 11.3) (7 of 8) Liabilities and Owner’s Equity Current liabilities Long-term Owners’ equity – debts owed liabilities – owners’ by the firm – debts owed by holdings in that must be the firm and the firm repaid within due in more one year (i.e. than one year accounts payable) Copyright © 2023 Pearson Canada Inc. 11 - 22 Financial Statements (L O 11.3) (8 of 8) Example of a Balance Sheet Figure 11.2 Apple Inc.’s balance sheet (in millions) Source: Balance Sheet, Apple Inc.’s Annual Report 2020, https://s2.q4cdn.com/470004039/files/doc_financials/2020/ar/_10-K-2020-(As-Filed).pdf, accessed May 25, 2021. Copyright © 2023 Pearson Canada Inc. 11 - 23 Income Statement (L O 11.4) (1 of 2) Income Statement – sometimes called a profit-and-loss statement – description of revenues and expenses that shows the firm’s annual profit or loss revenues – expenses = profit or loss  Copyright © 2023 Pearson Canada Inc. 11 - 24 Income Statement (L O 11.4) (2 of 2) Example of an Income Statement Figure 11.3 Apple Inc.’s income statement Source: Income Statement, Apple Inc.’s Annual Report 2020, https://s2.q4cdn.com/470004039/files/doc_financials /2020/ar/_10-K-2020-(As-Filed).pdf, accessed May 25, 2021 Copyright © 2023 Pearson Canada Inc. 11 - 25 Statement of Cash Flows (L O 11.4) (1 of 2) Operations cash flows from buying and selling of goods and services Investments cash flows from investment activities Financing cash flows from financing activities Copyright © 2023 Pearson Canada Inc. 11 - 26 Statement of Cash Flows (L O 11.4) (2 of 2) Statement of Cash Flows Figure 11.4 Apple Inc.’s Statement of Cash Flows Source: Income Statement, Apple Inc.’s Annual Report 2020, https://s2.q4cdn.com/470004039/files/doc_financials /2020/ar/_10-K-2020-(As-Filed).pdf, accessed May 25, 2021. Copyright © 2023 Pearson Canada Inc. 11 - 27 Revenue Recognition and Matching (L O 11.4) Revenue Recognition – the formal recording and reporting of revenues in financial statements once the earnings cycle is completed Matching Dinis Tolipov/123R F – expenses will be matched with revenues to show net income for an accounting period Copyright © 2023 Pearson Canada Inc. 11 - 28 Budget (L O 11.4) Budget – a detailed financial plan of estimated receipts and expenditures for a future period ▪ an internal financial statement (usually 1 year) ▪ requires input from other departments ▪ compares actual vs. budget to signal problems Copyright © 2023 Pearson Canada Inc. 11 - 29 Analyzing Financial Statements (L O 11.4) (1 of 4) Ratios Copyright © 2023 Pearson Canada Inc. 11 - 30 Analyzing Financial Statements (L O 11.4) (2 of 4) Solvency Ratios Short Term – current ratio (current assets/current liabilities) Long Term – debt to equity ratio (debt/owner’s equity) ▪ leverage Copyright © 2023 Pearson Canada Inc. 11 - 31 Analyzing Financial Statements (L O 11.4) (3 of 4) Profitability Ratios Return on Equity – net income/total owner’s equity Return on Sales – net income/sales revenue Earnings per Share – net income/number of common shares outstanding Copyright © 2023 Pearson Canada Inc. 11 - 32 Analyzing Financial Statements (L O 11.4) (4 of 4) Activity Ratios Inventory turnover ratio – cost of goods sold/average inventory ▪ measures the average number of times inventory is sold and restocked during the year Copyright © 2023 Pearson Canada Inc. 11 - 33 Bringing Ethics into the Accounting Equation (L O 11.5) Copyright © 2023 Pearson Canada Inc. 11 - 34 The Evolving Role of The Modern Accountant (L O 11.6) Table 11.3 Emerging competencies for success in accounting Competency Description Skills in Strategic The accountant can combine data with reasoning and professional knowledge to Thinking and Critical recognize and help solve critical problems for better strategic action. Problem Solving Communications, The accountant can communicate effectively in various business situations using Interpersonal Skills, and meaningful communications skills that provide interpersonal effectiveness and leadership. Effective Leadership Dedication to Meeting The accountant surpasses the competition in understanding each client’s unique needs, in Customer Needs meeting those needs, and in visualizing the client’s future needs. Ability to Integrate The accountant can combine financial and other kinds of information to gain new meaning Diverse Information that provides clients with useful insights and understanding for solving problems. Proficiency with The accountant can use information technology (I T) in performing services for clients and Information Technology can identify I T applications that the client can adopt for added value to the business. Source: Based on “The CPA Vision Project and Beyond,” American Institute of Certified Public Accountants, http://www.a Icpa.org/ RESEARCH/CPAHORIZONS2025/CPA VISIONPROJECT/Pages/CPAVisionProject.aspx, accessed April 15, 2017. Copyright © 2023 Pearson Canada Inc. 11 - 35 Quick-Check Questions (1 of 5) 1) The accounting profession in Canada is unifying under the ___________ designation. A) Chartered Accountant (C A) B) Chartered Professional Accountant (CP A) C) Certified Management Accountant (CM A) D) Certified Public Accountant (CP A) Copyright © 2023 Pearson Canada Inc. 11 - 36 Quick-Check Answer (1 of 5) 1) The accounting profession in Canada is unifying under the ___________ designation. A) Chartered Accountant (C A) B) Chartered Professional Accountant (CP A) C) Certified Management Accountant (CM A) D) Certified Public Accountant (CP A) Copyright © 2023 Pearson Canada Inc. 11 - 37 Quick-Check Questions (2 of 5) 2) __________ accounting supports the decisions of internal clients; while _________ accounting provides information to external users such as shareholders, banks, and the government. A) Financial; managerial B) Managerial; financial C) AI S; administrative D) Public; private Copyright © 2023 Pearson Canada Inc. 11 - 38 Quick-Check Answer (2 of 5) 2) __________ accounting supports the decisions of internal clients; while _________ accounting provides information to external users such as shareholders, banks, and the government. A) Financial; managerial B) Managerial; financial C) AI S; administrative D) Public; private Copyright © 2023 Pearson Canada Inc. 11 - 39 Quick-Check Questions (3 of 5) 3) Which of the following is categorized as a current asset? A) goodwill B) accounts receivable C) land D) equipment Copyright © 2023 Pearson Canada Inc. 11 - 40 Quick-Check Answer (3 of 5) 3) Which of the following is categorized as a current asset? A) goodwill B) accounts receivable C) land D) equipment Copyright © 2023 Pearson Canada Inc. 11 - 41 Quick-Check Questions (4 of 5) 4) A (n)___________ provides details about the generation of cash and the use of cash in a given time period. A) statement of cash flows B) profit-and-loss-statement C) income statement D) balance sheet Copyright © 2023 Pearson Canada Inc. 11 - 42 Quick-Check Answer (4 of 5) 4) A (n)___________ provides details about the generation of cash and the use of cash in a given time period. A) statement of cash flows B) profit-and-loss-statement C) income statement D) balance sheet Copyright © 2023 Pearson Canada Inc. 11 - 43 Quick-Check Questions (5 of 5) 5) The _________ ratio is an indicator of how efficiently the firm’s managers utilized investor resources. A) solvency B) debt-to-equity C) inventory turnover D) return on equity Copyright © 2023 Pearson Canada Inc. 11 - 44 Quick-Check Answer (5 of 5) 5) The _________ ratio is an indicator of how efficiently the firm’s managers utilized investor resources. A) solvency B) debt-to-equity C) inventory turnover D) return on equity Copyright © 2023 Pearson Canada Inc. 11 - 45