* * * Chapter 15 Accounting & Financial Statements. Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

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1 Chapter 15 Accounting & Financial Statements Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

2 Bookkeeping vs. Accounting Bookkeeping Accounting The recording of business transactions. Bookkeepers divide a firm s transactions into meaningful categories and post them into a record book or computer program called a journal. Start of Accounting Record/Journalize Recording, classifying, summarizing and interpreting of financial events and transactions in an organization to provide interested parties needed financial information. Analyze Recommend

3 Top Business Uses of Accountants Valuation, Merger, Acquistion Personal Financial Planning Market Strategy & Planning Cash Mgmt. & Forecasting Tax/Auditing 0% 20% 40% 60% 80% 100% 120%

4 Types of Accounting Financial Accounting vs. Managerial Accounting

5 FINANCIAL ACCOUNTING Financial Accounting -- Financial information and analyses are generated for people primarily outside the organization. Outside users are interested in these questions: - Is the organization profitable? - Is it able to pay its bills? - How much debt does it owe? 17-5

6 MANAGERIAL ACCOUNTING Managerial Accounting -- Provides information and analysis to managers inside the organization to assist them in decision making. Managerial accounting is involved with: - Costs of production - Costs of marketing - Preparation and control of budgets - Minimizing tax liabilities 17-6

7 The ACCOUNTING CYCLE Accounting Cycle -- A six-step procedure that results in the preparation and analysis of the major financial statements. 17-7

8 Key Financial Statements Balance Sheet - shows the financial position of a company on a particular day. Income Statement - shows the financial position of a company over a period of time. Statement of Cash Flows shows cash flowing in and flowing out of a company over a period of time.

9 Accounting Equation Assets = Liabilities + Owner s Equity Very Vegetarian Company $826,000 = $613,000 + $213,000

10 Very Vegetarian s Balance Sheet (Assets) Period ending 12/31/20 Assets Current Assets Cash $ 15,000 Accounts Receivable 200,000 Notes Receivable 50,000 Inventory 335,000 Total Current Assets $600,000 Fixed Assets Land $ 40,000 Buildings (net) 110,000 Equipment & Vehicles (net) 40,000 Furniture & Fixtures (net) 16,000 Total Fixed Assets $206,000 Intangible Assets Goodwill $ 20,000 Total Intangible Assets $ 20,000 Total Assets $826,000

11 Very Vegetarian s Balance Sheet (Liabilities & Owner s Equity) Period ending 12/31/20 Liabilities & Owners Equity Current Liabilities Accounts Payable $ 40,000 Notes Payable 8,000 Accrued Taxes & Salaries 240,000 Total Current Liabilities $288,000 Long-term Liabilities Notes Payable $ 35,000 Bonds Payable 290,000 Total Long-term Liabilities $325,000 Total Liabilities $613,000 Owners Equity Common Stock (1M shares) $100,000 Retained Earnings 113,000 Total Owners Equity $213,000 Total Liabilities & Owners Equity $826,000

12 The INCOME STATEMENT The formula for the income statement: Revenue -Cost of Goods Sold = Gross Profit -Operating Expenses = Net Income before Taxes -Taxes = Net Income or Net Loss 17-12

13 Very Vegetarian Income Statement Period Ending 12/31/20 Revenue Net Sales $ 700,000 Cost of Goods Sold Beginning Inventory $ 200,000 Net Purchases $ 440,000 Cost of Goods $ 640,000 Less: Ending Inventory - $ 230,000 Less: Cost of Goods Sold - $ 410,000 Gross Profit (Gross Margin) $ 290,000

14 Very Vegetarian s Income Statement (cont d) Gross Profit $290,000 Operating Expenses Selling Expenses Salaries $ 90,000 Advertising & Supplies $ 20,000 Total Selling Expenses $ 110,000 General Expenses Office Salaries $ 67,000 Depreciation $ 1,500 Insurance $ 1,500 Rent $ 28,000 Utilities $ 12,000 Miscellaneous $ 2,000 Total General Expenses $ 112,000 Less: Total Operating Expenses - $ 222,000 Net Income (Profit) Before Taxes $ 68,000 Less: Income Tax Expenses - $ 19,000 Net Income (Profit) After Taxes $ 49,000

15 Very Vegetarian s Statement of Cash Flow Net Cash Flow from Operations $ 52,000 Net Cash Flows from Investments ( 6,000) Net Cash Flow from Financing (19,000) Net Change in Cash & Equivalents $ 27,000 Beginning Cash Balance ( 2,000) Ending Cash Balance $ 25,000 =========

16 USING FINANCIAL RATIOS Ratio Analysis -- The assessment of a firm s financial condition using calculations and financial ratios developed from the firm s financial statements. Better than percentages and need to compare to industry standards. Key ratios include: - Liquidity ratios - Leverage ratios - Performance ratios - Activity ratios 17-16

17 COMMONLY USED LIQUIDITY RATIOS Liquidity ratios measure a firm s ability to turn assets into cash to pay its short-term debts. Two key ratios are: - Current ratio - Acid-test ratio This information is found on the firm s balance sheet

18 Liquidity Ratios Current Ratio Current Assets Current Liabilities Quick (Acid-Test) Ratio Cash + Marketable Securities + Receivables Current Liabilities

19 Financial Ratios Average based on 8,000 companies from Wall Street Current Ratio = 2.0 Quick Ratio = 0.5 to 1.0

20 Very Vegetarian Current Ratio $600,000 $288,000 = 2.08 Quick (Acid-Test) Ratio $265,000 $288,000 = 0.92

21 ACTIVITY RATIOS Activity ratios measure how effectively management is turning over inventory. Key ratios include: - Inventory turnover ratio This information is found on the firm s balance sheet and income statement

22 LEVERAGE RATIOS Leverage ratios measure the degree to which a firm relies on borrowed funds in its operations. Key ratios include: - Debt to Owner s Equity Ratio This information is found on the firm s balance sheet

23 PROFITABILITY RATIOS Profitability ratios measure how effectively a firm s managers are using the firm s various resources to achieve profits. Key ratios include: - Basic earnings per share - Return on sales - Return on equity This information is found on the firm s balance sheet and income statement

24 ACCOUNTING PRACTICES Generally Accepted Accounting Principles (GAAP) sometimes permits accountants to use different method of accounting for inventory. FIFO: First-In, First-Out LIFO: Last-In, First-Out Each valuation can affect income and ending inventory valuation

25 Effect of Inventory Valuation Methods on Taxes and Profits LIFO FIFO Sales $17,500 $17,500 Cost of Goods Sold 15,000 12,500 Net Profit before Taxes $2,500 $5,000 Taxes at 30% 750 1,500 Net Profit $1,750 $3,500

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