Professional Documents
Culture Documents
Twelfth Edition
Financial Report
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What Is Accounting, and Who Uses
Accounting Information? (1 of 4)
• Accounting
– comprehensive system for collecting, analyzing, and
communicating financial information
• Bookkeeping
– recording of accounting transactions
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What Is Accounting, and Who Uses
Accounting Information? (2 of 4)
• Accounting Information System (AIS)
– organized procedure for identifying, measuring,
recording, and retaining financial information for use in
accounting statements and management reports
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What Is Accounting, and Who Uses
Accounting Information? (3 of 4)
• 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.
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What Is Accounting, and Who Uses
Accounting Information? (4 of 4)
• 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.
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Who Are Accountants and What Do They
Do?
• Controller
– person who manages all of a firm’s accounting
activities (chief accounting officer)
• Certified Public Accountant (CPA)
– Accountant licensed by the state and offering services
to the public
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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
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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 of a firm’s assets and paid all of its liabilities
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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
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Balance Sheets (1 of 4)
• Balance Sheet
– financial statement that supplies detailed information
about a firm’s assets, liabilities, and owners’ equity
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Apple’s Balance Sheet
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Balance Sheets (2 of 4)
• 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
– ease with which an • Depreciation
asset can be converted – accounting method for
into cash distributing the cost of
an asset over its useful
life
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Balance Sheets (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 • Retained Earnings
(Payables) – earnings retained by a
– current liability firm for its use rather
consisting of bills owed than paid out as
to suppliers dividends
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Balance Sheets (4 of 4)
• 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
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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
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Apple’s Income Statement
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Income Statements (2 of 3)
• 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
• Operating Expenses
– costs, other than the cost of revenues, incurred in
producing a good or service
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Income Statements (3 of 3)
• 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 Income
– gross profit minus operating expenses
• Net Income (Net Profit, Net Earnings)
– gross profit minus operating expenses and income
taxes
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Statements of Cash Flows
• Statement of Cash Flows
– financial statement describing a firm’s yearly cash
receipts and cash payments
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Apple’s Statement of Cash Flows
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The Budget: An Internal Financial
Statement
• Budget
– detailed statement of estimated receipts and
expenditures for a future period of time
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Perfect Posters’ Sales Budget
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Reporting Standards and Practices
• Revenue Recognition
– formal recording and reporting of revenues at the
appropriate time
• Full Disclosure
– guideline that financial statements should not include
just numbers but should also furnish management’s
interpretations and explanations of those numbers
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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
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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
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Long-Term Solvency
• Debt • Leverage
– company’s total – ability to finance an
liabilities investment through
borrowed funds
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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
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Business Essentials
Twelfth Edition
Managing Business
Finances
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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
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Amount to Which an Initial $10,000
Investment Grows
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Common Stock Investments
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Stock Values
• Market Value
– current price of a share of stock in the stock market
• Book Value
– value of a common stock expressed as the firm’s
owners’ equity divided by the number of common
shares
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Dividends
• Dividend
– payment to shareholders, on a per-share basis, out of
the company’s earnings
• Blue-Chip Stock
– common stock issued by a well-established and
respected company with a sound financial history and a
stable pattern of dividend payouts
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Investing to Fulfill Financial Objectives
• Mutual Fund
– company that pools cash investments from individuals
and organizations to purchase a portfolio of stocks,
bonds, and other securities
– No-load fund, load fund
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Reasons for Investing
• Stability and Safety
• Conservative Capital Growth
• Aggressive Growth
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Exchange-Traded Funds
• Exchange-Traded Fund (ETF)
– bundle of stocks or bonds that are in an index that
tracks the overall movement of a market but, unlike a
mutual fund, can be traded like a stock
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Advantages of ETFs
• can be traded throughout the day like stocks
• have lower operating costs than mutual funds
• offer ease of entry for investors getting started
without much money
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The Business of Trading Securities (1 of 3)
• 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
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The Business of Trading Securities (2 of 3)
• 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
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The Business of Trading Securities (3 of 3)
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Stock
• Stock Exchange
– an organization of individuals to provide an institutional
auction setting in which stocks can be bought and sold
• National Association Of Securities Dealers
Automated Quotation (NASDAQ) System
– world’s oldest electronic stock market consisting of
dealers who buy and sell securities over a network of
electronic communications
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Selected Global Stock Exchanges and
Markets
Table 17.1 Selected Global Stock Exchanges and Markets
Trade Volume (2016)
Exchange (billions) Listings
New York Stock Exchange $19,223 2,400
NASDAQ $ 6,831 3.085
London Stock Exchange $ 6,187 3.014
Tokyo Stock Exchange $ 4,485 2,292
Shanghai Stock Exchange $ 3,986 1,041
Hong Kong Stock Exchange $ 3,325 1,966
Euronext $ 3,321 1,299
Toronto Stock Exchange $ 2,781 1,524
Shenzhen Stock Exchange $ 2,285 1,420
Frankfurt Stock Exchange $1,766 3.799
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Non-Exchange Trading: Electronic
Communication Networks
• Electronic Communication Network (ECN)
– electronic trading system that brings buyers and sellers
together outside traditional stock exchanges
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Individual Investor Trading (1 of 2)
• Stock Broker
– individual or organization that receives and executes
buy and sell orders on behalf of outside customers in
return for commissions
• Book-Entry Ownership
– procedure that holds investors’ shares in book-entry
form, rather than issuing a physical paper certificate of
ownership
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Individual Investor Trading (2 of 2)
• Market Index
– statistical indicator designed to measure the
performance of a large group of stocks or track the
price changes of a stock market
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Tracking the Market Using Stock Indexes
• Bull Market • Bear Market
– period of rising stock – period of falling stock
prices, lasting 12 prices marked by
months or longer, negative investor
featuring investor sentiments with
confidence for future motivation to sell ahead
gains and motivation to of anticipated losses
buy
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Bull and Bear
Markets
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Tracking the Market Using Stock Indexes (1
of 2)
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Tracking the Market Using Stock Indexes
(2 of 2)
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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)
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Potential Financial Returns Rise with
Riskier Investments
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Investment Dividends (or Interest),
Appreciation, and Total Return (1 of 2)
• Current/Interest Dividend Yield
– yearly dollar amount of income divided by the
investment’s current market value, expressed as a
percentage
• Price Appreciation
– increase in the dollar value of an investment at two
points in time (the amount by which the price of a
security increases)
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Investment Dividends (or Interest),
Appreciation, and Total Return (2 of 2)
• Capital Gain
– profit realized from the increased value of an
investment
• Total Return
– the sum of an investment’s current dividend (interest)
yield and capital gain
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Managing Risk with Diversification and
Asset Allocation
• Diversification
– purchase of several different kinds of investments
rather than just one
• Asset Allocation
– relative amount of funds invested in (or allocated to)
each of several investment alternatives
• Portfolio
– combined holdings of all the financial investments of
any company or individual
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Financing the Business Firm (1 of 2)
• Secured Loan (Asset-Backed Loan)
– loan to finance an asset, backed by the borrower
pledging the asset as collateral to the lender
• Collateral
– asset pledged for the fulfillment of repaying a loan
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Financing the Business Firm (2 of 2)
• Loan Principal
– amount of money that is loaned and must be repaid
• Unsecured Loan
– loan for which collateral is not required
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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
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Sale of Corporate Bonds (1 of 3)
• Corporate Bond
– formal pledge obligating the issuer (the company) to
pay interest periodically and repay the principal at
maturity
• 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)
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Sale of Corporate Bonds (2 of 3)
• Face Value (Par Value)
– amount of money that the bond buyer (lender) lent the
issuer and that the lender will receive on repayment
• Default
– failure of a borrower to make payment when due to a
lender
• Bondholders’ Claim
– request for court enforcement of a bond’s terms of
payment
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Sale of Corporate Bonds (3 of 3)
• Mortgage-Backed Security (MBS)
– mortgages pooled together to form a debt obligation—a
bond—that entitles the holder (investor) to cash that
flows in from the bundled mortgages
• Bankruptcy
– court-granted permission for a company to not pay
some or all debts
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Bond Rating Systems
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Becoming a Public Corporation
• Initial Public Offering (IPO)
– first sale of a company’s stock to the general public
• Corporate Raider
– investor conducting a type of hostile corporate takeover
against the wishes of the company
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Stock Valuation
• Stock Split
– stock dividend paid in additional shares to
shareholders, thus increasing the number of
outstanding shares
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Financial Comparison: Coca-Cola and
PepsiCo
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Capitalization
• Market Capitalization (Market Cap)
– total dollar value of all the company’s outstanding
shares
• Debt Financing
– long-term borrowing from sources outside a company
• Equity Financing
– using the owners’ funds from inside the company as
the source for long-term funding
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Corporation Sizes Based on Capitalization
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Regulating Securities Markets
• Prospectus
– registration statement filed with the SEC, containing
information for prospective investors about a security to
be offered and the issuing company
• Insider Trading
– illegal practice of using special knowledge about a firm
for profit or gain
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Copyright
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