© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 1

Getting to theGetting to theBottom Line:Bottom Line:

Basic Accounting Basic Accounting ConceptsConcepts

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 2

What is Accounting?What is Accounting?

• Financial

• Management

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 3

What Accountants DoWhat Accountants Do

• Bookkeeping

• Cost accounting

• Tax accounting

• Financial analysis

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 4

Ten Most Important Ten Most Important Accounting SkillsAccounting Skills

• Analytical

• Problem solving

• Interpersonal

• Listening

• Communication

• Leadership

• Decision making

• Time management

• Teamwork

• Computer

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 5

Types of AccountantsTypes of Accountants

• Private

–CMA or CPA

– Internal audit

• Public

–CPA

–External audit

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 6

Typical Finance Typical Finance DepartmentDepartment

Vice PresidentManufacturingVice PresidentManufacturing

Vice PresidentFinance

Vice PresidentFinance

Vice PresidentSales

Vice PresidentSales

PresidentPresident

Board ofDirectorsBoard ofDirectors

ControllerControllerTreasurerTreasurer

Director of CapitalBudgeting

Director of CapitalBudgeting

Credit ManagerCredit

ManagerInventoryManagerInventoryManager

CostAccounting

CostAccounting

TaxDepartment

TaxDepartment

FinancialAccountingFinancial

Accounting

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 7

Accounting RulesAccounting Rules

• Generally Accepted Accounting Principles (GAAP)

• Financial Accounting Standards Board (FASB)

• International Accounting Standards (IAS)• Securities and Exchange Commission

(SEC)

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 8

Sarbanes-Oxley ActSarbanes-Oxley Act

• Advantages

–Authority of auditors, conflict of interest, investor protection, corporate accountability

• Disadvantages

– Implementation, cost of compliance, enforcement, reporting requirements

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 9

Fundamental Fundamental Accounting ConceptsAccounting Concepts

• The accounting equation

• Double-entry bookkeeping

• The matching principle

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 10

The Accounting EquationThe Accounting Equation

Owner’s Equity:

Accounting Equation:

Assets = Liabilities + Owner’s Equity

Assets – Liabilities = Owner’s Equity

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 11

Maintaining BalanceMaintaining Balance

• Double-entry bookkeeping

–Credit purchase

–Cash purchase

• Matching principle

–Accrual basis

–Cash basis

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 12

How Are Financial How Are Financial Statements Used?Statements Used?

• A transaction takes place

• The transaction is measured and recorded

• Journal entries are analyzed and posted to

a ledger

• Account data are summarized and used to

prepare budgets, reports, and financial

statements

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 13

Understanding Financial Understanding Financial StatementsStatements

• Balance sheet

• Income statement

• Cash-flow statement

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 14

The Balance SheetThe Balance Sheet

• Assets

– Current

– Fixed

• Liabilities and shareholder’s equity

– Current liabilities

– Long-term liabilities

– Shareholder’s equity

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 15

The Income StatementThe Income StatementRevenues

Gross SalesLess Sales Returns and Allowances

Cost of Goods SoldBeginning Inventory + Net Purchases – Ending Inventory

Operating ExpensesSelling ExpensesGeneral Expenses

Net Income After TaxesNet Income Before Taxes – Income Taxes

Income Taxes

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 16

The Cash-Flow The Cash-Flow StatementStatement

• Operations

• Investments

• Financing

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 17

Analyzing Financial Analyzing Financial StatementsStatements

Trend AnalysisTrend Analysis Ratio AnalysisRatio Analysis

Consider MoreThan One Ratio

Uncover Business Shifts

Consider ExtraordinaryCircumstances

Check Specific Data

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 18

Types of Financial RatiosTypes of Financial Ratios

• Profitability

• Liquidity

• Activity

• Leverage

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 19

Profitability RatiosProfitability Ratios

Return on Sales

Net Income/Net Sales

Return on Equity

Net Income/Total Owner’s Equity

Earnings per Share

Net Income/Average Shares Outstanding

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 20

Liquidity RatiosLiquidity Ratios

Current Ratio

Current Assets/Current Liabilities

Quick Ratio

Current Assets – Inventory/Current Liabilities

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 21

Activity RatiosActivity Ratios

Inventory Turnover

Cost of Goods Sold/Average Inventory

Accounts Receivable Turnover

Sales/Average Accounts Receivable

© Prentice Hall, 2007 Excellence in Business, 3e Chapter 16 - 22

Leverage RatiosLeverage Ratios

Debt to Equity

Total Liabilities/Total Equity

Debt to Total Assets

Total Liabilities/Total Assets