Transcript Chapter 18

Chapter
Eighteen
Understanding Financial
Information and Accounting
18-1
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Importance of Accounting
Definition
Audiences
- Managers
- Government
- Investors,
Suppliers &
Creditors
18-2
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The Influence of
Accounting Information
Managers- Financial
reports pinpoint
problems/opportunities
Governmentassists with tax
collection
Investors, Suppliers, &
Creditors- provides a
means to analyze
business
18-3
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Areas of Accounting
Financial
Accounting
- Annual Report
- Private
Accountant
- Public Accountant
- C.P.A.
Auditing
Tax Accounting
Managerial
Accounting
- Inside
Organization
- C.M.A.
18-4
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Different Types
of Accountants
Public Accountant
Private Accountant
Auditing
Management
Accounting
Tax Consulting &
Compliance
Management
Consulting
Government
Accounting
Academia
18-5
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Top Business Uses
of Accountants
Valuation, Mergers, Acquisition
Advice
Personal Financial Planning
Market Strategy & Planning
Cash Mgmt. & Forecasting
Tax/Auditing
0%
20%
40%
60%
80%
100% 120%
18-6
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Services Growth in Acc’ting
Accounting & Auditing
2.9%
Taxes
13.1%
Management Consulting
117.7%
18-7
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Accounting vs. Bookkeeping
Bookkeeping
Accounting
Analyze
Start of Accounting
Recommend
Record/Journalize
18-8
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Accounting Cycle
1. Analyze/Categorize
2. Record
3. Post
- General Journal
- General Ledger
4. Trial Balance
5. Financial Statements
- Income Statement
- Balance Sheet
6. Analyze/Recommend
18-9
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The Accounting System
(Figure 18.1)
18-10
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Steps In The Accounting Cycle
(Figure 18.3)
18-11
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Financial Statements
Balance Sheet- Statement of
Financial Position
Income Statement- Statement of
Revenues & Expenses
Statement of Cash Flows
Statement of Owner’s Equity
18-12
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Accounting Equation
Assets
=
Liabilities + Owner’s Equity
Owned = Owed + Owner’s Claims
$826,000 = $613,000 + $213,000
18-13
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Fiberrific- Balance Sheet
Current Assets
$600,000
Fixed Assets
Intangible Assets(Goodwill)
Total Assets
$206,000
$ 20,000
$826,000
Current Liabilities
Long-Term Liabilities
$288,000
$325,000
Total Liabilities
Stockholders’ Equity
$613,000
$213,000
Total Liabilities & Equity
$826,00018-14
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Current Assets
Cash
Accounts Receivable
Notes Receivable
Inventory
Total Current Assets
$ 15,000
200,000
50,000
335,000
$ 600,000
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Fixed Assets
Land
Bldg. & Impr. $200,000
Deprec.
(90,000)
Equip./Veh.
$120,000
Deprec.
(80,000)
Furn./Fix.
Deprec.
$
40,000
110,000
40,000
$ 26,000
(10,000)
Total Fixed Assets
16,000
$ 206,000
18-16
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Current Liabilities
Accounts Payable
Notes Payable(12/02)
Accrued Taxes
Accrued Salaries
Total Current Liabilities
$ 40,000
8,000
150,000
90,000
$288,000
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Long-Term Liabilities
Notes Payable(3/04)
Bonds Payable(12/14)
Total Long-Term
$
35,000
290,000
$ 325,000
18-18
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Stockholders’ Equity
Common Stock
$100,000
Retained Earnings
113,000
Total Stockholders’ Equity $213,000
18-19
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Fiberrific- Income Statement
Net Sales
Cost of Goods Sold
Gross Profit
$ 700,000
(410,000)
$ 290,000
Operating Expenses
NBIT
Taxes
NAT
222,000
$ 68,000
(19,000)
$ 49,000
=========
18-20
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Revenues
Gross Sales
$ 720,000
Returns & Allowances $12,000
Discounts
Net Sales
8,000
(20,000)
$ 700,000
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Cost of Goods Sold
Beg. Inventory
Purchases
Freight
$200,000
$400,000
40,000
Net Purchases
Available for Sale
440,000
$640,000
End. Inventory
(230,000)
Cost of Goods Sold
$410,000
18-22
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Selling Expenses
Sales Salaries
Advertising
Supplies
Total Selling Expenses
$ 90,000
18,000
2,000
$110,000
18-23
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General Expenses
Office Salaries
Depreciation
Insurance
Rent
Light, Heat, & Power
Miscellaneous
Total General Expenses
$ 67,000
1,500
1,500
28,000
12,000
2,000
$112,000
18-24
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Fiberrific
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
Beginning Cash Balance
Ending Cash Balance
$ 27,000
( 2,000)
$ 25,000
=========
18-25
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Using Accounting
Information- Solvency Ratios
Short-Term
Long-Term
- Current Ratio
- Debt to Equity
Current Assets
Current Liabilities
Total Liabilities
Equity
- Quick Ratio
Cash + Marketable Securities + Receivables
Current Liabilities
18-26
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Using Acc’ting Info. (cont’d)Profitability Ratios
Profitability = Operating Success
- Return on Sales
- Earnings Per Share
Net Income
Net Income
Net Sales
# Common Shares
- Return on Equity
Net Income
Owner’s Equity
18-27
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Using Acc’ting Info. (Con’td)Activity Ratios
- Inventory Turnover
- A/R Turnover
Cost of Goods Sold
Net Acc’ts Receivable
Avg. Inventory
Net Daily Credit Sales
18-28
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Current Ratio- Fiberrific
$600,000
= 2.08
$288,000
18-29
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Quick(Acid-Test) Ratio
$265,000
= 0.92
$288,000
18-30
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Debt to Equity Ratio
$613,000 =
2.87
$213,000
18-31
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Profitability Ratios
Return on Sales
$ 49,000 = 7%
$700,000
Return on Equity $ 49,000 = 23%
$213,000
Earnings per Share $ 49,000 = $.049
1,000,000
18-32
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Activity Ratios
Inventory Turnover $410,000 = 1.9
$215,000
18-33
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Fiberiffic’s Balance Sheet (Assets)
Fiberriffic, Inc.
Period ending 3/31/02
Assets
Current Assets
Cash
Accounts Receivable
Notes Receivable
Inventory
Total Current Assets
Fixed Assets
Land
Buildings(net)
Equipment & Vehicles(net)
Total Fixed Assets
Intangible Assets
Goodwill
Total Intangible Assets
Total Assets
$ 15,000
200,000
50,000
335,000
$600,000
$ 40,000
110,000
56,000
$206,000
$ 20,000
$ 20,000
$826,000
18-34
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Fiberiffic’s Balance Sheet
(Liabilities & Owner’s Equity)
Fiberiffic, Inc.
Period ending 3/31/02
Liabilities
Current Liabilities
Accounts Payable
$ 40,000
Notes Payable
8,000
Accrued Taxes & Salaries
240,000
Total Current Liabilities
Long-term Liabilities
Notes Payable
$ 35,000
Bonds
290,000
Total Long-term Liabilities
Owner’s Equity
Common Stock(1,000,000 shares) $100,000
Retained Earnings
113,000
Total Owner’s Equity
Total Liabilities & Owner’s Equity
$288,000
$325,000
$213,000
$826,000
18-35
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Fiberiffic’s Income Statement
Fiberiffic, Inc.
Period Ending 12/31/02
Revenue
Net Sales
Cost of Goods Sold
Beginning Inventory
Merchandise Purchased
Cost of Goods Available for Sale
Less: Ending Inventory
Cost of Goods Sold
Gross Profit(Gross Margin)
$ 700,000
$ 200,000
$ 440,000
$ 640,000
-$ 230,000
$ 410,000
$ 290,000
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Fiberiffic’s Income
Statement(cont’d)
Operating Expenses
Selling Expenses
Salaries
Advertising & Supplies
Total Selling Expenses
General Expenses
Office Salaries
Depreciation
Insurance
Rent
Utilities
Miscellaneous
Total General Expenses
Total Operating Expenses
Net Profit (Income) Before Taxes
Less: Income Tax Expenses
Net Income (Profit) After Taxes
$ 90,000
$ 20,000
$ 110,000
$ 67,000
$ 1,500
$ 1,500
$ 28,000
$ 12,000
$ 2,000
$ 112,000
$
$
$
$
222,000
68,000
19,000
49,000
18-37
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How to Read a
Corporate Annual Report
Read management’s discussion of changes in
operations. Try to identify strengths or
weaknesses.
Review the firm’s consolidated balance
sheet. (Its assets, liabilities, and owner’s
equity.)
Analyze the Income Statement. Look beyond
the year (Sales drops can spell trouble).
Review the statement of changes in cash
flows.
Review auditor’s opinion.
18-38
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