Lecture Business: A changing world - Chapter 14: Accounting and financial statements

After reading this chapter, you will be able to: Define accounting and describe the different uses of accounting information; demonstrate the accounting process; decipher the various components of an income statement in order to evaluate a firm''s bottom line; interpret a company''s balance sheet to determine its current financial position; analyze financial statements, using ratio analysis, to evaluate a company''s performance; assess a company''s financial position using its accounting statements and ratio analysis.

Chapter Fourteen Accounting and Financial Statements     © 2003 McGraw­Hill Ryerson Limited Classification of  Accountants 14-1 Public  A licensed independent professional who  Accountant    provides accounting services to the public            (individuals or firms) for a fee May be a CA throughout Canada or a    CGA in certain provinces Private An accountant employed by a corporation,  Accountant    government agency, or other organization     © 2003 McGraw­Hill Ryerson Limited 14-2 Chartered Accountant    member of the Canadian  (CA)                Institute of Chartered            Accountants Certified General           member of the Certified         Accountant  (CGA)       General Accountant                             Association of Canada  Certified Management  member of the Society of the  Accountant (CGA)    Management Accountants of     Canada     © 2003 McGraw­Hill Ryerson Limited Favorite Recreational Activity by Chief  Financial Officers at Large Corporations 14-3   Activity Golf Reading Team sports   © 2003 McGraw­Hill Ryerson Limited % 21 14 10 Source: Accountemps from http://www.usatoday.com/, November 15, 1998 Accounting Information 14-4a   Management • • • • Lenders and suppliers • Evaluate credit risks   © 2003 McGraw­Hill Ryerson Limited Plan and set goals Organize Lead and motivate Control Accounting Information 14-4b   Shareholders and potential investors • Evaluate soundness of investments Government agencies • Confirm tax liabilities • Confirm payroll deductions • Approve new issues of stocks and bonds   © 2003 McGraw­Hill Ryerson Limited The Users of Accounting Information Business Activities Accounting 14-5 Management Owners, partners Boards of directors Officers of the company Managers Department heads Supervisors Those with Direct  Financial Interest Present or potential investors Present or potential creditors Those with Indirect Financial Interest Tax authorities Federal CCRA Provincial Municipal Other Regulatory Agencies Provincial Securities Commissions Economic Planners Federal Government Planners Stock exchanges Bank of  Canada Other agencies Prov. Govt planners Other groups Employees and labour unions Financial advisors Customers and the general public Actions That Affect Business Activities     © 2003 McGraw­Hill Ryerson Limited Source: Adapted from Needles, Belverd E., Henry R. Anderson, and James C.  Principles of Accounting, Fourth Edition. Copyright © 1990 by Houghton Mifflin. Used with permission The Accounting Equation 14-6 Assets =  Liabilities Things of value that a firm owns   A firm’s debts and obligations   © 2003 McGraw­Hill Ryerson Limited +   Owners’ equity The difference between a firm’s assets and its liabilities The Accounting Cycle 14-7 1. Examining     source     documents 4. Preparing     financial     statements   2. Recording     transactions 3. Posting     transactions   © 2003 McGraw­Hill Ryerson Limited Mark’s Income Statement 14-8     © 2003 McGraw­Hill Ryerson Limited Mark’s Balance Sheet 14-9     © 2003 McGraw­Hill Ryerson Limited Ratio Analysis 14-10   • • • • • Profitability ratios Asset utilization ratios Liquidity ratios Debt utilization ratios Per share data   © 2003 McGraw­Hill Ryerson Limited Profitability Ratios 14-11 Profit Margin Return on Assets Return on equity     © 2003 McGraw­Hill Ryerson Limited = Net income Sales = Net income Assets = Net income Equity Asset Utilization Ratios 14-12 Receivables turnover = Inventory turnover Return on equity     © 2003 McGraw­Hill Ryerson Limited Sales      Receivables = Sales Inventory = Sales Total Assets Liquidity Ratios 14-13 Current ratio Quick ratio     © 2003 McGraw­Hill Ryerson Limited = Current assets      Current liabilities = Current assets ­ Inventory Current liabilities Debt Utilization Ratios 14-14 Debt to total assets Times interest earned     © 2003 McGraw­Hill Ryerson Limited = Total debt      Total assets Income before interest & taxes = Interest expense Per Share Data 14-15 Net income Earnings per share   =     Number of  shares outstanding Dividends per  = share     © 2003 McGraw­Hill Ryerson Limited Total dividends paid Number of  shares outstanding Solve the Dilemma 14-16   a Describe the two basic accounting statements. What  type of information does each provide that can help  you  evaluate the situation? b Which of the financial ratios are likely to prove to be  of greatest value in identifying problem areas in the  company? Why? Which of your company’s financial  ratios might you expect to be especially poor? c Discuss the limitations of ratio analysis   © 2003 McGraw­Hill Ryerson Limited Explore Your Career Options 14-17 What contributions do accountants  make to organizations?     © 2003 McGraw­Hill Ryerson Limited Additional Discussion  Questions and Exercises 14-18a What is the accounting equation? Which financial statement  (income statement or balance sheet) is most similar to the  accounting equation? What is meant by the liquidity of assets? In measuring a firm’s performance, many investors and  managers prefer industry analysis or industry ratios. What  is  the advantage in using industry ratios?     © 2003 McGraw­Hill Ryerson Limited Additional Discussion  Questions and Exercises 14-18b How do public accountants, private accountants, and         certified public accountants differ? What are some different types of liabilities?     © 2003 McGraw­Hill Ryerson Limited Chapter 14 Quiz 14-19a Which generally appears on an income statement? a Assets = Liability + Owners’ equity b Revenue ­ Expenses = Profit or loss c Assets ­ Expenses = revenue d Current assets/Current liabilities An accountant who provides accounting services to individuals and/or  businesses for a fee is considered a a freelance accountant b public accountant c private accountant d local accountant     © 2003 McGraw­Hill Ryerson Limited Chapter 14 Quiz 14-19b Assume a firm’s inventory turnover was 25. That means a the firm made a 25 percent profit on its sales b the firm has sold and replaced its inventory 25 times in a year c the firm has 25 items in inventory d the firm needs to sell 25 items in inventory to make a profit The internal financial statement that forecasts expenditures and  revenues for a period is known as a a balance sheet b an income statement c a budget d an annual report     © 2003 McGraw­Hill Ryerson Limited ... the firm needs to sell 25 items in inventory to make a profit The internal financial statement that forecasts expenditures and revenues for a period is known as a a balance sheet b an income statement c a budget d an annual report... Plan and set goals Organize Lead and motivate Control Accounting Information 1 4-4 b   Shareholders and potential investors • Evaluate soundness of investments Government agencies • Confirm tax liabilities... Government Planners Stock exchanges Bank of  Canada Other agencies Prov. Govt planners Other groups Employees and labour unions Financial advisors Customers and the general public Actions That Affect Business Activities