10/31/2016

What is Accounting?
System for measuring and summarizing
The Role of Accounting in Business business activities, interpreting financial
information, and communicating the
results to management and other
decision makers

“THE LANGUAGE OF BUSINESS”

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Fields of Accounting Financial Accounting

• Management Accounting • Financial Statements
– Provides information to business managers – Income statements
• Financial Accounting – Statement of owner’s equity
– Reveals business performance and evaluates its – Balance sheet
current financial condition via financial statements – Statement of cash flows
– Used for owners, managers, investors, creditors, • Principles:
government agencies, others – Generally Accepted Accounting Principles (GAAP)
– International Financial Reporting Standards (IFRS)
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The Functions of Financial Statements Income Statement

• Income Statement – reports a business’s
sales/revenues, expenses, and net income/profit or loss • Revenues/Sales
• Statement of Owner’s Equity: shows changes in • Costs of goods sold
owner’s equity. • Expenses
• Balance Sheet – Reports a company’s assets, liabilities
• Gross profit (gross margin)
and owner’s equity
• Statement of Cash Flows – shows how much cash the • Net income (or net profit)
business has coming in and going out.
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Stress-Buster’s Income Statement Income Statement

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The Statement of Owner’s Equity

Statement of Owner’s Equity

Contributed Capital
(invested by owner)
Net income
(profit generated)

Retained Earnings
(earned by company) Dividends
(profit distributed)
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Statement of Owner’s Equity Balance Sheet

“…tells you what you have (and where it
came from) at a specific point in time…”

• Assets: resources
• Liabilities: debts company owes to outside parties
• Owner’s equity: amount invested

Assets = Liabilities + Owner’s Equity

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Stress-Buster’s Balance Sheet #1 Stress-Buster’s Balance Sheet #2

Classified Balance Sheet

Classified Balance Sheet
Balance Sheet that classifies assets and
liabilities into separate categories.

Assets
Current: Convert to cash within a year
Long-Term: Intend to hold for more than a year
 Liabilities
 Current: Pay off within a year
 Long-Term: Not due for more than a year
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End-of-year Balance Sheet

Statement of Cash Flows

Shows how much cash the business has

coming in and going out via operating,
investing and financing activities

The Statement of Cash Flows Statement of Cash Flows

PIZZA AROMA, INC.
Statement of Cash Flows
For the month Ended Sep 30,2010
Cash Flows from Operating activities
Cash collected from customers $10,000
Purpose Cash paid to suppliers and employees (5,000)
Cash provided by Operating Activities 5,000
Summarizes how a
business’s operating, Cash Flows from Investing Activities
investing and Cash used to buy equipment (40,000)
financing activities Cash used in Investing Activities (40,000)
caused its cash Cash Flows from Financing Activities
balance to change Capital contributed by stockholders 30,000
over a particular Cash dividends paid to stockholders (1,000)
Cash borrowed from the bank 20,000
period of time. Cash provided by Financing Activities 49,000

Change in Cash 14,000

Beginning Cash, Sep 1, 2010 0
Ending Cash, Sep 30, 2010 $14,000

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How Do Financial Statements

Relate To One Another?

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Comparative Income Statement

FINANCIAL STATEMENT ANALYSIS

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Comparative Balance Sheet

Ratio Analysis
1. Profit Margin Ratios: show how much of each sales dollar
is left after certain costs are covered.

2. Management Efficiency Ratios: tell how efficiently

company’s assets are being managed.

3. Management Effectiveness Ratios: tell how effective

management is at running the business and measure
overall company performance.

4. Financial Condition Ratios: used to assess a firm’s financial

strength.
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Profit Margin Ratios Management Efficiency Ratios

show how much of each sales dollar is left after costs
are covered. reveal the way in which assets are being used to
generate income.

Gross Profit Gross Profit

Margin = Sales
Inventory Sales
Turnover = Inventory
Net Profit Net Profit
=
Margin Sales
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Management Effective Ratios Financial Condition Ratios

assess a firm’s financial strength.
how effective management is at running the business
and measure overall company performance. Current Current Assets
Ratio =
Current Liabilities

Return On Net Profit Debt Total Liabilities

Assets = to Equity = Total Equity
Total Assets
Interest Operating Income
Coverage = Interest Expense
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Basic Things to Succeed

 Make good profit on each item
 Move inventory
 Make good return on investment
 Watch cash