Accounting and Financial Management

Chapters 17 and 18

BCEN 1400

Why Do We Need Accounting?

• Accounting:– Recording, classifying,

summarizing, and interpreting financial data

– Helps us to gauge how well the firm is performing and to report this

Types of Accounting

• Managerial– Measures cost and budget

information

• Financial – Preparation for external

users– FASB

• Financial Accounting Standards Board

• GAAP

• Auditing

• Tax

• Government

Becoming an Accountant

• Bachelor’s in Accounting

• CPA, CIA, CMA

• Forensic accounting

• Faster than average job growth– Sarbanes-Oxley Act

• Public Company Accounting Oversight Board

• Median salary: $51,000

The Accounting Cycle

Enter transactionsinto journals

Transfer transactionsto ledger

Prepare atrial balance

Create financialstatements

Read and analyzefinancials

The Financial Statements

• Balance Sheet– Snapshot of what the firm owns

• Income Statement– Revenue versus costs over a period of time

• Statement of Cash Flows– Inflow and outflow of cash over period of time

The Most Important Equation You Will Need in Accounting

The Balance Sheet

• Assets:– Current Assets– Fixed Assets– Intangible Assets

• Liabilities– Accounts payable, notes payable, bonds payable

• Owners’ Equity

The Income Statement

• Revenue– Monies earned by the firm

• Cost of Goods Sold– Production, raw materials, storage, piecerate labor– FIFO versus LIFO

• Operating Expenses

• Net Profit – Retained Earnings

Statement of Cash Flows

• Separated into Cash Flows from Operations, Investing, and Financing

• Operations– Sales, COGS, expenses, purchases, bills, taxes,

interest paid and received

• Investing– New equity, equipment

• The Importance of Cash

Ratios

• Help to compare year to year and compare your firm to others of different sizes

• Liquidity – how fast could you cover your debt?– Current ratio

• Can also do working capital (CA-CL)

– Quick ratio

Current AssetsCurrent Liabilities

Current Assets - Inventory Current Liabilities

Ratios

• Leverage– Debt-to-equity– Why it’s important to keep this level

• Profitability– Profit margin– Earnings per share– Return on equity

Long-Term DebtOwners Equity

Net Profit Sales

Net Profit # Shares Outstanding

Net Profit Owners Equity

Ratios

• Activity ratios– Inventory turnover

Cost of Goods SoldAverage Inventory