CHAPTER 8: Accounting - robertleecannon.com · • How can managerial accounting help managers with product costing, incremental analysis, and budgeting? Title: CHAPTER 8: Accounting

© 2009 South-Western, a division of Cengage Learning

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CHAPTER 8: Accounting

DECISION MAKING BY THE NUMBERS


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LOOKING AHEAD

• What is accounting? How is accounting information used?

• What are career opportunities in accounting?

• What are the goals of generally accepted accounting principles?

• What are the key elements of the major financial statements?

• How can horizontal, vertical and ratio analysis provide insight into financial statements?

• How can managerial accounting help managers with product costing, incremental analysis, and budgeting?


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ACCOUNTING: WHO NEEDS IT?

Managers Stockholders

Employees Creditors

What other groups would be interested in accounting information?


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THE ACCOUNTING PROFESSION:MORE THAN

• What Accountants Do– Private Accountants

– Internal Auditors

– Public Accountants

– Government Accountants

• Qualifications for Accounting Positions– Bachelor’s Degree

– Spreadsheet/Software Experience

– Certified Public Accountant (CPA)

– Certified Management Accountant (CMA)

– Master’s Degree – Preferred


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GAAP: PLAYING BY THE RULES OF FINANCIAL ACCOUNTING

Generally Accepted Accounting Principles (GAAP) –

accounting standards that are used in the preparation

of financial statements.

Financial Accounting Standards Board (FASB) –

private self regulated board that establishes and enforces GAAP.

Through GAAP, the FASB aims to ensure that financial statements are:

• Relevant• Reliable• Consistent• Comparable


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ETHICS IN ACCOUNTING

• Accounting scandals have shocked American business since the late 1990s– Overstating earnings

– Hidden money and debt

• The scandals have served as a wake-up call– State and federal laws have been

changed

– Auditor independence


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FINANCIAL STATEMENTS: THE MAIN OUTPUT OF FINANCIAL

• Financial accounting includes three basic financial statements:– Balance Sheet

– Income Statement

– Statement of Cash Flows

• Corporations with publicly held stock must publish annual reports with all three statements


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BALANCE SHEET: WHAT WE OWN AND HOW WE GOT IT

Assets =

Liabilities + Owner’s Equity

Owner’s Equity –

the claims owners have against their firm’s

assets

Balance Sheet – summarizes a firm’s financial position at a specific point in time.

Assets – things of

value that the firm owns

Liabilities – indicates what

the firm owes to non-owners


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SAMPLE BALANCE SHEET


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THE INCOME STATEMENT: HOW DID WE DO?

Revenue – Expenses =

Net Income

Net Income – the profit or lossthe firm earns

Income Statement – summarizes a firm’s operations over a given period of time in terms of profit and loss.

Revenue– the increase in the amount of assets the firm

earns

Expenses – the cash the firmspends or other assets it uses to

generate revenue


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ACCRUAL BASIS ACCOUNTING

• Revenue is not the same as cash received during the same time period

• Accrual basis accounting records revenues as they are earned

• Expenses are matched to the revenues they generated


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SAMPLE INCOME STATEMENT


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STATEMENT OF CASH FLOWS: SHOW ME THE MONEY

• Cash flowing into and out of the firm

– Operations

– Investing

– Financing

• Increase and decrease from all three sources

• Total amount of cash on hand

• Stakeholders want to know if there is adequate cash to pay workers, creditors, suppliers and IRS


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SAMPLE STATEMENT OF CASH FLOWS


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ADDITIONAL FINANCIAL STATEMENTS

Statement of Retained Earnings – reports how retained earnings have changed.

Stockholder’s Equity Statement – reports how net income and dividends affect retained earnings.


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INTERPRETING FINANCIAL STATEMENTS: DIGGING

• It’s important to view financial statements and:– Auditor’s Report

– Notes from Statements

– Analytical Techniques


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INDEPENDENT AUDITOR’S REPORT: A NECESSARY STAMP

• Publicly traded corporations are required to have a CPA firm perform an external audit

– Is the information in the financial statements accurate?

• The auditor will issue an unqualified, qualified or adverse opinion

• Auditors must be independent


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SARBANES-OXLEY ACT OF 2002

• Commonly referred to as SOX

• Banned relationships between CPA firms that might create conflict of interest

• Created Public Company Accounting Oversight Board (PCOAB)


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ANDERSEN’S REPUTATION LEFT IN SHREDS

• Arthur Andersen was a highly respected accounting firm until several thousand pages of documents related to the Enron case were shredded

• Although Andersen’s conviction was overturned, the company’s reputation had been shredded


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NOTES TO FINANCIAL STATEMENTS: READING THE

• Additional information may be required to explain the numbers– Lawsuits

– Employment Facts

– Mergers or acquisitions

– Health Insurance/Pension Funding


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BEYOND THE STATEMENTS

Horizontal Analysis – compares information in a firm’s financial statement over a period of 2 years or more.

Vertical Analysis – expresses items on the balance sheet and income statement as a percentage of a key value.

Ratio Analysis – compares selected items by computing percentages, rates or proportions.


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MANAGERIAL ACCOUNTING VS. FINANCIAL ACCOUNTING


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MANAGERIAL ACCOUNTING: INSIDE INTELLIGENCE

• Reports and analysis for informed business decisions– Product Costing

• Accurate measure and analysis of costs

• Activity Based Costing (ABC)


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• Make parts or buy from supplier?

• Repair equipment or buy new?

• Perform repairs or outsource?

• Eliminate or sell product line/business?

INCREMENTAL ANALYSIS

Evaluates the financial impact of different alternatives in a decision-making situation.


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INCREMENTAL ANALYSIS DECISION

An electronics firm produces high definition LCD televisions at a rate of 10,000 per month. It currently makes its own speaker sets for the televisions.

A supplier offers to sell the firm similar speakers at a cost of $23 per television. The firm could lower costs by buying the speakers, $23 is less than $26. Right?


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COST OF MAKING TELEVISION SPEAKERS: MAKE OR BUY?


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BUDGETS

• Outline how resources will be used to meet goals

• Communication and coordination among managers and employees

• Motivate achievement of goals

• Monitor progress


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DIFFERENT TYPES OF BUDGETS

• Operating Budgets identify sales and production goals.– Sales Budget– Production Budget– Direct Labor Budget

• Financial Budgets focus on the firm’s financial objectives.– Cash Budget– Capital Budget

Master Budget – brings together all of the budgets to

represent the overall plan.


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LOOKING BACK

• What is accounting? How is accounting information used by stakeholders?

• What are career opportunities in accounting?

• What are the goals of generally accepted accounting principles?

• What are the key elements of the major financial statements?

• How can horizontal, vertical and ratio analysis provide insight into financial statements?

• How can managerial accounting help managers with product costing, incremental analysis, and budgeting?

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CHAPTER 8: Accounting - robertleecannon.com · • How can managerial accounting help managers with product costing, incremental analysis, and budgeting? Title: CHAPTER 8: Accounting