Chapter 12: The Role Of Accounting In Business Exploring Business 2.0 © 2012 Flat World Knowledge

Chapter 12: The Role OfChapter 12: The Role OfAccounting In BusinessAccounting In Business

Exploring Business 2.0 © 2012 Flat World Knowledge

Chapter ObjectivesChapter Objectives1. Define accounting and explain the differences

between managerial accounting and financial accounting.

2. Identify some of the users of accounting information and explain how they use it.

3. Understand the function of the income statement.4. Understand the function of the balance sheet.5. Understand the function of the statement of

owner’s equity.6. Understand the difference between cash-basis and

accrual accounting.7. Understand the purpose of a statement of cash

flows and describe its format.Exploring Business 2.0 © 2012 Flat

World Knowledge

Chapter ObjectivesChapter Objectives8. Evaluate a company’s performance using

financial statements and ratio analysis.9. Understand why it’s not a good idea to

falsify financial statements.10.Appreciate the background behind

stricter legal and professional standards in U.S. business and accounting practice.

11.Understand ethics and their importance in the accounting profession.

12. Identify career opportunities in accounting.


StakeholdersStakeholders“…parties who are

interested in the activities of the business because they’re affected

by them…”


AccountingAccounting“…measuring and summarizing business activities, interpreting

financial information, and communicating the results to

management and other decision makers.”


Fields of Fields of AccountingAccounting

Management Accounting – provides information to decision makers inside the organization to help operate the business

Financial Accounting – furnishes information to individuals and groups inside/outside the organization to assess the firm’s financial performance


Management AccountingManagement Accounting

“…provides… reports… tailored to the needs of individual

managers…(in a) relevant, accurate, timely…format…(to

aid) in making decisions.”


Financial Financial Accounting Accounting

Financial Statements• Income Statement

•Statement of owner’s equity

•Balance Sheet

•Statement of Cash Flows

Generally Accepted Accounting Principles (GAAP)


Users OfUsers OfAccounting InformationAccounting Information

Owners &Owners &ManagersManagers

Investors & Investors & CreditorsCreditors

Government Government AgenciesAgencies

Other UsersOther Users


The FunctionsThe Functionsof Financial Statementsof Financial Statements

• Income Statement – Reports a company’s sales, expenses, and net profit or loss

• Balance Sheet – Reports a company’s assets, liabilities and owners’ equity (owners’ investment in business)

• Statement of Cash Flows – shows much much cash the business has coming in and going out


Income StatementIncome StatementRevenues and Expenses

Cost of Goods Sold

Operating Expenses

Gross Profit

Net Income


Stress-BusterStress-BusterIncome StatementIncome Statement


ProposedProposedIncome Statement #1Income Statement #1




Breakeven AnalysisBreakeven Analysis

$ Fixed Costs$ Variable Costs$ Contribution Margin Per Unit$ Breakeven Point In Units

“…total sales revenue must exactly equal all your expenses…”




Balance SheetBalance Sheet

Assets – Business resources Liabilities – Debts owed to outside entitiesOwner’s Equity – Amount invested

“…tells you what you have (and where it came from) at a specific

point in time…”


Accounting EquationAccounting Equation

Assets = Liabilities + Owner’s Equity


Stress-BusterStress-BusterBalance SheetBalance Sheet


Stress-BusterStress-BusterBalance Sheet #2Balance Sheet #2


The Statement of OwnerThe Statement of Owner’’s s EquityEquity


How Do Financial Statements How Do Financial Statements Relate to One Another?Relate to One Another?


Accrual AccountingAccrual Accounting

Account ReceivableAccount PayableInventory

Long-term assets

“…accountant records a transaction when it occurs…”


Classified Balance SheetClassified Balance Sheet

Assets Current- Convert to cash within a year Long-Term- Intend to hold for more than

a yearLiabilities

Current- Pay off within a yearLong-Term- Not due for more than a year


College ShopCollege ShopBalance SheetBalance Sheet


College ShopCollege ShopIncome StatementIncome Statement


Statement of OwnerStatement of Owner’’s s EquityEquity


End-of-YearEnd-of-YearBalance SheetBalance Sheet


Statement Of Cash FlowsStatement Of Cash Flows

“…tells… where cash came from and where it went.”

ActivitiesActivities::•OperatingOperating

•InvestingInvesting

•FinancingFinancing


Cash Flow Cash Flow StatementStatement


ComparativeComparativeIncome StatementIncome Statement


Income Statement WithIncome Statement WithVertical Percentage Vertical Percentage

AnalysisAnalysis


Ratio AnalysisRatio Analysis%Profit Margin

%Management Efficiency

%Management Effectiveness

%Financial Condition


Gross Profit MarginGross Profit Margin

Gross ProfitMargin

= Gross ProfitSales


Net Profit MarginNet Profit Margin

Net ProfitMargin = Net Profit

Sales


Management Efficiency Management Efficiency Ratios Ratios

• These ratios reveal the way in which assets (shown on the balance sheet) are being used to generate income (shown on the income statement)

• To compute this group of ratios, you must look at both statements


Comparative Balance Comparative Balance SheetSheet


Inventory Inventory TurnoverTurnover

InventoryTurnover = Sales

Inventory


Return On AssetsReturn On Assets

Return OnAssets = Net Profit

Total Assets


Current RatioCurrent RatioCurrentRatio = Current Assets

Current Liabilities


Debt-To-EquityDebt-To-Equity

Total Debtto Equity =

Total LiabilitiesTotal Equity


Interest Interest CoverageCoverage

InterestCoverage =

Operating IncomeInterest Expense


Basic Things to Basic Things to SucceedSucceed

Good profit on each item Move inventory Good return on investment Watch cash


Challenges ToChallenges ToAccounting ProfessionAccounting Profession

WorldCom

Enron


Ethical AccountingEthical Accounting

Sarbanes-Oxley Act

Public Company Accounting Oversight Board (PCAOB)

The Profession’s Code of Ethics


Careers In Careers In AccountingAccounting

“People Profession”Skills

• Analytical• Interpersonal• Communication

Job Prospects• Certified Public Accountants- Audits• Private Accountants- Controller• Certified Management Accountants


Documents

Chapter 12: The Role Of Accounting In Business Exploring Business 2.0 © 2012 Flat World Knowledge