Post on 21-Dec-2015
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Chapter
Using Financial Informationand Accounting
Using Financial Informationand Accounting
Prepared byNorm Althouse
University of Calgary
Prepared byNorm Althouse
University of Calgary
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Principles of Accounting
Accounting provides a framework to understand thefirm’s financial condition – central to every organization.
Accounting provides a framework to understand thefirm’s financial condition – central to every organization.
AccountingAccounting
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Accounting
The process of collecting, recording, classifying,
summarizing, reporting,and analyzing
financial activities.
The process of collecting, recording, classifying,
summarizing, reporting,and analyzing
financial activities.
AccountingAccounting
Accounting that provides financial information that
managers inside the organization can use to
evaluate and make decisions.
Accounting that provides financial information that
managers inside the organization can use to
evaluate and make decisions.
ManagerialAccounting
ManagerialAccounting
1
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Users of the Accounting System1
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The Accounting System
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The Accounting Cycle
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1. Analyze business transaction documents
2. Record business transactions in journal
3. Post entriesto ledgers
4. Prepare trial balance
5. Prepare financial statements &
management reports
6. Analyze reports
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The accountant is no longer in a backroom wearing a green eye-shades filling out ledgers by hand, but rather is now engaged in forward planning.
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Accounting calculations are, of course, now done by machine instead of by hand
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…and the machines accountants use are becoming more sophisticated every day. But there is still a lot of number crunching involved in accounting
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…resulting in a lot of stressful work as the year-end financial statements have to be prepared and as audit time comes around.
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Primary Financial Statements1
Balance Sheet
Income Statement
Statement of Cash Flows
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2 The Accounting Profession
Accounting DesignationsAccounting DesignationsAccounting DesignationsAccounting Designations
chartered accountant (CA)chartered accountant (CA)
certified management accountant (CMA)certified management accountant (CMA)
certified general accountant (CGA)certified general accountant (CGA)
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2 The Accounting Profession
PrivateAccountants
PrivateAccountants
Accountants employed to serve one particular organization.
Accountants employed to serve one particular organization.
Public Accountants
Public Accountants
Independent accountants whoserve organizations and
individuals on a fee basis.
Independent accountants whoserve organizations and
individuals on a fee basis.
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3 The Accounting Equation
AssetsAssets__
LiabilitiesLiabilities Owners’Equity
Owners’Equity
____
Things of valueowned by a firm
What a firm owesto its creditors
Investment in the firm minus liabilities;Net Worth
More commonly you will see the accounting equation as
A = L + OE
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4 The Balance Sheet
CategoriesCategoriesCategoriesCategories Company’s obligations(Liabilities)
Company’s obligations(Liabilities)
Resources of a company(Assets)
Resources of a company(Assets)
Owners’ EquityOwners’ Equity
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The Balance Sheet
Summarizes a firm’s financial position at a
specific point in time.
• Assets (resources)
– current, fixed, intangible, depreciation
• Liabilities (obligations)
– current, long-term
• Assets minus obligations (equity)
– retained earnings
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4 Assets
Fixed assetsFixed assets
Current assetsCurrent assets
Intangible assetsIntangible assets
CashMarketable securitiesAccounts receivableInventory
CashMarketable securitiesAccounts receivableInventory
Land and buildingsMachinery and equipmentFurnitureFixtures
Land and buildingsMachinery and equipmentFurnitureFixtures
Patents, CopyrightsTrademarksGoodwill
Patents, CopyrightsTrademarksGoodwill
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4 Liabilities
Long-termliabilities
Long-termliabilities
Current liabilitiesCurrent liabilities
Accounts payableNotes payableAccrued expensesIncome taxes payableCurrent portion of long-term debt
Accounts payableNotes payableAccrued expensesIncome taxes payableCurrent portion of long-term debt
Bank loansMortgages on buildingsCompany’s bonds sold to others
Bank loansMortgages on buildingsCompany’s bonds sold to others
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4 Owners’ Equity
Owners’ EquityOwners’ EquityOwners’ total net worth after
all liabilities have been paid
Owners’ total net worth after all liabilities have been paid
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CategoriesCategoriesCategoriesCategories ExpensesExpenses
RevenuesRevenues
Net Profit or LossNet Profit or Loss
The Income Statement
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The Income Statement
Summarizes the firm’s revenues and
expenses and shows total profit or loss over a period of time.
Revenues
– gross sales, net sales
Expenses
– cost of goods sold, operating expenses
Net profit or loss
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RevenuesRevenues
Gross sales: The total dollar amount of a company’s sales
Gross sales: The total dollar amount of a company’s sales
Net sales: The amount left after deducting sales discounts and returns and allowances from gross sales
Net sales: The amount left after deducting sales discounts and returns and allowances from gross sales
Revenues
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ExpensesExpenses
Cost of goods sold: The total expense of buyingor producing the firm’s goods or services
Cost of goods sold: The total expense of buyingor producing the firm’s goods or services
Operating expenses: The expenses of running a business that are not directlyrelated to producing or buying its products.
Operating expenses: The expenses of running a business that are not directlyrelated to producing or buying its products.
Expenses
Taxes are not an expense but an obligation. Taxes are subtracted after all expenses have been subtracted.
Taxes are not an expense but an obligation. Taxes are subtracted after all expenses have been subtracted.
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Net IncomeNet Income
Net LossNet Loss
Obtained by subtracting a firm’s expenses from revenues (when revenues aremore than expenses)
Obtained by subtracting a firm’s expenses from revenues (when revenues aremore than expenses)
Obtained by subtracting a firm’s expenses from revenues (when expenses aremore than revenues)
Obtained by subtracting a firm’s expenses from revenues (when expenses aremore than revenues)
Net Profit or Loss
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Cash FlowsCash Flowsfrom…from…
Cash FlowsCash Flowsfrom…from… Investment activitiesInvestment activities
Operating activitiesOperating activities
Financing activitiesFinancing activities
Statement of Cash Flows
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Statement of Cash Flows
Summarizes the money flowing into and out of a firm for a period of time.
Sources of cash flow:
– operating expenses
– investment activities
– financing activities
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RatioRatioClassificationsClassifications
RatioRatioClassificationsClassifications
Liquidity
Profitability
Activity
Debt
Ratio Analysis
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Acid-Test(Quick) Ratio
Acid-Test(Quick) Ratio
Ratio of total current assets excluding inventory to
total current liabilities.
Ratio of total current assets excluding inventory to
total current liabilities.
Net WorkingCapital
Net WorkingCapital
The amount obtained by subtractingcurrent liabilities from total current assets.
The amount obtained by subtractingcurrent liabilities from total current assets.
CurrentRatio
CurrentRatio
Ratio of total current assets to totalcurrent liabilities.
Ratio of total current assets to totalcurrent liabilities.
Measure the firm’s ability to pay its short-term debtsMeasure the firm’s ability to pay its short-term debts
Liquidity Ratios
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Return on Equity (ROE)
Return on Equity (ROE)
Ratio of net profit to total owners’ equity.
Ratio of net profit to total owners’ equity.
Earnings Per Share(EPS)
Earnings Per Share(EPS)
Ratio of net profit to the number ofshares of common stock outstanding.Ratio of net profit to the number of
shares of common stock outstanding.
Net ProfitMargin
Net ProfitMargin
Ratio of net profit to net sales. Return on sales.
Ratio of net profit to net sales. Return on sales.
Measure the firm’s use of resources to generate profitMeasure the firm’s use of resources to generate profit
Profitability Ratios
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InventoryTurnover Ratio
InventoryTurnover Ratio
The speed with which inventory moves through the firm and
is turned into sales.
The speed with which inventory moves through the firm and
is turned into sales.
Measure how well a firm uses its assetsMeasure how well a firm uses its assets
Activity Ratios
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Debt-to-EquityRatio
Debt-to-EquityRatio
Measures the relationship between the amount of debt financing and the
amount of equity financing.
Measures the relationship between the amount of debt financing and the
amount of equity financing.
Measure how well a firm uses its assetsMeasure how well a firm uses its assets
Debt Ratios
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8 Trends in Accounting
Role of accountants has been changing and expanding
Valuing knowledge assets
Canada Moves to International Financial Reporting Standards (IFRS)