mba report on ce

8/12/2019 MBA Report on CE

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Chapter 13

Copyri ght 2011 by the McGraw-H il l Companies, Inc. Al l r ights reserved.McGraw-Hill/Irwin

Small Business Accounting

Projecting and Evaluating

Performance


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Learning Objectives

LO1Review the basic concepts of accounting

LO2Specify the requirements for a small businessaccounting system

LO3Explain the content and format of commonfinancial statements

LO4Use accounting information as a tool formanaging your business effectively

LO5Develop a complete set of budgets for yourbusiness

LO6Use accounting information to make betterbusiness decisions

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Why Accounting Matters

Proveswhat your business did financially

Shows how much your business is worth

Banks, creditors, development agencies,

and investors requireit

Provides easy-to-understand plans for

business operations

You cant know how your business is doingwithout it

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Types of Accounting

Managerial accounting

Accounting methods that are specifically

intended to be used by managers for

planning, directing, and controlling abusiness.

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Types of Accounting

Tax accounting

An accountingapproach based

on specificaccountingrequirements setby governmental

taxing agencies.

Financialaccounting

A formal, rule-based

set of accountingprinciples andproceduresintended for use by

outside owners,investors, banks, andregulators.

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Basic Accounting Concepts

Business entityconcept

The concept that a

business has anexistence separatefrom that of itsowners.

Going concernconcept

The accounting

concept that abusiness isexpected tocontinue in

existence for theforeseeable future.

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The Accounting Equation

Accounting equation

The statement that assets equal liabilities

plus owners equity (assets liabilities

owners equity).

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The Accounting Equation

Asset

something the business owns that will havevalue in the future

Liability a legal obligation to pay some amount at a

time in the future.

Owners equity whatever value is left after all liabilities have

been paid.

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Revenues, Expenses, and Costs

Cost

The value given upto obtain

something that youwant.

Expense

A decrease inowners equity

caused byconsuming yourproduct or service.

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Information Usefulness

Only two reasons to do accounting:

1. To produce information that is usefulto you for managing your business

2. To meet legal or contractualrequirements

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Why Does Accounting Matter?

MACRS rate

the Modified Accelerated Cost Recovery

System

lets taxpayers depreciate more of the

cost earlier

Depreciation

Regular and systematic reduction inincome that transfers asset value to

expense over time.

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Accounting Systems for Small

Business

Computerized systems simplify theaccounting process by providingautomatic error checking, entry

screens that look like the commonbusiness forms, and automaticproduction of financial statements and

management reports.

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Financial Reports

Financial statements

Formal summaries of the content of an

accounting systems records of

transactions.

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Financial Reports

Five common financial statements

Income statement

Statement of retained earnings

Statement of owners equity

Balance sheet

Cash flow statement

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Flow ofInformation

inFinancialStatements

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Figure 13.1


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Financial Reports

Retained earnings

The sum of all profits and losses, less all

dividends paid since the beginning of the

business.

Articulate

The concept that information flows from

the income statement through thestatements of retained earnings and

owners equity to the balance sheet.

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Everyday Financial Documents

and Similar Financial Reports

13-17Figure 13.2


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Financial Reports

Income statement

A statement that lists revenues and

expenses and shows the amount of profit

a business makes for a specified period oftime.

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Organization of the

Income Statement

13-19Figure 13.3


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Typical Single-Step Format

Income Statement

13-20Figure 13.4A


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Typical Multiple-Step

Income Statement

13-21Figure 13.4B


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Financial Reports

Balance sheet

A statement of what a business owns

(assets), what it owes to others (liabilities),

and how much value the owners haveinvested in it (equity).

Liquidity

A measure of how quickly a company canraise money through internal sources byconverting assets to cash.

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Organization of the

Balance Sheet

13-23Figure 13.5


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Typical

Balance

Sheet

Figure 13.6


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Cash Flow Statement

Cash flow statement

A statement of the sources and uses of cashin a business for a specific period of time.

GAAP Generally Accepted Accounting Principles

are the standardized rules for accountingprocedures

used in all audits and submissions ofaccounting reports to the government.

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Typical Cash Inflows and Outflows

on the Cash Flow Statement

13-27Figure 13.7


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Cash Flow Statement

Operating activities

Activities involved inproducing andselling goods andservices.

Investing activities

The purchase and

sale of land,buildings,equipment, andsecurities.

Financing activities

Activities throughwhich cash isobtained from andpaid to lenders,owners, andinvestors.

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Uses of Financial Accounting

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Reporting to Outsiders

Record Keeping

Taxation

Control of Receivables

Analysis of Business Operations


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Uses of Managerial Accounting

External (cost)factors

Aspects of the

world outside thebusiness whichcould cause thebusinesss costs to

change.

Internal (cost)factors

Aspects of or

choices within thebusiness whichcould cause thebusinesss costs to

change.

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Uses of Managerial Accounting

Cost-volume-profit analysis

A managerial accounting technique

which looks at the fixed and variable

costs of a business to arrive at a numberof unit sales (volume) to maximize profits.

Variable, fixed costs

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Total Costs

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Figure 13.8


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Breakeven Point

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Figure 13.11

Breakeven point

The point at whichtotal costs equal

gross revenue.

Th B i Pl d th


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The Business Plan and the

Budget Process

Budget

A financial plan for the future, based on a

single level of operations; a quantitative

expression of the use of resourcesnecessary to achieve a businesss

strategic goals.

Pro forma

indicates estimated or hypothetical

information

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Budgeting Relationships

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Figure 13.2

Th B i Pl d th


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Budget Process

Master budget

A budget which consists of sets of

budgets that detail all projected receipts

and spending for the budgeted period. also referred to as a comprehensive

budget

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Th B i Pl d th


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Budget Process

Cost of goods sold budget

A schedule that shows the predicted cost

of product actually sold during the

accounting period.

Activity-based cost estimates

An accounting method which assigns

costs based on the different types of worka business does in order to sell a particular

product or service.

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Controlling

Variance

The difference between an actual and

budgeted revenue or cost

Variance analysis

The process of determining the effect of

price and quantity changes on revenues

and expenses.

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Controlling

Favorable/unfavorable variance

A label applied to variances to indicate

their effect upon the income statement;

Favorable variances would result in profitsbeing greater than budgeted, all other

things being equal;

Unfavorable variances would result inprofits being less than budgeted, all other

things being equal.

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Decision Making

To make good decisions we need:

1. Good information

2. Efficient ways to condenseinformation so it is understandable

3. Methods to help comparealternatives.

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