BADM1103F07Ch17

1/37Financial Information and Accounting2/37Importance•To run a business effectively you need to be able to read, understand, and analyze accounting reports and financial statements3/37Importance (cont.)•Health of a Person•Pulse rate and blood pressure reports•Health of a Business•Accounting reports and financial statements4/37•Accounting•The recording, classifying, summarizing, and interpreting of financial events and transactions•Provides management and other interested parties with the information they need to make good decisions 5/37•Financial Transactions•Buying and selling goods and services •Acquiring insurance •Paying employees •Using supplies 6/37•Accounting System•The method used to record and summarize accounting data into reports 7/37•Purpose •Give managers basic financial information•Report financial information to people outside the firm8/37•Accounting•The measurement and reporting of financial information to various users regarding the economic activities of the firm 9/37•Areas of Accounting •Managerial accounting•Financial accounting•Auditing•Tax accounting •Governmental and not-for-profit accounting10/37•Managerial Accounting•Accounting used to provide information and analyses to managers within the organization to assist them in decision making 11/37•Financial Accounting•Accounting information and analyses prepared for people outside the organization (owners and prospective owners, creditors and lenders, employee unions, customers, suppliers, governmental units, and the general public)12/37•Annual Report 13/37•Private Accountant •An accountant who work for a single firm, government agency, or nonprofit organization•Public Accounting•An accountant who provides his or her accounting services to individuals or businesses on a fee basis14/37•Public Accounting•Designing an accounting system for a firm•Helping select the correct computer and software to run the system•Analyzing the financial strength of an organization15/37•Certified Public Accounting (CPA)•An accountant who has passed a series of examinations established by the American Institute of Certified Public Accountants (AICPA) 16/37•The independent Financial Accounting Standards Board (FASB)•Defines what are Generally Accepted Accounting Principles (GAAP) that accountants must follow17/37•Sarbanes-Oxley Act•New government reporting standards for publicly traded companies•Public Company Accounting Oversight Board (PCAOB)18/37•Auditing•Reviewing and evaluating the records used to prepare the company’s financial statementsInternal audits Independent Audits •an evaluation and unbiased opinion about the accuracy of company’s financial statements 19/37•Tax Accountant•An accountant trained in tax law and responsible for preparing tax returns and developing tax strategies 20/37•Government and Not-For-Profit Accounting•The accounting system for organizations whose purpose is not generating a profit but serving ratepayers, taxpayers, and others according to a duly approved budget21/37•Accounting Cycle•A six-step procedure that results in the preparation and analysis of the major financial statements22/3723/37•Bookkeeping•The recording of business transactions•Financial Statement•The summary of all transactions that have occurred over a particular period24/37Understanding Key Financial Statements •Key Financial Statements •Balance Sheetreports the firm’s financial condition on a specific date25/37Understanding … (cont.)•Income StatementReports revenues, expenses, and profits (or losses) for a specific period of time•Statement of Cash FlowsProvides a summary of money coming into and going out of the firm26/37•Balance Sheet•What the company owns and owes on a certain day•Income Statement•What a firm sells its products for and what its selling costs are over a specific periodUnderstanding … (cont.)27/37•Statement of Cash Flows•The difference between cash coming in and cash going out of a business Understanding … (cont.)28/37•Fundamental Accounting Equationassets = liabilities + owners’ equity Understanding … (cont.)29/37•Income Statement•The financial statement that shows a firm’s profit after costs, expenses, and taxes•Summarizes all of the resources that have come into the firm (revenue), all the resources that have left the firm, and the resulting net incomeUnderstanding … (cont.)30/37•Net Income or Net Loss•Revenue left over after all costs and expenses, including taxes, are paid Understanding … (cont.)31/3732/37•Revenue•The value of what is received for goods sold, services rendered, and other financial sources •Cost of Goods Sold (Cost of Goods Manufactured)•A measure of the cost of merchandise sold or cost of raw materials and supplies used for producing items for resale 33/37•Gross Profit (Gross Margin)•How much a firm earned by buying (or making) and selling merchandise•Operating Expenses•Costs involved in operating a business, such as rent, utilities, and salaries Understanding … (cont.)34/3735/37•Statement of Cash Flows•The financial statement that reports cash receipts and disbursement related to the firm’s three major activities: operations, investment, and financingUnderstanding … (cont.)36/37•Cash Flow•The difference between cash coming in and cash going out of a business Understanding … (cont.)37/37