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CHAPTER 8: Accounting

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

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  1. CHAPTER 8: Accounting DECISION MAKING BY THE NUMBERS

  2. 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

  3. FINANCIAL STATEMENTS: THE MAIN OUTPUT OF FINANCIAL ACCOUNTING • Financial accounting includes three basic financial statements: • Balance Sheet • assets: value of the stuff 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 • Corporations with publicly held stock must publish annual reports with all three statements

  4. BALANCE SHEET: WHAT WE OWN AND HOW WE GOT IT Assets = Liabilities + Owner’s Equity 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

  5. Stuff & claims against stuff • Stuff • Car $4,000 • Claims against stuff • Dave (owner) $3,000 • Becky (loan) $1,000

  6. Stuff & claims against stuff • Stuff • House $140,000 • Claims against stuff • Bank (debt) $115,000 • Dave (owner) $ 25,000

  7. Stuff & claims against stuff • Stuff • Car $4,000 • Claims against stuff • Dave (owner) $3,000 • Becky (debt: 6 mo) $1,000 • Stuff • House $140,000 • Claims against stuff • Bank (debt) $115,000 • Dave (owner) $ 25,000

  8. Snap shot: The Balance Sheet Assets(stuff) • car 4,000 • house 140,000 • total144,000 Liabilities and Owners Equity • short term liabilities (becky) 1,000 • long term liabilities (bank) 115,000 • equity (car and house) 28,000 • total144,000 $ $

  9. SAMPLE BALANCE SHEET

  10. Foundation & Accounting Numbers

  11. Foundation & Accounting Numbers

  12. 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 – Expenses = Net Income Expenses – the cash the firm spends or other assets it uses to generate revenue Revenue– the increase in the amount of assets the firm earns Net Income – the profit or loss the firm earns

  13. SAMPLE INCOME STATEMENT

  14. Foundation & Accounting Numbers

  15. STATEMENT OF CASH FLOWS: SHOW ME THE MONEY • Cash flowing into and out of the firm • Operations • Investing • Financing • 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

  16. SAMPLE STATEMENT OF CASH FLOWS

  17. 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)

  18. BEYOND THE STATEMENTS Horizontal Analysis – compares information in a firm’s financial statement over a period of 2 years or more. Vertical Analysis – expresses items on the balance sheet and income statement as a percentage of a key value. Ratio Analysis – compares selected items by computing percentages, rates or proportions.

  19. MANAGERIAL ACCOUNTING VS. FINANCIAL ACCOUNTING

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