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Accounting and Financial Management Chapter 7 7-1 ©2007 Prentice Hall Chapter 7 Objectives After studying this chapter, you will be able to: • Discuss how managers and outsiders use financial information • Describe what accountants do • Summarize the impact of the Sarbanes-Oxley Act • State the basic accounting equation and explain the purpose of double-entry bookkeeping and the matching principle 7-2 ©2007 Prentice Hall Chapter 7 Objectives, cont. • Differentiate between cash basis and accrual basis accounting • Explain the purpose of the balance sheet and identify its three main sections • Explain the purpose of the income statement and statement of cash flows • Explain the purpose of ratio analysis and list the four main categories of financial ratios • Identify the responsibilities of a financial manager 7-3 ©2007 Prentice Hall Understanding Accounting Financial Accounting Management Accounting Interpreting Measuring Communication Decision Making 7-4 ©2007 Prentice Hall What Accountants Do Bookkeeping Cost Accounting Tax Accounting Financial Analysis 7-5 ©2007 Prentice Hall Ten Most Important Accounting Skills • Analytical • Leadership • Problem solving • Decision making • Interpersonal • Time management • Listening • Teamwork • Communication • Computer 7-6 ©2007 Prentice Hall Types of Accountants Private CPA CMA Public Internal Audit CPA External Audit 7-7 ©2007 Prentice Hall The Big Four • Deloitte & Touche • Ernst & Young • KPMG • Price Waterhouse Coopers 7-8 ©2007 Prentice Hall The Arthur Anderson Scandal • Deliberate deception by corporate clients • Changes in accounting practices • Conflict of interests • Overly aggressive business practices 7-9 ©2007 Prentice Hall The Rules of Accounting Generally Accepted Accounting Principles (GAAP) Financial Accounting Standards Board (FASB) International Securities and Accounting Standards Exchange Commission (IAS) (SEC) 7-10 ©2007 Prentice Hall Sarbanes-Oxley Act Advantages Disadvantages Authority of Auditors Implementation Conflict of Interest Cost of Compliance Investor Protection Enforcement Issues Corporate Accountability Reporting Requirements 7-11 ©2007 Prentice Hall The Accounting Equation Owner’s Equity: Assets – Liabilities = Owner’s Equity Accounting Equation: Assets = Liabilities + Owner’s Equity 7-12 ©2007 Prentice Hall Double-Entry Bookkeeping • Debit • Credit 7-13 ©2007 Prentice Hall Matching Principle • Accrual basis • Cash basis 7-14 ©2007 Prentice Hall How Are Financial Statements Used? 7-15 ©2007 Prentice Hall Understanding Financial Statements • Balance Sheet • Income Statement • Statement of Cash Flows 7-16 ©2007 Prentice Hall The Balance Sheet Assets Current Assets Fixed Assets Liabilities and Shareholder’s Equity Current Liabilities Long-Term Liabilities Shareholder’s Equity 7-17 ©2007 Prentice Hall The Income Statement Revenues Gross Sales – Returns and Allowances Cost of Goods Sold Beginning Inventory + Purchases – Cost of Goods – Ending Inventory Operating Expenses Selling Expenses + General Expenses Net Operating Income Gross Profit + Other Income – Operating Expenses Net Income After Taxes Net Income Before Taxes – Income Taxes 7-18 ©2007 Prentice Hall Statement of Cash Flows • Operations • Investments • Financing 7-19 ©2007 Prentice Hall Analyzing Financial Statements Ratio Analysis Trend Analysis Uncover Business Shifts Consider Extraordinary Circumstances Consider More Than One Ratio Check Specific Data 7-20 ©2007 Prentice Hall Types of Financial Ratios Profitability Ratio Liquidity Ratio Activity Ratio Leverage Ratio 7-21 ©2007 Prentice Hall Profitability Ratio Return on Sales = Net Income Net Sales Return on Equity = Net Income Total Owner’s Equity Earnings per Share = Net Income Average Shares Outstanding 7-22 ©2007 Prentice Hall Liquidity Ratio Working Capital = Current Assets Current Liabilities Current Ratio = Current Assets Current Liabilities Quick Ratio = Current Assets - Liabilities Current Liabilities 7-23 ©2007 Prentice Hall Activity Ratios Inventory Turnover = Cost of Goods Sold Average Inventory Receivables Turnover = Sales Average Accounts Receivable 7-24 ©2007 Prentice Hall Leverage (Debt) Ratio Debt to Equity = Total Liabilities Total Equity Debt to Total Assets = Total Liabilities Total Assets 7-25 ©2007 Prentice Hall Understanding Financial Management Develop and Implement a Financial Plan Amount of funds Sources of funds Uses of funds Monitor Cash Flow Cash Inventory Receivables and payables Develop a Budget Financial control Capital investments Capital budgeting 7-26 ©2007 Prentice Hall Financial Management Length of Term Cost of Capital Debt or Equity 7-27 ©2007 Prentice Hall
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