Wednesday morning

1. Wednesday morning Accounting

2. Accounting • Accounting -- Recording, classifying, summarizing and interpreting of financial events and transactions in an organization to provide interested parties needed financial information. • Outside parties - like employees, owners, creditors, unions, investors and the government - make use of a firm’s accounting information

3. The Accounting System

4. Financial Accounting • Financial Accounting -- Financial information and analyses are generated for people primarily outside the organization. Outside users are interested in these questions: • Is the organization profitable? • Is it able to pay its bills? • How much debt does it owe? • Annual Report -- A yearly statement of the financial condition, progress, and expectations of the firm. • American Eagle, Disney

5. HOW to READ an ANNUAL REPORT • Key things to watch for and read: • Management’s discussion and analysis of operations • Balance sheet • Income statement • Statement of cash flows • Auditor’s opinion

6. Managerial Accounting • Managerial Accounting --Provides information and analysis to managers inside the organization to assist them in decision making. • Managerial accounting is involved with: • Costs of production • Costs of marketing • Preparation and control of budgets • Minimizing tax liabilities

7. Public vs. Private Accountants • Private Accountants -- Work in a single firm, government agency, or nonprofit organization. • Public Accountants -- Provide accounting services to individuals or businesses. • Certified Public Accountants (CPAs) -- Accountants who have passed a series of examinations established by the American Institute of Certified Public Accountants (AICPA) and met a states requirements for education and experience.

8. Auditing • Auditing -- Reviewing and evaluating the information used to prepare a company’s financial statements. • Independent Audit -- An evaluation and unbiased opinion about the accuracy of a company’s financial statements. • Certified Internal Auditors (CIAs) -- Accountants who have a bachelor’s degree and two years of experience in internal auditing and pass an exam administered by the Institute of Internal Auditors.

9. Specialized Accountants • Tax Accountants -- Accountants trained in tax law and are responsible for preparing tax returns or developing tax strategies. • Forensic Accountants -- When a company is suspected of fraud or other accounting wrongdoings a court will commission a forensic accountant to search for foul play. Forensic accountants look for proof a company is “cooking the books.” Please note that this is not the role of the public accountants.

10. The Accounting Cycle • Accounting Cycle -- A six-step procedure that results in the preparation and analysis of the major financial statements.

11. GAAP • Generally Accepted Accounting Principles • the standard framework of guidelines for financial accounting used in any given jurisdiction; GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements.

12. Bookkeeping • Bookkeeping -- The recording of business transactions. Bookkeepers divide a firm’s transactions into meaningful categories and post them into a record book or computer program called a journal. • Use of double entry bookeeping • Ledger -- A specialized accounting book or program where all information is in one place. • Trial Balance -- A summary of all the information in the account ledgers.

13. Cash vs. Accrual Accounting • Revenue Recognition • An exchange of goods or services at an agreed upon price with payment or promise of payment • Accounts receivable, unearned revenue • Matching • Matching expenses with the revenue it helped to generate; matching expenses to the time period when they are incurred • inventory/cost of goods sold, accounts payable, prepaid expenses

14. Financial Statements • Financial Statement -- A summary of all the financial transactions that have occurred over a particular period. • Key financial statements of business are: • Balance sheet • Income statement • Statement of cash flows

15. The Fundamental Accounting Equation • Fundamental Accounting Equation -- The basis for the balance sheet. • The equation must always be balanced and includes the formula: • Assets = Liabilities + Owners Equity

16. Assets • Assets -- Economic resources owned by a firm. Items can be tangible or intangible. • Liquidity -- Ease with which assets can be converted into cash.

17. Classifying Assets • Current Assets -- Items that can or will be converted to cash within one year. • Fixed Assets -- Long-term assets that are relatively permanent such as land, buildings, or equipment. • Intangible Assets -- Long-term assets that have no physical form but do have value such as patents, trademarks, and goodwill.

18. Classifying Liabilities • Liabilities -- What the business owes to others - its debts. • Accounts Payable -- Current liabilities a firm owes for merchandise or services purchased on credit. • Notes Payable -- Short or long-term liabilities a business promises to pay by a certain date. • Bonds Payable -- Long-term liabilities that the firm must pay back.

19. Owners’ Equity • Owners’ Equity -- The owners’ share of the business: assets (what they own) minus liabilities (what they owe). • Consists of: • Paid-in Capital – amount of funds directly invested in the business by its owners • Retained Earnings -- Accumulated earnings from the firm’s profitable operations that are reinvested in the business.

20. The Income Statement • Income Statement -- The financial statement that shows a firm’s bottom line - that is, its profit after costs, expenses, and taxes. • Net Income/Net Loss -- The revenue left over or depleted.

21. The Multi-Step Income Statement • The formula for the multi-step income statement: • Revenue • Minus Cost of Goods Sold • Equals Gross Profit • Minus Operating Expenses • Equals Net Income before Taxes (Operating Income) • Minus Taxes • Equals Net Income or Net Loss

22. Income Statement Accounts • Revenues is the monetary value a firm received for goods sold, services rendered or other payments. • Recall revenue recognition • Cost of Goods Sold (or Manufactured) -- Measures the cost of merchandise the firms sells or the cost of raw materials and supplies it used in producing items for resale. • Recall matching • Gross Profit -- How much a firm earned by buying (or making) and selling merchandise.

23. Income Statement Accounts, cont’d • Operating Expenses -- Expenses a firm incurs in selling goods and services such as rent, salaries and supplies. • Depreciation -- The systematic write-off of the cost of a tangible asset over its estimated useful life.

24. Statement of Cash Flows • The purpose is to provide info about the sources and uses of cash during a particular time period • content and organization • operating activities: generally, any activities that enter into the determination of net income • investing activities: transactions involved in the acquisition or disposition of non-current assets (sale or purchase of non-current assets, sales or purchases of other company’s securities, collecting or giving a loan to a third party) • financing activities: transactions involving the company’s debt or equity (selling or acquiring company’s own stock, issuing or repaying long-term debt, payment of dividends) • There are two different ways to prepare the operating section of the SCF, the direct and indirect method;

25. Understanding Cash Flow • Cash is the lifeblood of any business • Managing cash flow is a key consideration of a business and can be particularly challenging for small and seasonal businesses.

26. Example of the Accounting Cycle • Glorian Portrait • Transaction worksheet • Income Statement • Retained Earnings • Balance Sheet • Statement of Cash Flows

27. Financial Statement Analysis • FSA - The assessment of a firm’s financial condition using calculations and financial ratios developed from the firm’s financial statements. Sometimes referred to as ratio analysis • The ratios do not exist in a vacuum • By themselves, they do not provide much meaning • They need to be compared to something: • Trends over time • Key competitors • Industry averages

28. FSA, cont’d • The ratios can be broken down into • Profitability • Short-term financial position (liquidity) • Long-term financial position (leverage/financial structure) • Efficiency/effectiveness • Yahoo Finance and WSJ as sources of ratio analysis • American Eagle (Yahoo), American Eagle (WSJ)

29. International Accounting Issues • Multinational companies must adapt their accounting reporting to the rules of multiple countries. • Many countries have adopted International Financial Reporting Standards (IFRS) and are pushing to make them standard. • The U.S. Securities & Exchange Commission believes there should be such a standard.

30. Timeline for the US move to IFRS • 2008: SEC offers proposed timeline • 2009: 110 large companies have the option of using IFRS • 2011: SEC assesses progress of IFRS • 2013: Final decision on the move to IFRS • 2014: Large public companies will be required to report in IFRS (pending SEC decision) • 2016: All companies will be required to report in IFRS (pending SEC decision)