14 chapter Business Essentials, 7 th Edition Ebert/Griffin © 2009 Pearson Education, Inc. The Role of Accounts and Accounting Information Instructor Lecture

14

chapter

Business Essentials, 7th EditionEbert/Griffin

© 2009 Pearson Education, Inc.

The Role of Accounts and Accounting Information

Instructor Lecture

PowerPoints PowerPoint Presentation prepared by Carol Vollmer Pope Alverno College

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

© 2009 Pearson Education, Inc. 2

After reading this chapter, you should be able to:1. Explain the role of accountants and distinguish between the

kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.

2. Explain how the accounting equation is used.3. Describe the three basic financial statements and show how

they reflect the activity and financial condition of a business.4. Explain the key standards and principles for reporting

financial statements.

L E A R N I N G O B J E C T I V E SL E A R N I N G O B J E C T I V E S


After reading this chapter, you should be able to:

5. Describe how computing financial ratios can help users get more information from financial statements to determine the financial strengths of a business.

6. Discuss the role of ethics in accounting.

L E A R N I N G O B J E C T I V E S (cont’d)L E A R N I N G O B J E C T I V E S (cont’d)


What’s in It for Me?

• By understanding this chapter’s discussion of accountants, their methods, and their responsibilities, you’ll benefit in three ways:

1. If you’re thinking about starting your own business, you’ll discover your obligations for reporting your firm’s financial status

2. As an employee or union member, you’ll see how to evaluate your company’s financial condition and its prospects for the future

3. As an interested citizen, you’ll learn about accounting ethics and regulatory requirements for maintaining public trust in the business system


What Is Accounting?• Accounting Defined:

– A comprehensive system for collecting, analyzing and communicating financial information

– Bookkeeping: the recording of transactions

• Users of Accounting Information:– Business managers– Employees and unions– Investors and creditors– Tax authorities– Government regulatory agencies


Who Are Accountants and What Do They Do?• Controller

– Manages all of a firm’s accounting activities

• Types of Accounting Systems– Financial Accounting

• Concerned with external information users—the firm’s external stakeholders

• Prepares income statements, balance sheets, and other financial reports published for shareholders and the public

– Managerial (Management) Accounting• Serves internal users (managers) by providing information to make

departmental decisions, monitor projects, and plan future activities


Who Are Accountants and What Do They Do? (cont’d)

• Certified Public Accountants (CPAs)– Licensed, offer services to the public

• Auditing (GAAP)• Tax services• Management advisory services

• Non-certified Public Accountants• Private Accountants

– Work exclusively for a firm as accountants

• Management Accountants– Certified management accountant (CMA)


Who Are Accountants and What Do They Do? (cont’d)

• Forensic Accountants– Assist in the investigation of business and financial issues

that may have application in a court of law– Investigative Accounting

• Identifying financial evidence that may be pertinent• Analyzing financial evidence• Presenting accounting conclusions and their legal implications

– Litigation Support• Certified fraud examiner: A specialty area within forensic

accounting


The CPA Vision Project

• Redefining the role of the accountant for today’s world economy

• Identifying issues for the future• Global forces as drivers of change• Recommendations• A new direction

– Core services– Core competencies


TABLE 14.1 Core Competencies for Accounting


Federal Restrictions on CPA Services and Financial Reporting: Sarbox

• Sarbanes-Oxley Act of 2002 (Sarbox)– Enacted to restore public trust in corporate accounting

practices as a direct response to corporate financial abuses

– Restricts non-audit services that CPAs can provide

• Sarbox Compliance Requirements– CFOs and CEOs must pledge that the company’s finances

are correct and face severe penalties for noncompliance– Whistleblowers must be protected


TABLE 14.2 Selected Provisions of the Sarbanes-Oxley Act


The Accounting Equation

• The Accounting Equation– Assets = Liabilities + Owners’ Equity– Assets – Liabilities = Owners’ Equity (or Net Worth)

• Asset– Any economic resource that is expected to benefit a firm

or an individual who owns it

• Liability– A debt that the firm owes to an outside party

• Owners’ Equity– Money that owners would receive if they sold all of a

company’s assets and paid all of its liabilities© 2009 Pearson Education, Inc.

Financial Statements

• Balance Sheets– Supply detailed information about:

• Assets– Current assets: Cash/assets that can be converted into cash

within a year– Fixed assets: Capital that has long-term use or value– Intangible assets: Patents, trademarks, copyrights, etc.

• Liabilities– Current liabilities: Debts that must be paid within one year,

including accounts payable– Long-term liabilities: Debts not due for at least a year

• Owners’ Equity– Paid-in (invested) capital– Retained earnings (net profits)


FIGURE 14.1 Google’s Balance Sheet


Financial Statements (cont’d)

• Income Statement (Profit and Loss Statement)– Its description of revenues and expenses results in a figure

showing the firm’s annual profit or loss• Revenues: The funds that flow into a business from the sale of

goods or services

• Cost of revenues: Shows the costs of obtaining the revenues from other companies during the year

• Cost of goods sold: Costs of obtaining materials to make products sold during the year

• Gross profit: Considers revenues and cost of revenues from the income statement

• Operating expenses: Resources that must flow out of a company if it is to earn revenues


FIGURE 14.2 Google’s Income Statement


Financial Statements (cont’d)

• Statements of Cash Flows– Describes yearly cash receipts and cash payments

• Cash Flows from Operations: Concerns main operating activities: cash transactions involved in buying and selling goods and services

• Cash Flows from Investing: Net cash used in or provided by investing

• Cash Flows from Financing: Net cash from all financing activities

• The Budget– A detailed report on estimated receipts and expenditures

for a future period of time


FIGURE 14.3 Google’s Statements of Cash Flows


FIGURE 14.4 Perfect Posters’ Sales Budget


Financial Statements Review

Balance SheetBalance SheetAssets – Liabilities = Owners’ EquityAssets – Liabilities = Owners’ Equity

Balance SheetBalance SheetAssets – Liabilities = Owners’ EquityAssets – Liabilities = Owners’ Equity

Income StatementIncome StatementRevenues – Expenses = Profit (or Loss)Revenues – Expenses = Profit (or Loss)

Income StatementIncome StatementRevenues – Expenses = Profit (or Loss)Revenues – Expenses = Profit (or Loss)

Statement of Cash FlowsStatement of Cash FlowsCash In and Cash OutCash In and Cash Out

Statement of Cash FlowsStatement of Cash FlowsCash In and Cash OutCash In and Cash Out

BudgetBudgetEstimate – Actual = VarianceEstimate – Actual = Variance

BudgetBudgetEstimate – Actual = VarianceEstimate – Actual = Variance


Reporting Standards and Practices

• Generally Accepted Accounting Principles (GAAP)– Revenue recognition: Formal recording and

reporting of revenues at the appropriate time– Full disclosure

• Financial statements should not include just numbers but should also furnish management’s interpretations and explanations of those numbers so that users can better understand information in the statements


Current Current Assets Assets

Current Current LiabilitiesLiabilities

Solvency Ratios

Current Ratio:

Short-Term

Leverage:Leverage: The ability to finance an investment The ability to finance an investment through borrowed fundsthrough borrowed funds


Solvency Ratios

Debt to Owners’ Equity Ratio:

DebtDebt

Owners’ EquityOwners’ Equity

Long-Term


Profitability and Activity Ratios

Return on Equity:

Earnings Per Share:Earnings Per Share:

Net IncomeNet Income

Total Owners' EquityTotal Owners' Equity

Inventory Turnover Ratio:Inventory Turnover Ratio:Cost of Goods SoldCost of Goods Sold

Average InventoryAverage Inventory

Net IncomeNet Income

# of Shares Outstanding# of Shares Outstanding


Bringing Ethics into the Accounting Equation

• Why Accounting Ethics?– To maintain public confidence in business

institutions, financial markets, and the products and services of the accounting profession

• AICPA’s Code of Professional Conduct– Maintained and enforced by the AICPA– The AICPA identifies six ethics-related areas with

which accountants must comply to maintain certification


TABLE 14.3 Overview of the Code of Ethics for CPAs


TABLE 14.4 Examples of Unethical and Illegal Accounting Actions


Key Terms

accountingaccounting equationaccounting information system (AIS)accounts payable (payables)activity ratioassetauditbalance sheetbookkeepingbudgetCertified Fraud Examiner (CFE)certified management accountant

(CMA)

certified public accountant (CPA)code of professional conductcontrollercore competencies for accountingcost of goods soldcost of revenuescurrent assetcurrent liabilitycurrent ratiodebtdepreciationearnings per sharefinancial accounting


Key Terms (cont’d)

financial statementfixed assetforensic accountingfull disclosuregenerally accepted accounting

principles (GAAP)goodwillgross profitincome statement (profit-and-loss

statement)intangible assetleverageliabilityliquidity


long-term liabilitymanagement accountantmanagement advisory servicesmanagerial (management) accountingnet income (net profit, net earnings)operating expensesoperating incomeowners’ equitypaid-in capitalprivate accountantprofitability ratioretained earnings

Key Terms (cont’d)

revenue recognitionrevenuesSarbanes-Oxley Act of 2002 (Sarbox)short-term solvency ratiosolvency ratiostatement of cash flowstax services


Documents

14 chapter Business Essentials, 7 th Edition Ebert/Griffin © 2009 Pearson Education, Inc. The Role of Accounts and Accounting Information Instructor Lecture