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Business in a
Changing World

Chapter 14
Accounting and Financial Statements

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McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved.

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14-4 . Carlos Slim Helu – once the richest man in the world. and tobacco.5 billion. printing. Slim dabbles in soft drinks. Self-made man. Owns Mexico’s largest insurance company worth $2.

measurement. often used in making business decisions. 14-5 . and interpretation of financial information.The Nature of Accounting Accounting. defined: The recording.

The Nature of Accounting GAAP – generally accepted accounting principles. 14-6 . SEC – Securities & Exchange Commission provides oversight.

government agency.Types of Accountants Public Accountant -. or other organization • CPA or a CMA (Certified Management Accountant) 14-7 .An accountant employed by a corporation.An independent professional who provides accounting services to the public (individuals or firms) for a fee • CPA (Certified Public Accountant) Private Accountant -.

14-8 . auditing.Types of Accountants Forensic Accountants – utilize accounting. and investigative skills to check books of companies.

500 $21.800 Second-Tier Firms Grant Thornton $635 $1.150 ers Ernst & Young $14.800 KPMG $4.616 $25.075 BDO Seidman $365 $589 McGladrey & Pullen No data $1.100 $19.300 2008 Vault Accounting Firm Rankings 14-9 .Leading Accounting Firms Company 2007 Revenues 2008 Revenues ($ millions) ($ millions) “Big Four” PricewaterhouseCoop $7.000 Deloitte & Touche $6.8750 $9.

Types of Accountants Sarbanes-Oxley Act – increased job prospects for accountants and students with accounting degrees. Higher demand for internal auditors. 14-10 .

responsible for obtaining and recording the information that accountants require to analyze a firm’s financial position. 14-11 . and develop sophisticated accounting systems necessary to classify and analyze complex financial information. Accountants -.record financial information and understand.Bookkeeping Bookkeepers -. interpret.Accounting .

The Users of Accounting Information 14-12 .

Uses of Accounting Information Internal uses: – Managerial accounting – Cash flow – Budget 14-13 .

or monthly basis Budget – the internal financial plan that forecasts expenses and income over a set period of time.Internal Uses Managerial accounting – internal use of accounting statements by managers in planning & directing the organization’s activities Cash flow – movement of money through organization over a daily. 14-14 . weekly.

Uses of Accounting Information External uses: – Reporting financial performance to outsiders – Filing income taxes – Obtaining credit – Reporting to stockholders 14-15 .

and growth plans for owners and investors.External Uses Annual report – summary of the firm’s financial information. Audited financial statements – annual report signed by a CPA certifying accuracy. products. 14-16 .

External Accounting Information Stockholders and Potential Investors – Evaluate soundness of investments Government Agencies – Confirm tax liabilities – Confirm payroll – Deductions – Approve new issues of stocks and bonds 14-17 .

14-18 .Hertz Goes Green Hertz’ “Green Collection” of fuel-efficient automobiles and hybrids. Helps consumers make environmentally responsible decisions.

and owners’ equity Assets = Liabilities + Owners’ Equity Things of A firm’s The difference value that debts and between a firm’s a firm obligations assets and its owns liabilities 14-19 . liabilities.The Accounting Equation The relationship between assets.

Assets = Liabilities + Owners’ Equity $325 = $325 14-20 .Double-Entry Bookkeeping A system of recording and classifying business transactions in separate accounts in order to maintain the balance of the accounting equation.

The Accounting Equation and Double-Entry Bookkeeping for Anna’s Flowers 14-21 .

Preparing financial statements 14-22 .The Accounting Cycle 1. Posting transactions 4. Examining source documents 2. Recording transactions 3.

– Income statement – Balance sheet – Statement of cash flows Financial statements are provided to: – Stockholders and potential investors – Creditors – Government agencies – Internal Revenue Service 14-23 .Financial Statements The end results of the accounting process are a series of financial statements.

GAAP Generally Accepted Accounting Principles (GAAP) -.Manufacturing firms. and nonprofit organizations each use a different set of accounting principles or rules upon which the accounting profession has agreed. 14-24 . service providers.

The Income Statement A financial report that shows an organization’s profitability over a period of time: – Month – Quarter – Year 14-25 .

general & administrative – R&D. engineering – Interest – Depreciation • Net income 14-26 .Key Income Statement Terms • Revenue – Cost of goods sold – Gross income • Expenses – Selling.

400 14-27 .850 Consulting: 73.300 Net Income $ 63.600 Selling Expenses: 37. 2008 Revenues: Net Sales: $123.700 Expenses: Cost of Goods Sold $ 72.John’s Pizza Income Statement December 31.700 General & Admin. 18.600 Total Expenses $134.850 Total Revenues $197.400 Other expenses 5.

750 Total Assets: $36.900 Total Assets: $121.850 Accounts Receivable 10.850 Total Prop.John’s Pizza Balance Sheet December 31.500 Total Liabilities & Owner’s Equity $121.600 Total Liabilities 36.700 14-28 . Capital 85. 84. 2008 Assets: Current Assets: Cash: $17.200 Merchandise Inventory 8.600 Total Current Liabilities 12.050 Office Building 73.800 Property & Equipment Equipment 11.200 Owner’s Equity: Anna Rodriguez. & Equip.700 Liabilities & Owner’s Equity Current Liabilities Acct’s Payable $12.600 Long-term Liabilities Mortgage Payable 23.

John’s Pizza Annual Budget for 2008 Sales Consulting Total January 6.800 6.400 October 5.850 $73.000 14.700 14-29 .900 8.900 9.000 8.200 12.100 7.000 14.000 11.000 6.900 November 5.500 5.500 12.600 May 7.500 February 6.000 12.000 April 6.500 Annual $123.700 15.900 September 6.800 13.500 8.800 16.600 15.000 March 5.400 August 6.500 December 4.600 7.700 8.500 13.100 6.000 6.850 $197.700 July 8.000 12.800 June 8.

The Balance Sheet • A “snapshot” of an organization’s financial position at a given moment – Presents an accumulation of all the company’s transactions since it began 14-30 .

Key Balance Sheet Terms • Assets – Current assets – Accounts receivable • Liabilities – Accounts payable – Accrued expenses • Owner’s equity 14-31 .

Cash from (used for) operating activities 2.The Statement of Cash Flow • Explains how the company’s cash changed from the beginning of the accounting period to the end • Three categories: 1. Cash from (used for) financing activities 14-32 . Cash from (used for) investing activities 3.

Ratio Analysis • Profitability ratios • Asset utilization ratios • Liquidity ratios • Debt utilization ratios • Per share data 14-33 .

Profitability Ratios Profit margin = Net income Sales Return on = Net income assets Assets Return on = Net income equity Equity 14-34 .

Asset Utilization Ratios Receivables = Sales turnover Receivables Inventory turnover = Sales Inventory Total asset turnover = Sales Total assets 14-35 .

Liquidity Ratios Current ratio = Current assets Current liabilities Quick ratio = Current assets - inventory Current liabilities 14-36 .

Debt Utilization Ratios Debt to total assets = Total debt Total assets Times interest = Income before interest & earned taxes Interest expense 14-37 .

Per Share Data Earnings per = Net income share Number of shares outstanding Dividends per = Total dividends paid share Number of shares outstanding 14-38 .

01% Times interest earned 29.98 Dividends per share $0.51% Return on assets 12.87 $1.30X Total asset turnover 1.79X 0.77X Debt to total assets 57.15% 10.45% 15.59% 8.80X Quick ratio 0.78X Current ratio 0.26% 48.00 $1.47X 0.67% Receivable turnover 32.69X 21.76X 0.15% Return on equity 29.64X Inventory turnover 13.46X Earnings per share $0.61X 182.86X 9. Industry Analysis Starbucks McDonald’s Profit margin 7.50 14-39 .