14-1 Business in a Changing World Chapter 14 Accounting and Financial Statements McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc All rights 14-3 Carlos Slim Helu – once the richest man in the world Self-made man, Slim dabbles in soft drinks, printing, and tobacco Owns Mexico’s largest insurance company worth $2.5 billion 14-4 The Nature of Accounting Accounting, defined: The recording, measurement, and interpretation of financial information, often used in making business decisions 14-5 The Nature of Accounting GAAP – generally accepted accounting principles SEC – Securities & Exchange Commission provides oversight 14-6 Types of Accountants Public Accountant An independent professional who provides accounting services to the public (individuals or firms) for a fee • CPA (Certified Public Accountant) Private Accountant An accountant employed by a corporation, government agency, or other organization • CPA or a CMA (Certified Management Accountant) 14-7 Types of Accountants Forensic Accountants – utilize accounting, auditing, and investigative skills to check books of companies 14-8 Leading Accounting Firms Company 2007 Revenues ($ millions) 2008 Revenues ($ millions) “Big Four” PricewaterhouseCoop ers $7,616 $25,150 Ernst & Young $14,500 $21,000 Deloitte & Touche $6,8750 $9,800 KPMG $4,100 $19,800 Grant Thornton $635 $1,075 BDO Seidman $365 $589 McGladrey & Pullen No data $1,300 Second-Tier Firms 2008 Vault Accounting Firm Rankings 14-9 Types of Accountants Sarbanes-Oxley Act – increased job prospects for accountants and students with accounting degrees Higher demand for internal auditors 14-10 The Income Statement A financial report that shows an organization’s profitability over a period of time: – Month – Quarter – Year 14-25 Key Income Statement Terms • Revenue – Cost of goods sold – Gross income • Expenses – – – – Selling, general & administrative R&D, engineering Interest Depreciation • Net income 14-26 John’s Pizza Income Statement December 31, 2008 14-27 John’s Pizza Balance Sheet December 31, 2008 14-28 John’s Pizza Annual Budget for 2008 Sales Consulting Total January 6,500 5,000 11,500 February 6,000 6,000 12,000 March 5,800 6,200 12,000 April 6,100 6,500 12,600 May 7,000 6,800 13,800 June 8,100 7,600 15,700 July 8,600 7,800 16,400 August 6,900 8,000 14,900 September 6,700 8,700 15,400 October 5,900 9,000 14,900 November 5,000 8,500 13,500 December 4,500 8,000 12,500 Annual $123,850 $73,850 $197,700 14-29 The Balance Sheet • A “snapshot” of an organization’s financial position at a given moment – Presents an accumulation of all the company’s transactions since it began 14-30 Key Balance Sheet Terms • Assets – Current assets – Accounts receivable • Liabilities – Accounts payable – Accrued expenses • Owner’s equity 14-31 The Statement of Cash Flow • Explains how the company’s cash changed from the beginning of the accounting period to the end • Three categories: Cash from (used for) operating activities Cash from (used for) investing activities Cash from (used for) financing activities 14-32 Ratio Analysis • • • • • Profitability ratios Asset utilization ratios Liquidity ratios Debt utilization ratios Per share data 14-33 Profitability Ratios Profit margin = Net income Sales Return on assets = Net income Assets Return on equity = Net income Equity 14-34 Asset Utilization Ratios Receivables turnover = Sales Receivables Inventory turnover = Sales Inventory Total asset turnover = Sales Total assets 14-35 Liquidity Ratios Current ratio = Current assets Current liabilities Quick ratio = Current assets inventory Current liabilities 14-36 Debt Utilization Ratios Debt to total assets = Total debt Total assets Times interest earned = Income before interest & taxes Interest expense 14-37 Per Share Data Earnings per share = Net income Number of shares outstanding Dividends per share = Total dividends paid Number of shares outstanding 14-38 Industry Analysis Starbucks McDonald’s Profit margin 7.15% 10.51% Return on assets 12.59% 8.15% Return on equity 29.45% 15.67% Receivable turnover 32.69X 21.64X Inventory turnover 13.61X 182.30X Total asset turnover 1.76X 0.78X Current ratio 0.79X 0.80X Quick ratio 0.47X 0.77X Debt to total assets 57.26% 48.01% Times interest earned 29.86X 9.46X Earnings per share $0.87 $1.98 Dividends per share $0.00 $1.50 14-39 ... fee • CPA (Certified Public Accountant) Private Accountant An accountant employed by a corporation, government agency, or other organization • CPA or a CMA (Certified Management Accountant) 14-7... Uses of Accounting Information Internal uses: – Managerial accounting – Cash flow – Budget 14-13 Internal Uses Managerial accounting – internal use of accounting statements by managers in planning... summary of the firm’s financial information, products, and growth plans for owners and investors Audited financial statements – annual report signed by a CPA certifying accuracy 14-16 External Accounting