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CHAPTER 8: Accounting. DECISION MAKING BY THE NUMBERS. Market Information. How can you tell how well you are doing? Measure individual transactions Put them all together – How much “stuff” (acquired wealth) do you have Where did it come from? (assets = liabilities + owners equity)
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CHAPTER 8: Accounting DECISION MAKING BY THE NUMBERS
Market Information • How can you tell how well you are doing? • Measure individual transactions • Put them all together – • How much “stuff” (acquired wealth) do you have • Where did it come from? (assets = liabilities + owners equity) • How much new wealth are you creating with it?(revenue - expense = profit) • Goal of business: To create wealth • Competing for transactions in the market
Financial statements: the main output of financial accounting • Financial accounting includes three basic financial statements: • Balance Sheet • assets: value of the stuff the you or the organization controls • liabilities: debt claims against the stuff • owners’ equity: owners’ claims against the stuff • Income Statement • revenues ($ coming in) • expenses ($ going out) • Statement of Cash Flows • Companies with more than $10 million in assets and a class of equity securities that is held by more than 500 owners must file annual and other periodic reports, regardless of whether the securities are publicly or privately traded. • The 10-K includes information such as company history, organizational structure, executive compensation, equity, subsidiaries, and audited financial statements, among other information.
The Independent Auditor’s Report: A Necessary Stamp of Approval • Publicly traded corporations are required to have a CPA firm perform an external audit • Rigorous Process • Check figures and methods • Physical Counts • The auditor will issue an unqualified, qualified or adverse opinion • Auditors must be independent
Checking Out the Notes to Financial Statements: What’s in the Fine Print? • Additional information may be required to explain the numbers, and notes can be very revealing: • Can be many pages… • Additional information about operations • Clarify and supplement numbers • Explain accounting methods or changes • Detail status of lawsuits
Looking for Trends in Comparative Statements • The SEC requires publicly traded companies to provide comparative financial statements • 2-3 years of figures side-by-side • View changes over a period of time • Trace what has happened to key assets and liabilities • Comparative analysis is a form of horizontal analysis
So What’s New or Different? Office People Products Factories
Types of Costs Implicit costs– opportunity costs; not monetary but what is given up Out-of-pocket costs – also called explicit costs; actual expenditures. Payments made to suppliers, workers and rent for office space Fixed costs– do not changes with levels of production Variable costs– rise and vary when the firm produces goods and services
Developing the Key Budget Components: One Step at a Time Master Budget – brings together all of the budgets to represent the overall plan • Operating Budgets identify sales and production goals. • Sales Budget • Production Budget • Direct Labor Budget • Financial Budgets focus on the firm’s financial objectives. • Cash Budget • Capital Budget
Balance sheet: what we own and how we got it Balance Sheet – summarizes a firm’s financial position at a specific point in time. Liabilities – indicates what the firm owes to non-owners Assets – things of value that the firm owns Owner’s Equity – the claims owners have against their firm’s assets = +
The income statement: how did we do? Income Statement – summarizes a firm’s operations over a given period of time in terms of profit and loss. Revenue– the increase in the amount of assets the firm earns Expenses – the cash the firm spends or other assets it uses to generate revenue Net Income – the profit or loss the firm earns - =
Statement of cash flows: show me the money • Increase and decrease from all three sources • Total amount of cash on hand • Stakeholders want to know if there is adequate cash to pay workers, creditors, suppliers and IRS
Sarbanes-oxley act of 2002 • Commonly referred to as SOX • Banned relationships between CPA firms that might create conflict of interest • Created Public Company Accounting Oversight Board (PCOAB)
Balance Sheet Horizontal Analysis – compares information in a firm’s financial statement over a period of 2 years or more.
Income StatementVertical Analysis – expresses items on the balance sheet and income statement as a percentage of a key value.
