Understanding business 8th by mcchugh nickels chapter 17

* Corporate Annual Report • Read management’s discussion of changes in operations.. • Review the firm’s consolidated balance sheet.. • Analyze the Income Statement.. • Review the statem

and Accounting 17

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Importance of Accounting Information

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The Influence of Accounting Information

• Managers- Financial reports pinpoint

problems/opportunities

• Government- assists with tax collection

• Investors, Suppliers, & Creditors- provides a

means to analyze business

• C.M.A

• Tax Accounting

• Government &

Not-for-profit Accounting

• Financial Accounting

• Annual Report

• Private Accountant

• Public Accountant

• C.P.A.

• Auditing

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Top Business Uses of Accountants

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Corporate Annual Report

• Read management’s discussion of changes

in operations Try to identify strengths or weaknesses.

• Review the firm’s consolidated balance sheet (Its assets, liabilities, and owners’ equity.)

• Analyze the Income Statement Look beyond the year (Sales drops can spell trouble.)

• Review the statement of changes in cash

flows.

• Review auditor’s opinion.

• Government Accounting

• Academia

Types of Accountants

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• Early Recognition of Revenue

• Late Recognition of Expense

• Inadequate Reserves for Bad Debts, Returns, & Liabilities

• Changing Inventory Valuation Methods- 1 Time Boost to Income

• Phony Transactions With Partnerships

Courtesy of B Lilly- De Anza College

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5 Tips To Be Ahead of Sneaky Accountant Tricks

1. Who’s who

2. Pick out the bad apples

3. Don’t fall for rapid refund

4. Know their loyalty

5. Watch what you sign

Source: CNNMoney.com, March 17, 2006

2. Highlight the things that matter

3. List the risks and assumptions built

into the numbers

4. Standardize operating income

5. Provide aid in figuring free-cash flow

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July 30, 2002 Prohibit personal loans to officers/directors.

CEOs/CFOs return incentive-based compensation after erroneous financial report.

August 29, 2002 CEOs/CFOs must certify annual/quarterly

reports Officers must make certifications regarding company’s internal controls.

January 26, 2003 Responsibilities for attorneys/audit firms

increased Disclosure requirements for balance sheets transactions tightened

off-April 26, 2003 Audit committees must: be independent

directors, be responsible for compensation &

oversight of certifying accountants.

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Not-for-Profits’ Policies Due to Sarbanes-Oxley

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Steps to Control Accounting Practices

Source: USA Today, “Snapshots”, Section B, pg 1, March 26, 2003

Record Transactions

in Journals

Post Journal Entries to Ledger

Take a Trial Balance

Prepare Financial Statements

Analyze Financial Statements

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• Income Statement- Statement of

Revenues & Expenses

• Statement of Cash Flows – Statement

of Cash Receipts & Disbursements

Very Vegetarian Company

Intangible Assets

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Very Vegetarian Income Statement

Less: Ending Inventory - $ 230,000

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Very Vegetarian’s Income Statement (cont’d)

Operating Expenses

Selling Expenses

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Statement of Cash Flow

Net Cash Flow from Operations $ 52,000

Net Cash Flows from Investments

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Current Assets Current Liabilities

Quick (Acid-Test) Ratio

Cash + Marketable Securities +

Receivables Current Liabilities

Current Ratio

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Total Liabilities Owners’ Equity

Debt-to-Owners’ Equity Ratio

$613,000

$213,000

Basic Earnings Per

Net Income Net Sales

Return on

Sales Profitability = Operating

Success

$213,000