Collins 09

8/8/2019 Collins 09

1/39

2007 Prentice-Hall, Inc. 9-1

Exp l

or

ingB

usines

s

Exp l

oring

B

usin

es

s

The Role OfThe Role OfAccounting In BusinessAccounting In Business

Chapter 9Chapter 9

8/8/2019 Collins 09

2/39

8/8/2019 Collins 09

3/39

9-3 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

sStakeholdersStakeholders

parties who are interestedparties who are interested

in the activities of thein the activities of the

business because theyrebusiness because theyreaffected by themaffected by them

8/8/2019 Collins 09

4/39

9-4 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

sAccountingAccounting

measuring andmeasuring and

summarizing businesssummarizing business

activities, interpretingactivities, interpretingfinancial statements, andfinancial statements, and

communicating the resultscommunicating the results

to management and otherto management and otherdecision makers.decision makers.

8/8/2019 Collins 09

5/39

9-5 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

sFields of AccountingFields of Accounting

Management Accounting Management Accounting

provides information to decisionprovides information to decision

makersmakers insideinside the organization tothe organization to

help operate the businesshelp operate the business

Financial Accounting furnishesFinancial Accounting furnishes

information to individuals andinformation to individuals and

groupsgroups inside/outsideinside/outside thethe

organization to assess the firmsorganization to assess the firms

financial performancefinancial performance

8/8/2019 Collins 09

6/39

9-6 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

sManagement AccountingManag

ement Accounting

providesreportsprovidesreports

tailored to the needstailored to the needs

of individual managersof individual managers(in a)(in a) relevant, accurate,relevant, accurate,

timelytimely

format(to aid) informat(to aid) in

making decisions.making decisions.

8/8/2019 Collins 09

7/39

9-7 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

sFinancial AccountingFinancial Accounting

StatementsStatements

Income StatementIncome Statement

Balance SheetBalance Sheet

Statement of Cash FlowStatement of Cash Flow

Generally AcceptedGenerally AcceptedAccounting PrinciplesAccounting Principles

8/8/2019 Collins 09

8/39

9-8 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

s

Users OfUsers OfAccounting InformationAccounting Information

Owners &Owners &ManagersManagers

Investors &Investors &CreditorsCreditors

GovernmentGovernmentAgenciesAgencies

Other UsersOther Users

8/8/2019 Collins 09

9/39

9-9 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

s

UnderstandingUnderstandingFinancial StatementsFinancial Statements

FunctionsFunctions

Income Statement WhatIncome Statement What

sales and expenses aresales and expenses areand whether a profit is madeand whether a profit is made

Balance Sheet Indicates assets andBalance Sheet Indicates assets andliabilities and amount invested inliabilities and amount invested in

companycompany

Statement of Cash Flows ShowsStatement of Cash Flows Showshow much cash flows in and outhow much cash flows in and out

8/8/2019 Collins 09

10/39

9-10 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

sIncome StatementIncome Statement

Revenues and ExpensesRevenues and Expenses

Cost of Goods SoldCost of Goods Sold

Operating ExpensesOperating Expenses

Gross ProfitGross ProfitNet IncomeNet Income

8/8/2019 Collins 09

11/39

9-11 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

s

Stress-BusterStress-BusterIncome StatementIncome Statement

8/8/2019 Collins 09

12/39

9-12 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

s

ProposedProposedIncome Statement #1Income Statement #1

8/8/2019 Collins 09

13/39

9-13 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

s

ProposedProposedIncome Statement #2Income Statement #2

8/8/2019 Collins 09

14/39

9-14 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

sBreakeven AnalysisBreakeven Analysis

Fixed CostsFixed CostsVariable CostsVariable Costs

Contribution MarginContribution MarginPer UnitPer Unit

Breakeven Point In UnitsBreakeven Point In Units

total sales revenue must

exactly equal all your

expenses

8/8/2019 Collins 09

15/39

9-15 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

s

ProposedProposedIncome Statement #3Income Statement #3

8/8/2019 Collins 09

16/39

9-16 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

sBalance SheetBalance Sheet

Assets Business resourcesAssets Business resourcesLiabilities Debts owed to outsideLiabilities Debts owed to outside

entitiesentities

Owners Equity Amount investedOwners Equity Amount invested

tells what you have (and

where it came from) at a

specific point in time

8/8/2019 Collins 09

17/39

9-17 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

sAccounting EquationAccounting Equation

Assets = Liabilities + Owners EquityAssets = Liabilities + Owners Equity

8/8/2019 Collins 09

18/39

9-18 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

s

Stress-BusterStress-BusterBalance SheetBalance Sheet

8/8/2019 Collins 09

19/39

9-19 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

s

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

8/8/2019 Collins 09

20/39

9-20 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

sAccrual AccountingAccrual Accounting

Account ReceivableAccount Receivable

Account PayableAccount PayableInventoryInventory

accountant records a

transaction when it occurs

8/8/2019 Collins 09

21/39

9-21 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

s

ClassifiedClassifiedBalance SheetBalance Sheet

AssetsAssetsCurrentConvert to cash withinCurrentConvert to cash withina yeara year

Long-TermHold for more thanLong-TermHold for more thana yeara year

LiabilitiesLiabilities

CurrentPay off within a yearCurrentPay off within a yearLong-TermNot due for moreLong-TermNot due for more

than a yearthan a year

8/8/2019 Collins 09

22/39

9-22 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

s

College ShopCollege ShopBalance SheetBalance Sheet

8/8/2019 Collins 09

23/39

9-23 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

s

College ShopCollege ShopIncome StatementIncome Statement

8/8/2019 Collins 09

24/39

9-24 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

s

End-of-YearEnd-of-YearBalance SheetBalance Sheet

8/8/2019 Collins 09

25/39

9-25 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

s

Statement OfStatement OfCash FlowsCash Flows

tellswhere cash cametellswhere cash camefrom and where it went.from and where it went.

ActivitiesActivities::

OperatingOperating

InvestingInvesting

FinancingFinancing

8/8/2019 Collins 09

26/39

9-26 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

sCash Flow StatementCash Flow Statement

8/8/2019 Collins 09

27/39

9-27 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

s

ComparativeComparativeIncome StatementIncome Statement

8/8/2019 Collins 09

28/39

9-28 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

s

Income Statement WithIncome Statement WithVertical Percentage AnalysisVertical Percentage Analysis

8/8/2019 Collins 09

29/39

9-29 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

s Ratio AnalysisRatio AnalysisProfit MarginProfit Margin

ManagementManagementEfficiencyEfficiency

Management EffectivenessManagement Effectiveness

Financial ConditionFinancial Condition

8/8/2019 Collins 09

30/39

9-30 2007 Prentice-Hall, Inc.

Explor

ingB

usin

es

s

Exp l

or

ingB

usines

sGross Profit MarginGross Profit Margin

Gross ProfitGross ProfitMarginMargin

= Gross ProfitSales

8/8/2019 Collins 09

31/39

9-31 2007 Prentice-Hall, Inc.

Expl

or

ingB

usin

es

s

Exp l

or

ingB

usines

sNet Profit MarginNet Profit Margin

Net ProfitNet ProfitMarginMargin

= Net ProfitSales

8/8/2019 Collins 09

32/39

9-32 2007 Prentice-Hall, Inc.

Expl

or

ingB

usin

es

s

Exp l

or

ingB

usines

sComparative Balance SheetComparative Balance Sheet

8/8/2019 Collins 09

33/39

9-33 2007 Prentice-Hall, Inc.

Expl

or

ingB

usin

es

s

Exp l

or

ingB

usines

sInventory TurnoverInventory Turnover

InventoryInventoryTurnoverTurnover

= SalesInventory

8/8/2019 Collins 09

34/39

9-34 2007 Prentice-Hall, Inc.

Expl

or

ingB

usin

es

s

Exp l

or

ingB

usines

sReturn On AssetsReturn On Assets

Return OnReturn OnAssetsAssets

= Net ProfitTotal Assets

8/8/2019 Collins 09

35/39

9-35 2007 Prentice-Hall, Inc.

Expl

or

ingB

usin

es

s

Exp l

or

ingB

usines

s Current RatioCurrent Ratio

CurrentCurrentRatioRatio

= Current AssetsCurrent Liabilities

8/8/2019 Collins 09

36/39

9-36 2007 Prentice-Hall, Inc.

Expl

or

ingB

usin

es

s

Exp l

or

ingB

usines

sDebt-To-EquityDebt-To-Equity

Total DebtTotal Debtto Equityto Equity

=Total Liabilities

Total Equity

8/8/2019 Collins 09

37/39

9-37 2007 Prentice-Hall, Inc.

Expl

or

ingB

usin

es

s

Exp l

or

ingB

usines

sInterest CoverageInterest Coverage

InterestInterestCoverageCoverage

= Operating IncomeInterest Expense

Ch ll TCh ll

T

8/8/2019 Collins 09

38/39

9-38 2007 Prentice-Hall, Inc.

Expl

or

ingB

usin

es

s

Exp l

or

ingB

usines

s

Challenges ToChallenges ToAccounting ProfessionAccounting Profession

Arthur AndersenArthur Andersen

EnronEnron

Sarbanes-OxleySarbanes-OxleyActAct

Public AccountingPublic AccountingOversight BoardOversight Board

8/8/2019 Collins 09

39/39

9-39

2007 P ti H ll I

Expl

or

ingB

usin

es

s

Exp l

or

ingB

usines

sCareers In AccountingCareers In Accounting

People ProfessionPeople Profession

SkillsSkills AnalyticalAnalytical

InterpersonalInterpersonal CommunicationCommunication

Job ProspectsJob Prospects Certified Public AccountantsAuditsCertified Public AccountantsAudits

Private AccountantsControllerPrivate AccountantsController Certified Management AccountantsCertified Management Accountants