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The Nature of Accounting

The Nature of Accounting. The recording, measurement, and interpretation of financial information, often used in making business decisions. Did You Know? Corporate fraud costs are estimated at $600 billion annually. Types of Accountants. Public Accountant

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The Nature of Accounting

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  1. The Nature of Accounting • The recording, measurement, and interpretation of financial information, often used in making business decisions. Did You Know? Corporate fraud costs are estimated at $600 billion annually.

  2. Types of Accountants • Public Accountant • An independent professional who provides accounting services to the public (individuals or firms) for a fee • CPA (Certified Public Accountant) • Private Accountant • An accountant employed by a corporation, government agency, or other organization • CPA or a CMA (Certified Management Accountant)

  3. Leading Accounting Firms

  4. Is it Accounting or Bookkeeping? • Bookkeepers are responsible for obtaining and recording the information that accountants require to analyze a firm’s financial position. • Accountants are not only trained to record financial information, but to understand, interpret, and even develop the sophisticated accounting systems necessary to classify and analyze complex financial information.

  5. The Users of Accounting Information

  6. Internal uses: Managerial accounting Cash flow Budget External uses: Reporting financial performance to outsiders Filing income taxes Obtaining credit Reporting to stockholders Uses of Accounting Information

  7. Management Plan and set goals Organize Lead and motivate Control Lenders & suppliers Evaluate credit risks Internal Accounting Information

  8. Stockholders and Potential Investors Evaluate soundnessof investments Government Agencies Confirm tax liabilities Confirm payroll Deductions Approve new issues of stocks and bonds External Accounting Information

  9. The Accounting Process • The accounting equation • Double-entry bookkeeping

  10. The Accounting Equation • The relationship between assets, liabilities, and owners’ equity = + Liabilities A firm’s debts and obligations Owners’ Equity The difference between a firm’s assets and itsliabilities Assets Things of value that a firm owns

  11. 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

  12. The Accounting Equation and Double-Entry Bookkeeping for Anna’s Flowers

  13. The Accounting Cycle • Examining source documents • Recording transactions • Posting transactions • Preparing financial statements

  14. Financial Statements • The end results of the accounting process are a series of financial statements. • Income statement • Balance sheet • Statement of cash flows • Financial statements are provided to: • Stockholders and potential investors • Creditors • Government agencies • Internal Revenue Service

  15. GAAP • 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.

  16. Equivalent Terms in Accounting

  17. The Income Statement • A financial report that shows an organization’s profitability over a period of time: • Month • Quarter • Year

  18. Key Income Statement Terms • Revenue • Cost of goods sold • Gross income • Expenses • Selling, general & administrative • R&D, engineering • Interest • Depreciation • Net income

  19. Anna’s Flowers Income Statement December 31, 2007

  20. Anna’s Flowers Balance Sheet December 31, 2007

  21. Anna’s Flowers Annual Budget for 2007 Sales Consulting Total January 6,500 5,000 11,500 February 6,000 6,000 12,000 March 5,800 6,200 12,000 April 6,100 6,500 12,600 May 7,000 6,800 13,800 June 8,100 7,600 15,700 July 8,600 7,800 16,400 August 6,900 8,000 14,900 September 6,700 8,700 15,400 October 5,900 9,000 14,900 November 5,000 8,500 13,500 December 4,500 8,000 12,500 Annual $123,850 $73,850 $197,700

  22. 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

  23. Key Balance Sheet Terms • Assets • Current assets • Accounts receivable • Liabilities • Accounts payable • Accrued expenses • Owner’s equity

  24. The Statement of Cash Flow • Explains how the company’s cash changed from the beginning of the accounting period to the end • Three categories: • Cash from (used for) operating activities • Cash from (used for) investing activities • Cash from (used for) financing activities

  25. Analyzing Financial Statements with Ratio Analysis • Profitability ratios • Asset utilization ratios • Liquidity ratios • Debt utilization ratios • Per share data

  26. Profitability Ratios

  27. Asset Utilization Ratios

  28. Liquidity Ratios

  29. Debt Utilization Ratios

  30. Per Share Data

  31. Industry Analysis

  32. Solve the Dilemma • Describe the three basic accounting statements. What type of information does each provide that can help you evaluate the situation? • Which of the financial ratios are likely to prove to be of greatest value in identifying problem areas in the company? Why? • Which of your company’s financial ratios might you expect to be especially poor? • Discuss the limitations of ratio analysis.

  33. Explore Your Career Options • What contributions do accountants make to organizations?

  34. Additional Discussion Questions and Exercises • What is the accounting equation? • Which financial statement (income statement or balance sheet) is most similar to the accounting equation? • What is meant by the liquidity of assets? • In measuring a firm’s performance, many investors and managers prefer industry analysis or industry ratios. • What is the advantage in using industry ratios?

  35. Additional Discussion Questions and Exercises • How do public accounts, private accountants, and certified public accountants differ? • What are some different types of liabilities?

  36. Chapter 15 Quiz • Which generally appears on an income statement? • Assets = Liability + Owners’ equity • Revenue - Expenses = Profit or loss • Assets - Expenses = revenue • Current assets/Current liabilities • An accountant who provides accounting services to individuals and/or businesses for a fee is considered a: • certified public accountant (CPA) • public accountant • private accountant • local accountant

  37. Chapter 15 Quiz • Assume a firm’s inventory turnover was 25. That means: • the firm made a 25 percent profit on its sales. • the firm has sold and replaced its inventory 25 times in a year. • the firm has 25 items in inventory. • the firm needs to sell 25 items in inventory to make a profit. • The internal financial statement that forecasts expenditures and revenues for a period is known as: • a balance sheet • an income statement • a budget • an annual report

  38. Multiple Choice Questions about the Video • Aon is a Gaelic word that means: • harmony • unity • oneness • accounting • Aon has offices in more than ____ countries. • 12 • 60 • 120 • 190

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