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Saving..... Post Reply Close Saving..... Edit Comment Close Premium member Presentation Transcript CHAPTER 17 : 1 CHAPTER 17 Understanding Principles of Accounting Chapter Outline : 2 Chapter Outline What Is Accounting and Who Uses Accounting Information? Who Are Accountants and What Do They Do? Tools of the Accounting Trade Financial Statements Analyzing Financial Statements International Accounting What Is Accounting and Who Uses Accounting Information? : 3 What Is Accounting and Who Uses Accounting Information? Accounting is a comprehensive system for collecting, analyzing and communicating financial information Bookkeeping is the recording of transactions What Is Accounting and Who Uses Accounting Information? : 4 What Is Accounting and Who Uses Accounting Information? Accounting information system (AIS) is an organized means by which financial information is identified, measured, recorded and retained for use in accounting statements and management reports Users of Accounting Information : 5 Users of Accounting Information Business Managers Employees and Unions Investors and Creditors Tax Authorities Government Regulatory Agencies What is a Controller? : 6 What is a Controller? Person who manages all of a firm’s accounting activities (chief accounting officer Who Are Accountants and What Do They Do? : 7 Who Are Accountants and What Do They Do? Financial Versus Managerial Accounting Financial accounting system is concerned with external information users Managerial (or Management) accounting system serves internal users What is an Audit? : 8 What is an Audit? Systematic examination of a company’s accounting system to determine whether its financial reports fairly represent its operations What is GAAP (or Generally Accepted Accounting Principles)? : 9 What is GAAP (or Generally Accepted Accounting Principles)? Accepted rules and procedures governing the content and form of financial reports The Accounting Equation : 10 The Accounting Equation Assets = Liabilities + Owners’ Equity The Accounting Equation : 11 The Accounting Equation Asset is any economic resource expected to benefit a firm or an individual who owns it Liability is a debt owned by a firm to an outside organization or individual Owners’ equity is the amount of money that owners would receive if they sold all of a firm’s assets and paid all of its liabilities What is Double-Entry Accounting? : 12 What is Double-Entry Accounting? Bookkeeping system that balances the accounting equation by recording the dual effects of every financial transaction Financial Statements : 13 Financial Statements Balance sheets supply detailed information about the accounting equation factors: Assets Current Assets Fixed Assets Intangible Assets Financial Statements : 14 Financial Statements Balance sheets supply detailed information about the accounting equation factors: Liabilities Current Liabilities Long-Term Liabilities Owners’ Equity Common Stock Paid-in Capital Retained Earnings Perfect Posters’ Balance Sheet : 15 Perfect Posters’ Balance Sheet Financial Statements : 16 Financial Statements Income statement (or Profit-and-loss statement) lists a firm’s annual revenues and expenses so that a bottom line shows annual profit or loss. Three major categories: Revenues Cost of Goods Sold Gross Profit (or Gross Margin) Operating Expenses Operating and Net Income Perfect Posters’ Income Statement : 17 Perfect Posters’ Income Statement Financial Statements : 18 Financial Statements Statement of cash flows describes a firm’s yearly cash receipts and cash payments. Three activities: Cash Flows from Operations Cash Flows from Investing Cash Flows from Financing An Internal Financial Statement: What is the Budget? : 19 An Internal Financial Statement: What is the Budget? Detailed statement of estimated receipts and expenditures for a future period of time Perfect Posters’ Sales Budget : 20 Perfect Posters’ Sales Budget Slide 21: 21 Analyzing Financial Statements Solvency Ratio Financial ratio, either short- or long-term, for estimating the risk in investing in a firm Profitability Ratio Financial ratio for measuring a firm’s potential earnings Activity Ratio Financial ratio for evaluating management’s use of a firm’s assets Analyzing Financial Statements : 22 Analyzing Financial Statements Solvency ratios, both short- and long-term, estimate risk. They include: Short-Term Solvency Ratios Liquidity ratio measures a firm’s ability to pay its immediate debts Current Ratio Working Capital Slide 23: 23 Short-Term Solvency Ratios Liquidity Ratio Solvency ratio measuring a firm’s ability to pay its immediate debts Current Ratio Solvency ratio that determines a firm’s credit worthiness by measuring its ability to pay current liabilities Short-Term Solvency Ratios : 24 Short-Term Solvency Ratios Working Capital Difference between a firm’s current assets and current liabilities Quick (or Acid-Test) Ratio Solvency ratio for determining a firm’s ability to meet emergency demands for cash Quick Asset Cash plus assets one step removed from cash (marketable securities and accounts receivable) Slide 25: 25 Long-Term Solvency Ratios Debt Ratio Solvency ratio measuring a firm’s ability to meet its long-term debts Debt-to-Owners’ Equity Ratio (or Debt-to-Equity Ratio) Solvency ratio describing the extent to which a firm is financed through borrowing Debt A firm’s total liabilities Slide 26: 26 Profitability Ratios Net Profit Margin (or Return on Sales) Profitability ratio indicating the percentage of its income that is a firm’s profit Return on Equity Profitability ratio measuring income earned for each dollar invested Slide 27: 27 Profitability Ratios Earnings Per Share Profitability ratio measuring the size of the dividend that a firm can pay shareholders Slide 28: 28 Activity Ratios Inventory Turnover Ratio Activity ratio measuring the average number of times that inventory is sold and restocked during the year You do not have the permission to view this presentation. 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