Post on 05-Jan-2016
Accounting: Measuring how Efficiently and Effectively
Resources are Creating Value and Profit
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
McGraw-Hill/IrwinIntroduction to Business
Chapter Fourteen
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
1. Explain how the success of a company’s business model can be measured by financial accounts and describe the various kinds of activities that accounting perform.
2. Analyze a company’s balance sheet and describe how it balances the assets a company owns against the capital owed to its creditors and stockholders.
3. Explain how the income statement is used to measure a company’s bottom line profit and the various costs and expenses that must be deducted to arrive at this total.
4. Understand the need for cash, as well as profit, affects a company’s business model, and how the cash flow statement measures the cash that flows into and out of a company.
5. Appreciate how financial ratios can be used to analyze the information in company’s financial statements and how they help both managers and investors evaluate a company’s current and future profitability.
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
ROIC• The most accurate measure of a company’s
profitability is Return on Invested Capital
• Increasing profitability and sales suggests the company functions and activities are creating more value for its customers than its competitors and now have a competitive advantage
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
GAAP• Accounting is a process of collecting, measuring and
recording data in an organized method or generally accepted accounting principles (GAAP)
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
GAAP• For example, the matching principle requires that
expenses incurred be deducted from the revenue within the same time period
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
GAAP• Also the revenue is stated in the time frame when the
sale is made not when the customer pays for the sale and companies must follow this accrual basis of accounting
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
GAAP• This data is analyzed and then reported the results
into financial reports and statement
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
Accounting system• The financial information system used to measure,
record, analyze and report all the transactions involved in its value-creation process
• All company stakeholders are interested in the financial report and statements resulting from the accounting function
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
Accounting System• Stockholders, managers, and employees all use these
statements to analyze the financial health and improve company performance
• Employees, even if not stockholders, are concerned the company will be able to reward and employ them in the future
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
Accounting Activities• Is a hierarchy of data information and knowledge• Bookkeeping is the recording activity needed to
monitor and track all financial transactions • Depreciation is the process of reducing the value of
the asset over time as it is used
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
Accountants • Companies employ accountants, both internal and
external, and certified professionals (CPA)• To perform the accounting activities necessary to meet
strict professional and legal requirements
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
Accountants• The Sarbanes-Axley Act of 2002 added to these
requirements necessitating the CEO as well as others to sign off ( thereby legally liable) on all financial statements
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
Accountants• Financial accountants who specialize in
preparing and analyzing financial data for use by managers
• Financial accountants who specialize in preparing financial data for use by stakeholders
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
Financial Statements• Managers of all levels use accounting financial
statements and need to understand the accounting methods used to prepare these statementsBalance sheetIncome statementStatement of cash flows
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
Financial Statements• The balance sheet is a summary of the financial
conditions of a company for a specific time and as of a specific day (think of a “snapshot” or a still picture)
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
The Accounting Equation
• States that assets minus liabilities equals owner equity • Assets are the resources a company owns from cash to
all investments• Liabilities are the financial obligations that a company
incurs from purchasing or borrowing to obtain capital
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
The Accounting Equation • The other main source of a company’s capital is its
stockholder’s equity which is the total capital invested by its founders and stockholders
• This equation is balanced by double entry bookkeeping which records the dual effects of a financial transaction on a company’s assets and liabilities
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
Key Terms• Current liabilities are debts due and payable within
one year• Total equity is the sum of the capital stock invested
and retained earnings
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
Key Terms• Liquidity is how fast an asset can be converted to cash
and may be categorized as current (working) or long term assets
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
Income Statement• Reports the results of a company’s profitability and
may be called a profit and loss statement
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
Income Statement• The basic equation of sales revenue minus expenses
equals profit (or loss) is used on this statement to determine the bottom line profit or the amount of net income (or profits or earnings)
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
Cash Flow Statement • Shows how much cash a company generates during a
specific financial period, and how it is used
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
Cash Flow Statement• In accounting cash refers to the value of a company’s
assets that can be converted into cash immediately
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
Financial Ratios• Measures of different aspects of a company's
performance and profitability and categorized as liquidity, asset management and profitability ratios
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Chapter 14Accounting: Measuring how Efficiently and
Effectively Resources are Creating Value and Profit
Financial Ratios• Note that gross margin indicates how much of each
sales dollar remains after deducting cost of goods sold from sales