Business Essentials Chapter 12 Accounting Information PDF

Business Essentials Thirteenth Edition Chapter 12 Accounting Information Copyright © 2022, 2019, 2016 Pearson Education, Inc. Learning Outcomes 1 Explain the role...

Business Essentials Thirteenth Edition Chapter 12 Accounting Information Copyright © 2022, 2019, 2016 Pearson Education, Inc. Learning Outcomes 1 Explain the role of accountants and distinguish between the kinds of work done by public accountants and private accountants. 2 Explain how the accounting equation is used. 3 Describe the three basic financial statements. 4 Explain the key standards and principles for reporting financial statements. 5 Describe how computing financial ratios can help users get more information from financial statements to determine the financial strengths of a business. Copyright © 2022, 2019, 2016 Pearson Education, Inc. What Is Accounting Accounting – comprehensive system for collecting, analyzing, and communicating financial information Bookkeeping – recording of accounting transactions Copyright © 2022, 2019, 2016 Pearson Education, Inc. Who Uses Accounting Information? (1 of 2) Business managers use it to develop goals and plans, set budgets, and evaluate prospects. Employees and unions use it to plan for and receive compensation benefits. Investors use it to estimate returns to stockholders, determine growth prospects Creditors use it to decide whether a firm is a creditworthy. Copyright © 2022, 2019, 2016 Pearson Education, Inc. Who Uses Accounting Information? (2 of 2) 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 © 2022, 2019, 2016 Pearson Education, Inc. Financial versus Managerial Accounting Financial Accounting Managerial – field of accounting (Management) concerned with external Accounting users of a company’s – field of accounting that financial information serves internal users of a company’s financial information Copyright © 2022, 2019, 2016 Pearson Education, Inc. Who Are Accountants and What Do They Do? Controller – person who manages all a firm’s accounting activities (chief accounting officer) Certified Public Accountant (CPA) – accountant licensed by the state and offering services to the public Private Accountant – salaried accountant hired by a business to carry out its day-to-day financial activities Copyright © 2022, 2019, 2016 Pearson Education, Inc. CPA Services (1 of 2) Audit – systematic examination of a company’s accounting system to determine whether its financial reports reliably represent its operations Generally Accepted Accounting Principles (GAAP) – accounting guidelines that govern the content and form of financial reports Copyright © 2022, 2019, 2016 Pearson Education, Inc. CPA Services (2 of 2) Tax Services – assistance provided by CPAs for tax preparation and tax planning Management Advisory Services – assistance provided by CPA firms in areas such as financial planning, information systems design, and other areas of concern for client firms Copyright © 2022, 2019, 2016 Pearson Education, Inc. The Accounting Equation (1 of 2) 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 © 2022, 2019, 2016 Pearson Education, Inc. The Accounting Equation (2 of 2) 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 a firm’s assets and paid all its liabilities – Assets-Liabilities Copyright © 2022, 2019, 2016 Pearson Education, Inc. 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 – Statement of financial position, income statement, statement of cash flows Copyright © 2022, 2019, 2016 Pearson Education, Inc. Statement of Financial Position (Balance Sheets)(1 of 4) Statement of Financial Position – financial statement that supplies detailed information about a firm’s assets, liabilities, and owners’ equity Copyright © 2022, 2019, 2016 Pearson Education, Inc. Apple’s Statement of Financial Position (Balance Sheet) Copyright © 2022, 2019, 2016 Pearson Education, Inc. Statement of Financial Position (2 of 4) Current Asset Fixed Asset (non- – asset that can or will be current asset) converted into cash – asset with long-term within a year use or value, such as – Cash land, buildings, and – Short term deposits equipment – Account receivable (Money receiving soon) Copyright © 2022, 2019, 2016 Pearson Education, Inc. Statement of Financial Position (3 of 4) Current Liability Long-Term Liability – debt that must be paid – debt that is not due for within one year at least one year Accounts Payable (Payables) – current liability consisting of bills owed to suppliers Copyright © 2022, 2019, 2016 Pearson Education, Inc. Statement of Financial Position (4 of 4) Owners Equity – Paid in Capital: additional money invested in the firm by its owners – Retained Earnings: earnings retained by a firm for its use rather than paid out as dividends Copyright © 2022, 2019, 2016 Pearson Education, Inc. Income Statements (1 of 3) 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 Profit (or Loss) = Revenues − Expenses Copyright © 2022, 2019, 2016 Pearson Education, Inc. Apple’s Income Statement Copyright © 2022, 2019, 2016 Pearson Education, Inc. Income Statements (2 of 3) Revenues – funds that flow into a business from the sale of goods or services Cost of Goods Sold (Cost of Revenues) – costs of obtaining materials for making the products sold by a firm during the year 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) Copyright © 2022, 2019, 2016 Pearson Education, Inc. Income Statements (3 of 3) Operating Expenses – costs, other than the cost of revenues, incurred in producing a good or service Operating Income – gross profit minus operating expenses Net Income (Net Profit, Net Earnings) – gross profit minus operating expenses and income taxes Copyright © 2022, 2019, 2016 Pearson Education, Inc. Statements of Cash Flows Statement of Cash Flows – financial statement describing a firm’s yearly cash receipts and cash payments ▪ Cash Flows from Operations: Concerns main operating activities: cash transactions involved in buying and selling goods and services ▪ Cash Flows from Investing: Net cash used in or provided by investing: buying and selling stocks, property, equipment ▪ Cash Flows from Financing: Net cash from all financing activities: Issuing stocks, payment of dividends, and repayment of borrowed money Copyright © 2022, 2019, 2016 Pearson Education, Inc. Apple’s Statement of Cash Flows Copyright © 2022, 2019, 2016 Pearson Education, Inc. The Budget: An Internal Financial Statement Budget – detailed statement of estimated receipts and expenditures for a future period of time Copyright © 2022, 2019, 2016 Pearson Education, Inc. Perfect Posters’ Sales Budget Copyright © 2022, 2019, 2016 Pearson Education, Inc. Reporting Standards and Practices Revenue Recognition – formal recording and reporting of revenues at the appropriate time (Earning cycle must be complete) 1. Sale is completed and product is delivered. 2. Sale price has been collected or is collectible. Full Disclosure – guideline that financial statements should not include just numbers but should also furnish management’s interpretations and explanations of those numbers Copyright © 2022, 2019, 2016 Pearson Education, Inc. Analyzing Financial Statements Solvency Ratio – financial ratio, either short- or long-term, for estimating the borrower’s ability to repay debt Profitability Ratio – financial ratio for measuring a firm’s potential earnings Activity Ratio – financial ratio for evaluating management’s efficiency in using a firm’s assets Copyright © 2022, 2019, 2016 Pearson Education, Inc. Solvency Ratios: Borrower’s Ability to Repay Debt Short-Term Solvency Ratio – financial ratio for measuring a company’s ability to pay immediate debts Current Ratio – financial ratio for measuring a company’s ability to pay current debts out of current assets Current Assets Current Ratio: Current Liabilities Copyright © 2022, 2019, 2016 Pearson Education, Inc. Long-Term Solvency Debt Leverage – company’s total – ability to finance an liabilities investment through borrowed funds Debt to Owners’ Equity Ratio: Debt Owners’ Equity Copyright © 2022, 2019, 2016 Pearson Education, Inc. Profitability Ratios: Earnings Power for Owners Return on Equity Net Income Return on Equity: Total Owners' Equity Copyright © 2022, 2019, 2016 Pearson Education, Inc. Profitability Ratios: Earnings Power for Owners Earnings Per Share – profitability ratio measuring the net profit that the company earns for each share of outstanding stock Net Income Earnings Per Share: No. of Shares Outstanding Copyright © 2022, 2019, 2016 Pearson Education, Inc. Summary Copyright © 2022, 2019, 2016 Pearson Education, Inc.