Business a changing world 7e by ferrell chap014

Business in a Changing WorldChapter 14 Accounting and Financial Statements... The Nature of AccountingAccounting, defined: The recording, measurement, and interpretation of financial i

Business in a Changing World

Chapter 14

Accounting and Financial Statements

Carlos Slim Helu – once the richest man in the world

Self-made man, Slim dabbles in soft drinks,

printing, and tobacco Owns Mexico’s largest insurance company worth $2.5 billion.

The Nature of Accounting

Accounting, defined:

The recording, measurement, and interpretation of

financial information, often used in making

business decisions.

The Nature of Accounting

GAAP – generally accepted accounting

principles.

SEC – Securities & Exchange Commission

provides oversight.

Types of Accountants

provides accounting services to the public (individuals or

firms) for a fee

• CPA (Certified Public Accountant)

corporation, government agency, or other organization

• CPA or a CMA (Certified Management Accountant)

Types of Accountants

Forensic Accountants – utilize accounting,

auditing, and investigative skills to check books of companies.

Leading Accounting Firms

Ernst & Young $14,500 $21,000

Deloitte & Touche $6,8750 $9,800

Second-Tier Firms

Grant Thornton $635 $1,075

BDO Seidman $365 $589

McGladrey & Pullen No data $1,300

2008 Vault Accounting Firm Rankings

Types of Accountants

Sarbanes-Oxley Act – increased job prospects

for accountants and students with accounting

degrees Higher demand for internal auditors.

Accounting - Bookkeeping

Bookkeepers responsible for obtaining and recording

the information that accountants require to analyze a firm’s financial position

Accountants record financial information and

understand, interpret, and develop sophisticated

accounting systems necessary to classify and analyze complex financial information

The Users of Accounting Information

Uses of Accounting Information

Internal uses:

– Managerial accounting

– Cash flow

– Budget

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, weekly, or monthly

basis

Budget – the internal financial plan that forecasts

expenses and income over a set period of time

Uses of Accounting Information

External uses:

– Reporting financial performance to outsiders

– Filing income taxes

– Obtaining credit

– Reporting to stockholders

External Uses

Annual report – summary of the firm’s financial

information, products, and growth plans for

owners and investors

Audited financial statements – annual report

signed by a CPA certifying accuracy

External Accounting Information

Stockholders and Potential Investors

Hertz Goes Green

Hertz’ “Green Collection” of fuel-efficient

automobiles and hybrids Helps consumers make

environmentally responsible decisions

The Accounting Equation

The relationship between assets, liabilities, and

Owners’ Equity

The difference between a firm’s assets and its

liabilities

Double-Entry Bookkeeping

A system of recording and classifying business

transactions in separate accounts in order to

maintain the balance of the accounting equation.

Assets = Liabilities + Owners’ Equity

$325 = $325

The Accounting Equation and Double-Entry

Bookkeeping for Anna’s Flowers

The Accounting Cycle

1 Examining source documents

2 Recording transactions

3 Posting transactions

4 Preparing financial statements

– Statement of cash flows

Financial statements are provided to:

– Stockholders and potential investors

– Creditors

– Government agencies

– Internal Revenue Service

Generally Accepted Accounting Principles

(GAAP) Manufacturing firms, service providers, and

nonprofit organizations each use a different set of

accounting principles or rules upon which the

accounting profession has agreed

The Income Statement

A financial report that shows an organization’s

profitability over a period of time:

– Month

– Quarter

– Year

Key Income Statement Terms

John’s Pizza Income Statement

December 31, 2008

John’s Pizza Balance Sheet December 31,

2008

John’s Pizza Annual Budget for 2008

Sales Consulting Total January 6,500 5,000 11,500

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

Key Balance Sheet Terms

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) operating activities

2 Cash from (used for) investing activities

3 Cash from (used for) financing activities

Ratio Analysis

• Profitability ratios

• Asset utilization ratios

• Liquidity ratios

• Debt utilization ratios

• Per share data

Asset Utilization Ratios

Debt Utilization Ratios

Total assets

Times interest

Interest expense

Per Share Data

Debt to total assets 57.26% 48.01%

Times interest earned 29.86X 9.46X

Earnings per share $0.87 $1.98

Dividends per share $0.00 $1.50