43087_pbu0045_chapter13_t2 1dvdv516

After reading this chapter, you should be able to:Explain the role of accountants and distinguish between the kinds of work done by public accountants and private accountants.Explain how the accounting equation is used.Describe the three basic financial statements.Explain the key standards and principles for reporting financial statements.Describe how computing financial ratios can help users get more information from financial statements to determine the financial strengths of a business. 14-*Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

What Is Accounting, and WhoUses Accounting Information?Accounting comprehensive system for collecting, analyzing, and communicating financial informationBookkeeping recording of accounting transactionsCopyright 2013 Pearson Education, Inc. publishing as Prentice Hall14-*


What Is Accounting, and WhoUses Accounting Information?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.

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall14-*


What Is Accounting, and WhoUses Accounting Information?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.



Who Are Accountantsand What Do They Do?Controller person who manages all of a firms accounting activities (chief accounting officer)Certified Public Accountant (CPA) Accountant licensed by the state and offering services to the publicCopyright 2013 Pearson Education, Inc. publishing as Prentice Hall14-*Private Accountant salaried accountant hired by a business to carry out its day-to-day financial activities


Financial versus Managerial AccountingFinancial Accounting field of accounting concerned with external users of a companys financial informationManagerial (Management) Accountingfield of accounting that serves internal users of a companys financial informationCopyright 2013 Pearson Education, Inc. publishing as Prentice Hall14-*


CPA ServicesAudit systematic examination of a companys accounting system to determine whether its financial reports reliably represent its operationsGenerally Accepted Accounting Principles (GAAP) accounting guidelines that govern the content and form of financial reportsCopyright 2013 Pearson Education, Inc. publishing as Prentice Hall14-*


CPA ServicesTax Services assistance provided by CPAs for tax preparation and tax planningManagement Advisory Services assistance provided by CPA firms in areas such as financial planning, information systems design, and other areas of concern for client firmsCopyright 2013 Pearson Education, Inc. publishing as Prentice Hall14-*


The Accounting EquationAccounting Equation Assets = Liabilities + Owners Equity used by accountants to balance data for the firms financial transactions at various points in the yearCopyright 2013 Pearson Education, Inc. publishing as Prentice Hall14-*


The Accounting EquationAsset any economic resource expected to benefit a firm or an individual who owns itLiability debt owed by a firm to an outside organization or individualOwners Equity amount of money that owners would receive if they sold all of a firms assets and paid all of its liabilitiesCopyright 2013 Pearson Education, Inc. publishing as Prentice Hall14-*


Financial StatementsFinancial Statement any of several types of reports summarizing a companys financial status to stakeholders and to aid in managerial decision makingbalance sheet, income statement, statement of cash flowsCopyright 2013 Pearson Education, Inc. publishing as Prentice Hall14-*


Balance SheetsBalance Sheet financial statement that supplies detailed information about a firms assets, liabilities, and owners equityCopyright 2013 Pearson Education, Inc. publishing as Prentice Hall14-*


Balance SheetsCurrent Asset asset that can or will be converted into cash within a year

Fixed Asset asset with long-term use or value, such as land, buildings, and equipment



Balance SheetsCurrent Liability debt that must be paid within one yearAccounts Payable (Payables) current liability consisting of bills owed to suppliers

Long-Term Liability debt that is not due for at least one yearRetained Earnings earnings retained by a firm for its use rather than paid out as dividendsCopyright 2013 Pearson Education, Inc. publishing as Prentice Hall14-*


Income StatementsIncome Statement (Profit-and-Loss Statement)financial statement listing a firms annual revenues and expenses so that a bottom line shows annual profit or lossrevenues, cost of revenues, operating expenses, and net incomeCopyright 2013 Pearson Education, Inc. publishing as Prentice Hall14-*


Income StatementsRevenues funds that flow into a business from the sale of goods or servicesCost of Goods Sold costs of obtaining materials for making the products sold by a firm during the yearOperating Expenses costs, other than the cost of revenues, incurred in producing a good or service



Income StatementsGross Profit preliminary, quick-to-calculate profit figure calculated from the firms revenues minus its cost of revenues (the direct costs of getting the revenues)Operating Income gross profit minus operating expensesNet Income (Net Profit, Net Earnings) gross profit minus operating expenses and income taxes



Statements of Cash FlowsStatement of Cash Flows financial statement describing a firms yearly cash receipts and cash paymentsCash Flows from Operations: Concerns main operating activities: cash transactions involved in buying and selling goods and servicesCash Flows from Investing: Net cash used in or provided by investingCash Flows from Financing: Net cash from all financing activitiesCopyright 2013 Pearson Education, Inc. publishing as Prentice Hall14-*


The Budget: An Internal Financial StatementBudget detailed statement of estimated receipts and expenditures for a future period of timeCopyright 2013 Pearson Education, Inc. publishing as Prentice Hall14-*


Reporting Standards and PracticesRevenue Recognition formal recording and reporting of revenues at the appropriate timeFull Disclosure guideline that financial statements should not include just numbers but should also furnish managements interpretations and explanations of those numbersCopyright 2013 Pearson Education, Inc. publishing as Prentice Hall14-*


Analyzing Financial StatementsSolvency Ratio financial ratio, either short- or long-term, for estimating the borrowers ability to repay debtProfitability Ratio financial ratio for measuring a firms potential earningsActivity Ratio financial ratio for evaluating managements efficiency in using a firms assetsCopyright 2013 Pearson Education, Inc. publishing as Prentice Hall14-*


Solvency Ratios: Borrowers Ability to Repay DebtShort-Term Solvency Ratio financial ratio for measuring a companys ability to pay immediate debtsCurrent Ratio financial ratio for measuring a companys ability to pay current debts out of current assets

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall14-*Current Ratio:Current Assets Current Liabilities


Long-Term SolvencyDebt companys total liabilitiesLeverage ability to finance an investment through borrowed fundsCopyright 2013 Pearson Education, Inc. publishing as Prentice Hall14-*Debt to Owners Equity Ratio:

DebtOwners Equity


Profitability Ratios: Earnings Power for OwnersCopyright 2013 Pearson Education, Inc. publishing as Prentice Hall14-*Earnings Per Share:Net IncomeNo. of Shares OutstandingReturn on Equity:Net IncomeTotal Owners' Equity


*14-*Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall


*Explain the role of accountants and distinguish between the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.Explain how the accounting equation is used.Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.Explain the key standards and principles for reporting financial statements.***Figure 14.1 is a simplified presentation of the balance sheet for Google, Inc.*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 assetsPaid-In Capital money that is invested in a company by its owners

*Figure 14.2 shows the 2010 income statement for Google, whose bottom line was $8.50 (rounded) billion. The income statement is divided into four major categories: revenues, cost of revenues, operating expenses, and net income.*Googles 2010 statement (simplified) of cash flows is reproduced in Figure 14.3.*Figure 14.4 is a sales budget for a hypothetical wholesaler, Perfect Posters.******

43087_pbu0045_chapter13_t2 1dvdv516

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