>>>>>>>> BUS-101
Chapter 15: Understanding Accounting and
Financial Statements
Instructor: SgS
Ac c o u n t i n g
► Accounting is the process of identifying, recording and communicating
economic events of an organization to interested users.
► Accounting is the process of measuring, interpreting and communicating
the financial information to enable people to make informed decision.
► Accounting Information support internal and external business decision
making process.
► An accountant prepares financial information or economic events or
business transaction in a way that describes the firm’s operation.
E.g. when an organization purchase a computer for office, the
accountant will identify this transaction, record the value of the item and
present this info to the manager.
I n fo rm at ion
f Ac c ou n t in g
Users o
ion U s ers
Inform at
• Internal Users Is the company earning
satisfactory income?
- marketing, finance,
HR, management
• External Users
Is cash sufficient to pay
- investors, creditors, bills?
What do we
suppliers, SEC, Tax do if they
catch us?
authorities, etc
Will the company be able to pay its debts as they
come due?
cc oun t i ng
I n vo lvi ngA
s s A ct ivi ties
Busine
• Operating activities focus on selling goods and
services, but they also consider expenses as
important elements of sound financial
management.
• Investing activities provide valuable assets
required to run a business.
• Financing activities provide necessary funds to
start a business and expand it after it begins
operating.
n d a ti o n o f
T h e F ou s
t i n g S y s t e m
Accoun
Generally accepted accounting principles (GAAP)
• encompass the conventions, rules, and procedures for determining
acceptable accounting practices at a particular time.
• It is a guidelines or standards to provide reliable, consistent & unbiased
information
Financial Accounting Standards Board (FASB) is primarily responsible for
evaluating, setting, or modifying GAAP in the U.S.
Sarbanes-Oxley Act (SOX) responded to cases of accounting fraud.
– Created the Public Accounting Oversight Board, which sets audit standards
and investigates and sanctions accounting firms that certify the books of
publicly traded firms.
– Senior executives (CEO & CFO) must personally certify that the financial
information reported by the company is correct.
c c o u n t i n g
The A
Cycle
Accounting process/cycles - set of activities involved in converting
information about transactions into financial statements.
t i n g Eq ua t i on
The Accoun
• Assets - anything of value owned or leased by a business.
• Liability - claim against a firm’s assets by a creditor.
• Owner’s equity - all claims of the proprietor, partners, or
stockholders against the assets of a firm, equal to the excess of
assets over liabilities.
• Basic accounting equation - relationship that states that
assets equal liabilities plus owners’ equity.
• Double-entry bookkeeping - process by which accounting
transactions are entered; each individual transaction always has
an offsetting transaction.
e S h e e t
Ba l a nc
Balance sheet - statement of a firm’s financial
position—what it owns and the claims against its
assets—at a particular point in time.
Photograph of firm’s assets together with its liabilities
and owner’s equity
Follows the accounting equation
a la n c e S he et
S a mp l e B
t a t e m e n t
Inc om e S
Income Statement - financial record of a company’s
revenues and expenses, and profits over a period of
time.
Firm’s financial performance in terms of revenues,
expenses, and profits over a given time period.
Reports profit or loss.
Focus on revenues and costs associated with
revenues.
pl e I nc om e
Sam
Sta te m en t
St a t e m e n t o f
e r ’ s E q u i t y
Own
Statement of Owner’s Equity - is designed to show
the components of the change in equity from the end
of one fiscal year to the end of the next.
Begins with the amount of equity shown on the
balance sheet.
Net income is added, and cash dividends paid to
owners are subtracted.
S ta t e m e n t o f
Sa m p l e
e r ’ s E qu i t y
Own
t e m e n t of
The Sta
Ca s h Flo w s
Statement of cash flows - a firm’s cash receipts and
cash payments that presents information on its
sources and uses of cash.
Accrual accounting - method that records revenue
and expenses when they occur, not necessarily when
cash actually changes hands.
S t a t e m en t of
S a mp l e
Ca s h F l o ws
t io s A n a l y s is
Fi na n ci a l R a
Ratio analysis - tool for measuring a firm’s liquidity, profitability,
and reliance on debt financing, as well as the effectiveness of
management’s resource utilization.
y R a ti o s
L i q ui d i t
Total current assets
Current ratio compares
current assets to current
liabilities.
Total current liabilities
Acid-test (or quick) Cash and equivalents
ratio measures the + short-term investments
ability of a firm to meet + accounts receivable
its debt payments on
short notice.
Total current liabilities
i t y R a t i o s
Activ
Net sales
Inventory turnover
ratio indicates the
number of times
merchandise moves
Average of inventory
through a business.
Net sales
Total asset turnover ratio
indicates how much in
sales each dollar invested
in assets generates.
Average of total assets
l i t y R a t i o s
Profitabi
Profitability ratios measure the organization’s overall financial
performance by evaluating its ability to generate revenues in excess of
operating costs and other expenses.
e Ra t i o s
Leverag
• Leverage ratios measure the extent to which a firm relies on
debt financing.
• Total liabilities to total assets ratio > 50 percent indicates that a
firm is relying more on borrowed money than owners’ equity.
