Transcript Wednesday morning - Villanova University

Wednesday morning
Accounting
Accounting
• Accounting -- Recording, classifying,
summarizing and interpreting of financial
events and transactions in an organization
to provide interested parties needed
financial information.
• Outside parties - like employees, owners,
creditors, unions, investors and the
government - make use of a firm’s
accounting information
The Accounting System
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?
• Annual Report -- A yearly statement of the financial
condition, progress, and expectations of the firm.
– American Eagle, Disney
HOW to READ
an ANNUAL REPORT
• Key things to watch for and read:
- Management’s discussion and analysis of operations
- Balance sheet
- Income statement
- Statement of cash flows
- Auditor’s opinion
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
Public vs. Private Accountants
• Private Accountants -- Work in a single firm,
government agency, or nonprofit organization.
• Public Accountants -- Provide accounting
services to individuals or businesses.
• Certified Public Accountants (CPAs) -Accountants who have passed a series of
examinations established by the American
Institute of Certified Public Accountants (AICPA)
and met a states requirements for education and
experience.
Auditing
• Auditing -- Reviewing and evaluating the
information used to prepare a company’s financial
statements.
• Independent Audit -- An evaluation and unbiased
opinion about the accuracy of a company’s
financial statements.
• Certified Internal Auditors (CIAs) -- Accountants
who have a bachelor’s degree and two years of
experience in internal auditing and pass an exam
administered by the Institute of Internal Auditors.
Specialized Accountants
• Tax Accountants -- Accountants trained in
tax law and are responsible for preparing tax
returns or developing tax strategies.
• Forensic Accountants -- When a company
is suspected of fraud or other accounting
wrongdoings a court will commission a
forensic accountant to search for foul play.
Forensic accountants look for proof a
company is “cooking the books.” Please note
that this is not the role of the public
accountants.
The Accounting Cycle
• Accounting Cycle -- A six-step procedure
that results in the preparation and analysis
of the major financial statements.
GAAP
• Generally Accepted Accounting Principles
– the standard framework of guidelines for financial
accounting used in any given jurisdiction; GAAP
includes the standards, conventions, and rules
accountants follow in recording and summarizing
transactions, and in the preparation of financial
statements.
Bookkeeping
• Bookkeeping -- 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.
– Use of double entry bookeeping
• Ledger -- A specialized accounting book or
program where all information is in one place.
• Trial Balance -- A summary of all the
information in the account ledgers.
Cash vs. Accrual Accounting
• Revenue Recognition
– An exchange of goods or services at an agreed
upon price with payment or promise of payment
• Accounts receivable, unearned revenue
• Matching
– Matching expenses with the revenue it helped to
generate; matching expenses to the time period
when they are incurred
• inventory/cost of goods sold, accounts payable, prepaid
expenses
Financial Statements
• Financial Statement -- A summary of all
the financial transactions that have
occurred over a particular period.
• Key financial statements of business are:
- Balance sheet
- Income statement
- Statement of cash flows
The Fundamental Accounting Equation
• Fundamental Accounting Equation -- The basis
for the balance sheet.
• The equation must always be balanced and
includes the formula:
o Assets = Liabilities + Owners Equity
Assets
• Assets -- Economic resources owned by a
firm. Items can be tangible or intangible.
• Liquidity -- Ease with which assets can
be converted into cash.
Classifying Assets
• Current Assets -- Items that can or will be
converted to cash within one year.
• Fixed Assets -- Long-term assets that are
relatively permanent such as land, buildings,
or equipment.
• Intangible Assets -- Long-term assets that
have no physical form but do have value
such as patents, trademarks, and goodwill.
Classifying Liabilities
• Liabilities -- What the business owes to others - its
debts.
• Accounts Payable -- Current liabilities a firm owes for
merchandise or services purchased on credit.
• Notes Payable -- Short or long-term liabilities a
business promises to pay by a certain date.
• Bonds Payable -- Long-term liabilities that the firm
must pay back.
Owners’ Equity
• Owners’ Equity -- The owners’ share of the business:
assets (what they own) minus liabilities (what they
owe).
• Consists of:
– Paid-in Capital – amount of funds directly invested in the
business by its owners
– Retained Earnings -- Accumulated earnings from the
firm’s profitable operations that are reinvested in the
business.
The Income Statement
• Income Statement -- The financial
statement that shows a firm’s bottom line that is, its profit after costs, expenses, and
taxes.
• Net Income/Net Loss -- The revenue left
over or depleted.
The Multi-Step Income Statement
• The formula for the multi-step income statement:
o Revenue
o Minus Cost of Goods Sold
o Equals Gross Profit
o Minus Operating Expenses
o Equals Net Income before Taxes (Operating Income)
o Minus Taxes
o Equals Net Income or Net Loss
Income Statement Accounts
• Revenues is the monetary value a firm received for goods
sold, services rendered or other payments.
– Recall revenue recognition
• Cost of Goods Sold (or Manufactured) -- Measures the
cost of merchandise the firms sells or the cost of raw
materials and supplies it used in producing items for resale.
– Recall matching
• Gross Profit -- How much a firm earned by buying (or
making) and selling merchandise.
Income Statement Accounts, cont’d
• Operating Expenses -- Expenses a firm
incurs in selling goods and services such
as rent, salaries and supplies.
• Depreciation -- The systematic write-off of
the cost of a tangible asset over its
estimated useful life.
Statement of Cash Flows
• The purpose is to provide info about the sources and uses of
cash during a particular time period
• content and organization
– operating activities: generally, any activities that enter into the determination
of net income
– investing activities: transactions involved in the acquisition or disposition of
non-current assets (sale or purchase of non-current assets, sales or purchases
of other company’s securities, collecting or giving a loan to a third party)
– financing activities: transactions involving the company’s debt or equity
(selling or acquiring company’s own stock, issuing or repaying long-term debt,
payment of dividends)
– There are two different ways to prepare the operating section of the SCF, the
direct and indirect method;
Understanding Cash Flow
• Cash is the lifeblood of any business
• Managing cash flow is a key consideration
of a business and can be particularly
challenging for small and seasonal
businesses.
Example of the Accounting Cycle
• Glorian Portrait
– Transaction worksheet
– Income Statement
• Retained Earnings
– Balance Sheet
– Statement of Cash Flows
Financial Statement Analysis
• FSA - The assessment of a firm’s financial condition
using calculations and financial ratios developed
from the firm’s financial statements. Sometimes
referred to as ratio analysis
• The ratios do not exist in a vacuum
• By themselves, they do not provide much meaning
• They need to be compared to something:
– Trends over time
– Key competitors
– Industry averages
FSA, cont’d
• The ratios can be broken down into
– Profitability
– Short-term financial position (liquidity)
– Long-term financial position (leverage/financial
structure)
– Efficiency/effectiveness
• Yahoo Finance and WSJ as sources of ratio
analysis
– American Eagle (Yahoo), American Eagle (WSJ)
International Accounting Issues
• Multinational companies must adapt their
accounting reporting to the rules of multiple
countries.
• Many countries have adopted International
Financial Reporting Standards (IFRS) and
are pushing to make them standard.
• The U.S. Securities & Exchange Commission
believes there should be such a standard.
Timeline for the US move to IFRS
• 2008: SEC offers proposed timeline
• 2009: 110 large companies have the option of
using IFRS
• 2011: SEC assesses progress of IFRS
• 2013: Final decision on the move to IFRS
• 2014: Large public companies will be required to
report in IFRS (pending SEC decision)
• 2016: All companies will be required to report in
IFRS (pending SEC decision)