Busn 101 Chapter 17

Busn 101 Chapter 17Accounting & Financial Information

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Goals

•Accounting Professions•Accounting & Financial Statements and Reports•Accounting Cycle•Accounting Vs. Bookkeeping•Computers in Accounting•Financial Statements & Ratio Analysis

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Accounting Professions•Financial Accounting (CPA or other)

▫Accountants inside the business that creating financial statements, reports and other useful information so that people outside the business can use the information to make decisions

•Tax Accounting (CPA or EA)▫Accounting that prepares tax returns that comply with tax

law, and tax strategies•Auditing (CPA or CIA)

▫Accountants that look at business’s internal accounting and issues reports about the credibility of the internal accounting (Internal or External)

▫Independent Audit Evaluation and unbiased opinion about the accuracy (credibility) of

a company’s reports3

Accounting Professions•Managerial Accounting (CMA or other)

▫Accountants inside a business that provide useful information and analysis to managers inside the business so they can make decisions

•Private Accountant▫Works for a single entity

•Public Accountant▫Provides accounting services to many entities for a fee

•Government or Not-for-profit accounting▫Accounting system for an entity whose purpose is not

to generate a profit, but to serve ratepayers, taxpayers, and others according to a duly approved budget

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Accounting Rules

• Generally accepted accounting principles Generally accepted accounting principles (GAAP)(GAAP)▫The rules or guidelines used for carrying out The rules or guidelines used for carrying out

the accounting processthe accounting process

• Who creates the rules?Who creates the rules?▫Voters Voters Congress Congress SEC SEC PCAOB PCAOB FASB FASB

GAAP GAAP

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Why do we want to learn Why do we want to learn Accounting?Accounting?

Language of BusinessLanguage of Business

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Why is accounting important?•Accounting is the language of business

▫You cannot run a business without knowing basic accounting

▫You cannot run a business without knowing how to read and interpret financial statements

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Double-entry accounting

•The system by which each business transaction is recorded in at least two accounts and the accounting equation is kept in balance

•Example: Buy Paper for Printer:•1st Account = Cash•2nd Account = Paper Expense (Supplies

Expense)

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What Is Accounting

•Definition Accounting:▫The recording, classifying, summarizing, and

interpreting of financial events and transactions to provide management and other interested parties the information they need to make good decisions

▫Process of analyzing, classifying, Process of analyzing, classifying, recording, summarizing, and interpreting recording, summarizing, and interpreting business transactions in financial or business transactions in financial or monetary termsmonetary terms

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17-10The Accounting SystemThe Accounting System

Financial Statements and Reports:•The end result of financial accounting•The accounting numbers summarized for a

particular period in a way that provides useful information

•Financial Statements provide useful information that can be used as is or used after analyzing to then make business decisions▫Example: Promotion expense too high, lower it

•Financial Statements and Reports can be annual, quarterly, monthly, daily, or other time periods

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Financial Statements:•Income Statement

▫What is your profit for the period?▫Revenues – Expenses = Net Income or Loss

•Balance Sheet▫Account balances on the last day or the period

•Statement of Cash Flows▫Cash flows in and out for three areas:

Operations Investment Financing

•Other Reports…12

How Accounting works (Accounting Cycle)1. Analyze source documents

▫Invoices, loan documents, etc.2. Record Transactions in Journal

▫Journal is the book of original entry (data entered here first)3. Post to information in Journal to Ledgers

▫ Ledgers are listings of all individual accounts such as Cash or Rent Expense and the transactions and balances for the period

4. Trial Balance▫Prove that everything balances for the period (DR = CR)

5. Prepare Financial Statements▫IS, BS, SOCF, more…

6. Analyze Financial Statements▫Make decisions from the Financial Statements

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Accounting Vs. Bookkeeping

• There is not an exact distinction between There is not an exact distinction between bookkeeping & accountingbookkeeping & accounting

• In General:In General:▫BookkeepingBookkeeping

Systematic recording of business transactions in Systematic recording of business transactions in financial termsfinancial terms

▫AccountingAccounting Create accounting system, audit accounting Create accounting system, audit accounting

system, or create official reportssystem, or create official reports

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Accounting Is Fun! 1 - 15

Fundamental Accounting Equation

• A = L + OE

• Assets = Liabilities + Owner’s Equity

Itemsowned

Amountsowed tocreditors

Owner’sinvestment


Define Asset

• Asset– Cash, properties, and other things of value

owned by an economic unit or business entity

– Provides (probable) future economic benefits


Identify Assets• Examples of assets:

– Cash– Trucks– Buildings– Land– Shoes in a shoe store (Inventory)– Kites in a kite store (Inventory)– Accounts Receivable

• The amount owed to you or the business


Define Accounts Receivable

• Accounts Receivable– An account used to record the amounts

owed by charge customers• The business has legal claims against charge

customers

• A/R = Holding Tank for future receipt of cash

Assets

• Current Assets– Assets that can be converted to cash within 1

year (Cash, Inventory, AR)• Fixed Assets (Long-term Assets)

– Long lived assets like Buildings, Equipment and Land

• Intangible Assets– No physical form (Patents, Trademarks,

Goodwill)



Define Liability

• Liability– Debts or amounts owed to creditors– (Probable) sacrifice of future economic

benefits

• In one word:– Debt


Identify Liabilities

• Examples of Debts/Liabilities– Accounts Payable account

• Buy goods/services on credit• Receive a bill, but don’t pay until later• Buy supplies from a store, but pay for them

later– Notes Payable

• Long or short-term loans (liabilities)– Bonds Payable

• Long-term loans (liabilities)


Define Accounts Payable

• Accounts Payable– A liability account used for short-term

liabilities or charge accounts, usually due within thirty days

• A/P = Holding Tank for cash the business will pay out later


Define Owner’s Equity

• The owner’s right to or investment in the business

• Assets – Liabilities = Owners’ Equity• A – L = OE


Identify Owner’s Equity

• What is left over for the owner after all the debts have been paid– Remember: Creditors must be paid before

the owner’s are paid

Retained Earnings

• All Net Income (Profit) from Firm’s history that has not been paid back to owners




Suppose the total value of the assets is $26,000 and the business entity does not owe any amount against the assets.

Assets = Liabilities + Owner’s Equity$26,000 = $0 + $26,000



Suppose the total value of the assets consists of a truck that costs $23,000. The owner invested $11,000 in the truck and borrowed 12,000 from the bank.

Assets = Liabilities + Owner’s Equity$23,000 = $12,000 + $11,000


Determine Owner’s Equity

Ms. Burns has $9,000 invested in her travel agency, and the agency owes creditors $2,000.

Assets = Liabilities + Owner’s Equity? = $2,000 + $9,000


$2,000 Liabilities+ 9,000 Owner’s Equity= 11,000 Assets



Mr. Shea owns an auto lube shop. His business has assets of $36,000 and it owes creditors $5,000.

Assets = Liabilities + Owner’s Equity$36,000 = $5,000 + ?

Assets = Liabilities + Owner’s Equity

$36,000 = $5,000 + $31,000

$36,000 Assets- 5,000 Liabilities= 31,000 Owner’s Equity



Mr. Stan’s insurance agency has assets of $32,000; his investment (his equity) amounts to $20,000.

Assets = Liabilities + Owner’s Equity$32,000 = ? + $20,000


$32,000 Assets- 20,000 Owner’s Equity= 12,000 Liabilities


Define Revenues

• The amounts a business earns• Examples

– Fees earned for performing services– Sales of merchandise– Rent income, and interest income

• May take the form of cash, credit card receipts, or accounts receivable (charge accounts)


Identify Revenue Accounts

• Fees Earned for performing services• Sales Income from selling merchandise• Rent Income for the use of property• Interest Income for lending money• Credit Sales where cash will be

received at a later time– Example: Home Depot sells lumber to a

customer and lets the customer pay later


Define Expenses

• The costs that relate to earning revenue (the costs of doing business)

• Examples– Wages– Rent– Interest– Advertising

• May be paid in cash, immediately or at a future time (accounts payable)


Identify Expense Accounts

• Wages Expense for labor performed• Rent Expense for the use of property• Interest Expense for the use of money• Advertising Expense• Expense incurred but not paid:

– Example: Received a bill for a newspaper ad you took out last week

– Cash will be paid at a later time

Depreciation Expense

• The systematic write-off of the cost of a tangible asset over its estimated life

• Annual Straight Line Depreciation =• (Cost – Salvage Value)/(Estimated Life

in Years)• Annual Straight Line Depreciation =• (20,000-5000)/6 = 2500


Cost Of Goods Sold (COGS) & Gross Profit

• COGS = the cost of the item sold, such as the shoe or the boomerang or the car

• Sales Price = Price tag• Gross Profit = Sales Price - COGS


Accounting Is Fun! 37

Revenues from Sales:Sales 301,010.00$ Less: Sales Returns & Allowances 3,000.00$ Sales Discounts 24,300.00 27,300.00

Net Sales 273,710.00$ Cost of Goods Sold:

Merchandise Inventory, Jan. 1, 2002 55,500.00$ Purchases 215,000.00$ Less: Purchases Returns & Allowances 3,450.00$

Purchases Discount 2,400.00 5,850.00 Net Purchases 209,150.00$ Add Freight In 7,000.00 Delivered Cost of Purchases 216,150.00 Goods Available for Sale 271,650.00$ Less Merchandise Inventory, Dec. 31, 2002 53,400.00 Cost of Goods Sold: 218,250.00

Gross Profit 55,460.00$ Operating Expenses:

Wages Expense 28,270.00$ Advertising Expense 3,900.00 Rent Expense 8,400.00 Store Supplies Expense 300.00 Insurance Expense 615.00 Depreciation Expense, Store Equipment 6,395.00 Total Operating Expenses 47,880.00

Income From Operations 7,580.00 Other Income:

Investment Income 3,900.00$ Other Expenses:

Investment Expenses 250 3,650.00 Net Income 11,230.00$

Bay Air ToolsIncome Statement

For the Year Ended December 31, 2002


Performance Measures• Different measure on the classified income

statement tell us different things:

– Gross profit:• How profitable the company is after only subtracting COGS• Common measure used to compare companies (GP%)

– Operating income:• How profitable the company is from its ordinary operations,

before any “other revenue/expenses”• Common measure used in estimating future profitability

– Net income:• The bottom line• Profit for the period


Calculate Net Sales


Net Sales 273,710.00$




Calculate COGS








Calculate Gross Profit





Gross Profit 55,460.00$




Calculate Income From Operations



Income From Operations 7,580.00


Calculate Other Income & Expenses





Investment Expenses 250 3,650.00


Calculate Net Income





Investment Expenses 250 3,650.00 Net Income 11,230.00$


AssetsCurrent Assets:

Cash 5,400.00$ Accounts Receivable 14,100.00 Merchandise Inventory 103,400.00 Store Supplies 390.00 Prepaid Insurance 2,900.00 Total Current Assets $126,190.00

Plant & Equipment:Land $105,000.00Building 190,000.00$

Less Accumulated Depreciation 125,000.00 65,000.00Shop Equipment 43,900.00$

Less Accumulated Depreciation 31,200.00 12,700.00Trucks 34,500.00$

Less Accumulated Depreciation 12,750.00 21,750.00Total Plant & Equipment 204,450.00

Total Assets $330,640.00

LiabilitiesCurrent Liabilities:

Mortgage Payable (Current Portion) 20,200.00$ Accounts Payable 47,500.00Wages Payable 1,270.00Unearned Rent Revenue 4,500.00Total Current Liabilities 73,470.00$

Long-Term LiabilitiesMortgage Payable 127,500.00

Total Liabilities $200,970.00

Owner's EquityM.R. Short, Capital 129,670.00Total Liabilities & Owner's Equity $330,640.00

Bay Air ToolsBalance Sheet

December 31, 2002


Current Assets• Cash and any other assets or resources that are

expected to be realized in cash or to be sold or consumed during the normal operating cycle* of the business* One year, if the normal operating cycle is less than

twelve months• Listed on balance sheet in the order of liquidity

(how quickly can it be converted to cash):– Cash– N/R (current)– A/R– Inventory– Prepaid items (supplies, prepaid insurance)


Calculate Current Assets




December 31, 2002


Fixed Assets (Plant And Equipment)

• Long-lived assets that are held for use in the production or sale of other assets or services– Also called fixed assets

• Order on Balance Sheet: – Rank according to length of life

• Longest life first


Calculate Plant & Equipment (Fixed Assets) & Total Assets



Plant & Equipment:Land $105,000.00Building 190,000.00$

Less Accumulated Depreciation 125,000.00 65,000.00Shop Equipment 43,900.00$

Less Accumulated Depreciation 31,200.00 12,700.00Trucks 34,500.00$

Less Accumulated Depreciation 12,750.00 21,750.00Total Plant & Equipment 204,450.00

Total Assets $330,640.00


December 31, 2002


Current Liabilities• Debts that will become due within the normal

operating cycle of a business– Usually within one year

• Normally paid from current assets• Listed on balance sheet in the order they will be

paid off:– N/P– Mortgage payable (current portion)– A/P– Wages payable– Unearned revenue


Calculate Current Liabilities




Long-Term Liabilities

• Debts payable over a comparatively long period– Usually more than one year

• For sole-proprietorship only LTL:– Mortgage payable (LT portion)

• Terms Used:– Notes Payable and Bonds Payable


Calculate Total Liabilities & Owner’s Equity



Long-Term LiabilitiesMortgage Payable 127,500.00

Total Liabilities $200,970.00

Owner's EquityM.R. Short, Capital 129,670.00Total Liabilities & Owner's Equity $330,640.00


Liquidity

• “How quickly an asset can be converted to cash”

• The ability of an asset to be quickly turned into cash, either by selling it or by putting it up as security for a loan– Banks want to know if the firm can make its interest

payments– Managers want to know if they have enough money to

pay the bills and buy assets– Cash is queen! (Cash is king)


Current Assets & Current Liabilities

• Current assets (CA)– Get cash soon

• Current liabilities (CL)– Pay cash soon

• Short term cash management measures (liquidity measures):1. Working capital2. Current ratio


Liquidity Measures:

• Current Ratio– A firm’s current assets divided by its current

liabilities• Because of the division, the number can be used

to compare with other companies– Portrays a firm’s short-term debt-paying ability

• Ability to pay current liabilities with current assets

• CA/CL = Current Ratio


Liquidity Measures:

• Working Capital– A firm’s current assets less its current

liabilities– The amount of capital a firm has available to

use or to work with during a normal operating cycle

• CA – CL = Working Capital

Computers in Accounting

•Accounting is not done by hand any more.•Accounting is done with computer programs

such as QuickBooks, Peachtree or custom made computer programs

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Statement Of Cash Flows & Ratio Analysis

•See Excel

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Accounting Professions

•Financial Accounting•Tax Accounting•Auditing•Managerial Accounting•Private Accountant•Public Accountant•Government or Not-for-profit accounting

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Accounting & Financial Statements and Reports

•Accounting is the language of Business•You must know some accounting to work in

a business field•Financial Statements are the end result of

Financial Accounting and provide useful information to Business Decision Makers

•Financial Statements:▫IS▫BS▫SOCF

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Accounting Cycle

1. Analyze source documents2. Record Transactions in Journal3. Post to information from Journal

to Ledgers4. Trial Balance5. Prepare Financial Statements6. Analyze Financial Statements

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Accounting Vs. Bookkeeping

•Bookkeeping involves recording transactions•Accounting involves creating reports,

creating the accounting systems, auditing the accounting systems, planning tax strategies

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Computers in Accounting

•Accounting is not done by hand anymore.•Computer programs like QuickBooks are

used for the procedural side of bookkeeping and accounting

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Ratio Analysis

•Ratio analysis is one means used to analyze financial statements in order to see the health of a company

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Documents

Busn 101 Chapter 17