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8/17/2019 Chapter 1, Powers Et Al
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Chapter 1
Uses of AccountingInformation and the
Financial Statements
CFGM 6102 Accounting and Financial Decision Making
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Accounting as an
Information S#stem Accounting is an information s#stem thatmeasures" processes" and communicatesnancial information about an economic
entit#% As sho'n in the &$hibit in the ne$t slide"
accounting is a lin! bet'een businessactivities and decision ma!ers%
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Accounting as an
Information S#stem
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/usiness )oals
A business is an economic unit that aimsto sell goods and services to customersat prices that 'ill provide an ade0uate
return to its o'ners% he t'o major goals of all businesses are2
Proftability3earning a su4cient return tomaintain o'ner interest
Liquidity3having enough cash to pa#debts as the# come due
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/usiness Activities
All companies pursue their business goalsb# engaging in the follo'ing activities2 Operating activities3selling goods and
services to customers5 emplo#ing managersand 'or!ers5 bu#ing and producing goods andservices5 and pa#ing ta$es
Investing activities3spending the capital a
compan# receives in productive 'a#s that helpit achieve its objectives
Financing activities3obtaining funds tobegin operations and to continue operating
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/usiness )oals and
Activities
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Financial *erformance
Anal#sis Financial analysis is the use of nancialstatements to determine that a business is'ell managed and is achieving its goals%
Perormance measures must be 'ellaligned 'ith the t'o major goals of therm2 protabilit# and li0uidit#%
Financial ratios sho' ho' the elementsof nancial statements relate to eachother%
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6anagement Accounting
Management accounting3accountinginformation for internal decision ma!ers
his is an operating report providing the
details such as2 ho' much 'as sold 'hat costs 'ere incurred
a budget for sales and costs for the ne$t#ear
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Financial Accounting
Financial accounting3accounting informationfor e$ternal decision ma!ers5 reports are calledfnancial statements%
It is important to distinguish accounting from the
'a#s in 'hich accounting information isprocessed b# boo!!eeping and managementinformation s#stems% Bookkeeping is the mechanical and repetitive
record!eeping aspect of accounting%
Management inormation systems (6IS+ consists ofthe interconnected subs#stems that provide theinformation needed to run a business%
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&thical Financial 7eporting
t!ics is a code of conduct that addresses'hether actions are right or 'rong%
&thics is especiall# important in preparing
nancial reports because users of thesereports must depend on the good faith ofthe people involved in their preparation% Fraudulent fnancial reporting can result
from the distortion of records" falsiedtransactions" or the misapplication of variousaccounting principles%
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Sarbanes8O$le# Act
he "arbanes#O$ley Act 'as passed in9::9 in response to nron %orporationand &orld%om scandals and regulates
nancial reporting and the accountingprofession%
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6atch each term 'ith one of the four denitions that follo'2
;;;; 1% 6anagement Accounting a% An unethicalpractice
;;;; 9% Li0uidit# b% A business goal ;;;; % Operating Activities ;;;; ?% Financing Activities
;;;; @% *rotabilit#
;;;; % Fraudulent nancial reporting
SOLUTION
1. d; 2. b; 3. d; 4. c; 5. c; 6. c; 7. b; . a
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Decision 6a!ers2 he Users
of Accounting Information Management refers to the people 'hoare responsible for ensuring that acompan# meet its goals of protabilit# andli0uidit#
Users 'ith a Direct nancial interest Investors' have invested capital in a compan#
and thus ac0uired part o'nership in it %reditors' those 'ho lend mone# or deliver
goods and services before being paid Users 'ith an Indirect nancial interest (a$ Aut!orities2 Companies and individuals
pa# man# !inds of ta$es%
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he Users of Accounting
Information )egulatory Agencies include "ecurities and
$c!ange %ommission *"%+ to 'hich allpublicall# traded corporations must reportperiodicall#%
Other groups include the follo'ing2 Labor Unions Advisors of Investors and Creditors Consumer )roups" Customers" and the )eneral *ublic &conomic *lanners
,overnmental and -ot#or#ProftOrgani.ations include functions raising funds and
deplo#ing scarce resources%
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he Users of Accounting
Information
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6atch each term 'ith one of the three t#pes of users ofaccounting information that follo'2
;;;; 1% a$ authorities a% Internal user
;;;; 9% Investors b% Direct e$ternal
user ;;;; % 7egulator# agencies
;;;; ?% Labor unions and consumer groups
SOLUTION
1. c; 2. b; 3. a; 4. b; 5. c; 6. c
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Accounting 6easurement
Four 0uestions must be ans'ered toma!e an accounting measurement% Bhat is measured
Bhen should the measurement be made Bhat value should be placed on 'hat is
measured o' should 'hat is measured be classied
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/usiness ransactions
A business transaction is an economicevent that aEects a business,s nancialposition%
A transaction can be an e$change of value (apurchase" sale" pa#ment" collection" or loan+bet'een t'o or more parties%
A transaction that does not involve an e$change isa none$change transaction%G For e$ample" losses
from re" .ood" e$plosion" and theft5 ph#sical 'earand tear on machiner# and e0uipment5 and theda#8b#8da# accumulation of interest%
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6one# 6easure
he money measure concept statesthat a business transaction should berecorded in terms of mone#%
ransactions bet'een countries mustinvolve the translation of amounts ofmone# using the appropriate e$c!angerate%
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&$amples of Foreign&$change 7ates
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Separate &ntit#
In accounting" a business is a separateentity/ distinct not onl# from itscreditors and customers but also from its
o'ners%
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6atch each description 'ith one of the terms that follo'2
;;;; 1% An e$change of value bet'een a% /usiness transaction
t'o or more parties
;;;; 9% 7e0uires a separate set of records b% 6one# measure for a business
;;;;
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Forms of /usiness(slide 1 of 9+
Forms o Business "ole proprietors!ip3one o'ner
he o'ner ta!es all of the prots or losses of thebusiness
he o'ner has unlimited liabilit# Partners!ip3t'o or more o'ners
In a partnership t'o or more o'ners share protsor losses based on a predetermined arrangement
O'ners have unlimited liabilit# 'hich can beavoided b# forming a limited liabilit# partnership
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Forms of /usiness(slide 1 of 9+
%orporation3a business unit chartered b#the state 6an# o'ners but managed b# a board of
directors
Legall# separate from its o'ners (thestockholders+
Stoc!holders enjo# limited liabilit#
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Humber and 7eceipts of U%S%*roprietorships" *artnerships" andCorporations
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he Corporate Form of/usiness (slide 1 of >+ Formation and Organi.ation o a
%orporation A corporation is a business unit chartered
b# the state ('hen articles oincorporation are led+ and considered aseparate legal entit# from its o'ners%
he liabilit# of corporate stoc!holders is
limited to their investment%
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he Corporate Form of/usiness (slide 9 of >+ "tock!olders
A s!are o stock is a unit of o'nership ina corporation%
%ommon stock is the most universal form ofstoc!%
Board o 0irectors he board of directors sets corporate polic#
and declares dividends%
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he Corporate Form of/usiness (slide < of >+
he authorit# to manage a corporation isgiven b# the o'ners and board of directorsto the corporate management% %orporategovernance is the oversight of a
corporation,s management and ethics b#its board of directors%
A provision of the Sarbanes8O$le# Actre0uires boards of directors to establish an
audit committee to ensure that the boardis objective in evaluating managementperformance%
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he Corporate Form of/usiness (slide = of >+ Management
Appointed b# the board of directors to carr#out corporate policies and run da#8to8da#
operations Also have the dut# of reporting the nancial
results
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he Corporate Form of/usiness(slide > of >+
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6atch each of the descriptions 'ith the terms that follo'2
;;;; 1% Issues stoc! a% Sole proprietorship
;;;; 9% O'ned b# onl# one person b% *artnership
;;;;
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he Financial Statementsand their &lements Income statement (also referred to as the
statement of operations+ the mostimportant nancial report because it sho's'hether a business achieved its protabilit#
goal through its operating activities )evenues are the increases in stoc!holders,
e0uit# that result from operating a business% $penses are the decreases in stoc!holders,
e0uit# that result from operating a business%
-et Income Bhen revenues e$ceed e$penses"the diEerence is called net income% Bhene$penses e$ceed revenues" the diEerence iscalled net loss1
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Income Statement for InglotConsultanc#" Inc%
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Statement of 7etained&arnings )etained earnings represent the
accumulated earnings generated b# abusiness,s income8producing activities lessamounts that have been paid out to the
stoc!holders% he statement of retained earnings sho's the
changes in retained earnings over an accounting period%
0ividends are distributions of resources"generall# in the form of cash" to stoc!holders"and onl# the board of directors has theauthorit# to declare them%
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Statement of 7etained&arnings for Inglot
Consultanc#" Inc%
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he Accounting &0uation
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/alance Sheet
Balance s!eet (also called the statementof nancial position+ sho's the nancialposition of a business on a certain date"usuall# the end of the month or #ear
he assets e0ual the sum of the liabilities andstoc!holders, e0uities" under the accountingequation
Assets are the economic resources of acompan# that are e$pected to benet the
compan#,s future operations% Liabilities are a business,s present obligations
to pa# cash" transfer assets" or provideservices to other entities in the future%
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/alance Sheet for InglotConsultanc#
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/alance Sheet
"tock!olders2 equity (also called shareholders’equity) represents the claims of the o'ners of acorporation (the stoc!holders+ to the assets of thebusiness% -et assets are 'hat 'ould be left over if all liabilities
'ere paid %ontributed capital is the amount that stoc!holders
invest in the business% Par value is an amount per share that 'hen multiplied
b# the number of common shares becomes the
corporation,s common stoc! amount5 it is the minimumamount that can be reported as contributed capital% Bhen the value received is greater than par value" the
amount over par value is called additional paid#incapital1
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Statement of Cash Flo's
"tatement o cas! 3o4s focuses oncompan#,s li0uidit#%
%as! 3o4s are the in.o's and out.o's
of cash into and out of a business% hestatement is organi-ed according to thethree major business activities2 Cash Flo's from Operating Activities
Cash Flo's from Investing Activities Cash Flo's from Financing Activities
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Statement of Cash Flo's forInglot Consultanc#" Inc%
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Income Statement" Statement of 7etained&arnings" /alance Sheet" and Statement ofCash Flo's
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Financial 7atios
Financial ratios sho' importantrelationships among the elements of thenancial statements%
he follo'ing nancial ratios have beensho'n to be most predictive of compan#performance2 *rot margin Asset turnover Cash .o' #ield Debt to e0uit# ratio
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Focus on FinancialStatement &lements
!"e si# ele$ents %to& 'o() on t"e *inancial
state$ents a'e used to co$&ute t"e *ou' 'atios
%botto$ 'o() t"at allo( +ou to anal+,e *inancial
state$ents and dete'$ine "o( (ell o' &oo'l+ a
co$&an+ is &e'*o'$ing- ("ic"- in tu'n- is t"e basis
*o' $aking good business decisions.
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Financial 7atio2 *rot6argin
$3,200Profit Margin =
$10,000
= 0.320,or 32.0%
Net IncomeProfit Margin
Revenues
+ using t"e net inco$e and 'e/enuest"at a&&ea' on nglot Consultanc+s
inco$e state$ent- (e can calculate
nglots &'o*it $a'gin as *ollo(s
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Complete the nancial statements that appear belo' b# determining the amounts that correspond to the letters% (Assume no ne'investments b# stoc!holders%+
Income "tatement
7evenues 9"@@>
&$penses (a+
Het income 5 *b+
"tatement o )etained arnings
/eginning balance @"9>:
Het income (c+
Less dividends >::&nding balance 56/788
Balance "!eet
otal assets (d+
Liabilities =":::
Stoc!holders, e0uit#
Common stoc! >":::
7etained earnings (e+
otal liabilities and stoc!holders, e0uit# 5 *+
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Het income lin!s the income statement and the statementof retained earnings% he ending balance of retainedearnings lin!s the statement of retained earnings and thebalance sheet%
hus" start 'ith (c+" 'hich must e0ual @>: (@"9>: J @>:8 >:: J @">::+% hen" (b+ e0uals (c+" or @>:% hus" (a+must e0ual 9":9> (9"@@> 8 9":9> J @>:+% /ecause (e+e0uals @">:: (ending balance from the statement ofretained earnings+" (f+ must e0ual 1?">:: (="::: J>"::: J @">:: J 1?">::+% Ho'" (d+ e0uals (f +" or1?">::%
SOLUTION
ll i
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)enerall# AcceptingAccounting *rinciples ,AAP are the conventions" rules" and
procedures that dene acceptableaccounting practice at a particular time%
)AA* and the Independent C*A,s 7eport %ertifed public accountant *%PA+ performs
independent audits of businesses, nancialstatements%
An audit is an e$amination of the nancialstatements and the accounting s#stems"controls" and records to ascertain that nancialstatements are in accordance 'ith )AA*%
i l i d
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Large International Certied*ublic Accounting Firms
O i i h I
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Organi-ations hat IssueAccounting Standards he Financial Accounting "tandards
Board *FA"B+ is responsible fordeveloping )AA*%
he International Accounting"tandards Board *IA"B+ setsinternational accounting standards% Issues international fnancial reporting
standards *IF)"+
IF7S is becoming increasingl# importantbecause of the acceptance of its standardsin man# nancial mar!ets throughout the'orld%
O h O i i h
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Other Organi-ations hatIn.uence )AA* !"e Public Company Accounting Oversight Board (PCAOB) is a
go/e'n$ental bod+ c'eated b+ t"e a'banes#le+ Act to 'egulate
t"e accounting &'o*ession.
!"e American Institute of Certified Public Accountants (AICPA)
in*luences GAA t"'oug" ad/iso'+ co$$ittees.
!"e Securities and Echange Commission (SEC) sets its o(n
standa'ds *o' co$&anies ("ose secu'ities a'e listed on t"e stock
e#c"anges.
!"e !overnmental Accounting Standards Board (!ASB) (as
establis"ed to issue accounting standa'ds *o' state and local
go/e'n$ents.
Internal "evenue Service (I"S) guidelines a'e establis"ed to
collect ta#es but &la+ an in*luential 'ole in t"e establis"$ent o*
accounting &'actices.
* f i l C d t
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*rofessional Conduct(slide 1 of 9+
6anagement accountants have a codeof professional ethics Integrity
Ob9ectivity Independence
0ue care
* f i l C d t
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*rofessional Conduct (slide 9 of 9+
Institute o ManagementAccountants *IMA+ the primar# professional association of
management accountants"
Code of professional conduct emphasi-esthat management accountants have a responsibilit# to be competent in their jobs" must !eep information condential e$cept 'hen
authori-ed or legall# re0uired to disclose it"
must maintain integrit# and avoid con.icts ofinterest" and communicate information objectivel# and
'ithout bias%
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6atch the follo'ing acron#ms 'ith the descriptions that follo'2
;;;; 1% )AA* a% Sets U%S% accounting standards
;;;; 9% IF7S b% Audits nancial statements
;;;; % IAS/ e% &stablished b# the FAS/
;;;; ?% *CAO/ f% &stablished b# the IAS/
;;;; @% AIC*A g% In.uences accounting standards through
member C*As
;;;; % S&C h% 7eceives audited nancial statements ofpublic companies
SOLUTION
1. e; 2. *; 3. b; 4. a; 5. d; 6. c; 7. g; . ".