Chapter 15 Accounting & Financial Statements Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall
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
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%
Types of Accounting Financial Accounting vs. Managerial Accounting
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
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
The ACCOUNTING CYCLE Accounting Cycle -- A six-step procedure that results in the preparation and analysis of the major financial statements. 17-7
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.
Accounting Equation Assets = Liabilities + Owner s Equity Very Vegetarian Company $826,000 = $613,000 + $213,000
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
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
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
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
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
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 =========
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
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. 17-17
Liquidity Ratios Current Ratio Current Assets Current Liabilities Quick (Acid-Test) Ratio Cash + Marketable Securities + Receivables Current Liabilities
Financial Ratios Average based on 8,000 companies from Wall Street Current Ratio = 2.0 Quick Ratio = 0.5 to 1.0
Very Vegetarian Current Ratio $600,000 $288,000 = 2.08 Quick (Acid-Test) Ratio $265,000 $288,000 = 0.92
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. 17-21
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. 17-22
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. 17-23
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. 17-24
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