ACCOUNTING FUNDAMENTALS FOR MANAGERS

1. ACCOUNTING FUNDAMENTALS FOR MANAGERS University of Management and Technology 1901 North Fort Myer Drive Arlington, VA 22209 Voice: (703) 516-0035 Fax: (703) 516-0985 Website: www.umtweb.edu

2. Task Force Clip Art included in this electronic presentation is used with the permission of New Vision Technology of Nepean Ontario, Canada.

3. Chapter 1 The Role of Accounting in Business

4. Learning Objectives After studying this chapter, you should be able to: • Describe the types and forms of businesses, business strategies, value chains, and stakeholders. • Describe the three business activities of financing, investing, and operating. • Define accounting and explain its role in business. • Describe and illustrate the basic financial statements and how they interrelate. • Describe eight basic accounting concepts underlying financial reporting. • Describe and illustrate the use of horizontal analysis to analyze and evaluate a company’s performance.

5. Learning Objectives 1 Describe the types and forms of businesses, business strategies, value chains, and stakeholders.

6. Types of Businesses Manufacturing Business Product General Motors Automobiles, trucks, vans General Mills Breakfast cereals Boeing Jet aircraft Nike Athletic shoes Coca-Cola Beverages Sony Stereos, televisions, radios

7. Types of Businesses Merchandising Business Product Wal-Mart General merchandise Toys”R”Us Toys Barnes & Noble Books Best Buy Consumer electronics Amazon. Com Books

8. Types of Businesses Service Business Product Disney Entertainment Delta Air Lines Transportation Marriott Hotels Hospitality and lodging Merrill Lynch Financial advice Sprint Telecommunication

9. There are three forms of business organizations • Proprietorship • Partnership • Corporation

10. A proprietorshipis owned by one individual. • Advantages • Ease in organizing • Low cost of organizing • Disadvantage • Limited source of financial resources • Unlimited liability Doug’s

11. A partnership is owned two or more individuals. • Advantages • More financial resources than a proprietorship. • Additional management skills. Doug and Max’s • Disadvantage • Unlimited liability.

12. A corporation is organized under state or federal statutes as a separate legal entity. • Advantage • The ability to obtain large amounts of resources issuing stocks. D & M Inc. • Disadvantage • Double taxation.

13. Business Ownership in America Total Companies

14. Business Strategy A business strategy is an integrated set of plans and actions designed to enable the business to gain an advantage over its competitors, and to maximize profits.

15. Differentiation Strategy Under a differentiation strategy, a business designs and produces a product or service that possess unique attributes or characteristics for which customers are willing to pay a premium price.

16. Business Stakeholders A business stakeholder is a person or entity that has an interest in the economic performance and well-being of a business.

17. Business Stakeholders STAKEHOLDERS External: Suppliers Customers Stockholders Internal: Stockholders Managers Employees

18. Business Stakeholders Interest in the Business Business Stakeholders Examples Capital market Providers of major Banks, owners, stakeholder financing for the stockholders business Product or service Buyers of products Customers and market stakeholders or services and vendors suppliers to the business Government Collectors of taxes and Federal, state, and stakeholder fees from the business city governments and its employees Internal stakeholders Individuals employed Employees and by the business managers

19. Learning Objective 2 Describe the three business activities of financing, investing, and operating.

20. Financing Activities Financing activities involve obtaining funds to begin and operate a business.

21. Financing Activities Businesses seek financing by: • borrowing • issuing shares of ownership

22. Financing Activities A liability is a legal obligation to repay the amount borrowed according to the terms of the borrowing agreement.

23. Financing Activities Samples of Liabilities • Accounts payable: When a business buys a service or product on service. • Bonds payable: When a business borrows money by issuing bonds. • Interest payable: Any interest that is due on a note or a bond. • Note payable: When a business issues commercial paper or borrows on a line of credit.

24. Financing Activities A business may also finance its operations by issuing shares of stock. The basic type of stock is called common stock.

25. Investing Activities Investing activities involve the selection and management of long-term resources that will be used to develop, produce, and sell goods and services.

26. Investing Activities What are assets? Assets are resources that the business owns or are otherwise under its legal control and available for use in the future.

27. Investing Activities When the business sells merchandise or services to a customer, the right to collect is an account receivable.

28. Operating Activities What is revenue? Revenue is the increase in assets from selling products or services. Revenue is often identified according to its source, such as Rent Revenue.

29. Operating Activities What is an expense? An expense is a decrease in assets or an increase in liabilities from producing and delivering goods or providing services that constitute the primary operating activities of an organization.

30. Operating Activities Revenues - Expenses = Net Income = Net Loss

31. Learning Objective 3 Define accounting and its role in business.

32. What is accounting? Accounting is an information system that provides reports to stakeholders about the economic activities and condition of a business.

33. Major objectives of financial accounting 1.To report the financial condition of a business at a point in time. 2.To report changes in the financial condition of a business over a period of time.

34. Learning Objective 4 Describe and illustrate the basic financial statements and how they interrelate.

35. Income Statement An income statement is a summary of the revenue and the expenses for a specific period of time. Objective: Reports change in financial condition

36. Income Statement Hershey Foods Corporation Income Statement For the Year Ended December 31, 2001 (in thousands) Note that the time period for the statement is in the heading. Revenues: Sales $4,557,241 Expenses: Cost of sales $2,665,566 Selling and administrative 1,269,964 Other expenses 209,077 Interest 69,093 Income taxes 136,385 4,350,085 Net income $ 207,156

37. Retained Earnings Statement The retained earnings statement reports changes in financial condition due to changes in retained earnings. Objective: Reports change in financial condition

38. Retained Earnings Statement Hershey Foods Corporation Retained Earnings Statement For the Year Ended December 31, 2001 (in thousands) Again, note the time period Retained earnings, January 1, 2001 $2,702,927 Add net income $207,156 Less dividends 154,750 Increase in retained earnings 52,406 Retained earnings, December 31, 2001 $2,755,333 From the income statement

39. Balance Sheet The balance sheet reports the financial condition as of a point in time. Objective: Reports financial condition

40. Assets = Balance Sheet (Claims) Rights to the Assets

41. Assets Liabilities Stock-holders’ Equity + = Balance Sheet The Accounting Equation The rights of creditors The rights of the stockholders

42. Balance Sheet Hershey Foods Corporation Balance Sheet December 31, 2001 (in thousands) Note that the date is a specific point in time Assets Cash $ 134,147 Accounts receivable 361,726 Inventories 512,134 Prepaid expenses 62,595 Property, plant, and equipment 1,534,901 Intangibles 429,128 Other assets 212,799 Total assets $3,247,430 Continued

43. Liabilities Accounts payable $ 133,049 Accrued liabilities 462,901 Notes and other debt 1,245,939 Income taxes 258,337 Total liabilities $2,100,226 Stockholders’ Equity Capital stock $ 183,213 Retained earnings 2,755,333 Repurchased stock and other equity items (1,791,342) Total stockholders’ equity $1,147,204 Total liabilities and stockholders’ equity $3,247,430 Matches total assets

44. Statement of Cash Flows The statement of cash flows reports the changes in financial condition due to the changes in cash during a period. Objective: Reports change in financial condition

45. Statement of Cash Flows Three categories on the statement of cash flow are: • Operating activities • Investing activities • Financing activities

46. Hershey Foods Corporation Statement of Cash Flows For the Year Ended December 31, 2001 (in thousands) Note the time period Net cash flows from operating activities $ 706,405 Cash flows from investing activities: Investments in property, plant, and equipment $(187,029) Proceeds from sale of property, plant, and equipment 63,042 Net cash flows used in investing activities $(123,987) Cash flows from financing activities: Cash receipts from financing activities, including debt $ 30,589 Dividends paid to stockholders (154,750) Repurchase of stock (40,322) Other, including repayment of debt (315,757) Net cash flows used in financing activities $(480,240) Net increase in cash during 2001 $ 102,178 Cash as of January 1, 2001 31,969 Cash as of December 31, 2001 $ 134,147

47. Learning Objective 5 Describe eight basic accounting concepts underlying financial reporting.

48. Accounting Concepts The business entity concept limits the economic data in the accounting system to data related directly to the activities of the business. The cost concept determines the amount initially entered into the accounting records for purchases.

49. Accounting Concepts A business normally expects to continue operating for an indefinite period of time. This is known as the going concern concept. Under the matching concept, revenues for a period are matched with the expenses incurred in generating the revenue. The objectivity concept requires that entries in the accounting records and the data reported on financial statements be based on objective evidence.

50. Accounting Concepts The unit of measure concept requires that all economic data be recorded in dollars. Financial statements should contain all relevant data a reader needs to understand the financial condition and performance of a business. This is the adequate disclosure concept. The accounting period concept is the process in which accounting data are recorded and summarized in financial statements.