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Business in a
Changing World

Chapter 14
Accounting and Financial Statements

2
McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved.
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 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.

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The Nature of Accounting

Accounting, defined:
The recording, measurement, and interpretation
of financial information, often used in making
business decisions.
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The Nature of Accounting

GAAP – generally accepted accounting

principles.

SEC – Securities & Exchange Commission

provides oversight.
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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)

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Types of Accountants

Forensic Accountants – utilize accounting,

auditing, and investigative skills to check
books of companies.
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Leading Accounting Firms
Company 2007 Revenues 2008 Revenues
($ millions) ($ millions)

“Big Four”
PricewaterhouseCoop $7,616 $25,150
ers
Ernst & Young $14,500 $21,000
Deloitte & Touche $6,8750 $9,800
KPMG $4,100 $19,800
Second-Tier Firms
Grant Thornton $635 $1,075
BDO Seidman $365 $589
McGladrey & Pullen No data $1,300

2008 Vault Accounting Firm Rankings

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Types of Accountants

Sarbanes-Oxley Act – increased job prospects

for accountants and students with accounting
degrees. Higher demand for internal auditors.
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Accounting - Bookkeeping

Bookkeepers -- responsible for obtaining and recording

the information that accountants require to analyze a
firm’s financial position.
Accountants -- record financial information and
understand, interpret, and develop sophisticated
accounting systems necessary to classify and analyze
complex financial information.

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The Users of Accounting Information

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Uses of Accounting Information

Internal uses:
– Managerial accounting
– Cash flow
– Budget

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Internal Uses
Managerial accounting – internal use of accounting
statements by managers in planning & directing
the organization’s activities

Cash flow – movement of money through

organization over a daily, weekly, or monthly
basis

Budget – the internal financial plan that forecasts

expenses and income over a set period of time.

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Uses of Accounting Information

External uses:
– Reporting financial performance to outsiders
– Filing income taxes
– Obtaining credit
– Reporting to stockholders

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External Uses

Annual report – 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.

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External Accounting Information
Stockholders and Potential Investors
– Evaluate soundness
of investments

Government Agencies
– Confirm tax liabilities
– Confirm payroll
– Deductions
– Approve new issues of stocks and bonds

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Hertz Goes Green

Hertz’ “Green Collection” of fuel-efficient

automobiles and hybrids. Helps consumers make
environmentally responsible decisions.

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The Accounting Equation
The relationship between assets, liabilities, and
owners’ equity

Assets = Liabilities + Owners’ Equity

Things of A firm’s The difference

value that debts and between a firm’s
a firm obligations assets and its
owns liabilities

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Double-Entry Bookkeeping
A system of recording and classifying business
transactions in separate accounts in order to
maintain the balance of the accounting
equation.

Assets = Liabilities + Owners’ Equity

$325 = $325

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The Accounting Equation and Double-Entry
Bookkeeping for Anna’s Flowers

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The Accounting Cycle

1. Examining source documents

2. Recording transactions

3. Posting transactions

4. Preparing financial statements

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Financial Statements
The end results of the accounting process are a series
of financial statements.
– Income statement
– Balance sheet
– Statement of cash flows

Financial statements are provided to:

– Stockholders and potential investors
– Creditors
– Government agencies
– Internal Revenue Service

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GAAP

Generally Accepted Accounting Principles

(GAAP) -- Manufacturing firms, service providers, and
nonprofit organizations each use a different set of
accounting principles or rules upon which the
accounting profession has agreed.

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The Income Statement

A financial report that shows an organization’s

profitability over a period of time:
– Month
– Quarter
– Year

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Key Income Statement Terms
• Revenue
– Cost of goods sold
– Gross income

• Expenses
– Selling, general & administrative
– R&D, engineering
– Interest
– Depreciation

• Net income

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John’s Pizza Income Statement
December 31, 2008
Revenues:
Net Sales: $123,850
Consulting: 73,850
Total Revenues $197,700
Expenses:
Cost of Goods Sold $ 72,600
Selling Expenses: 37,700
General & Admin. 18,400
Other expenses 5,600
Total Expenses $134,300
Net Income $ 63,400

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John’s Pizza Balance Sheet December 31,
2008
Assets:
Current Assets:
Cash: $17,850
Accounts Receivable 10,200
Merchandise Inventory 8,750
Total Assets: $36,800
Property & Equipment
Equipment 11,050
Office Building 73,850
Total Prop. & Equip. 84,900
Total Assets: $121,700
Liabilities & Owner’s Equity
Current Liabilities
Acct’s Payable $12,600
Total Current Liabilities 12,600
Long-term Liabilities
Mortgage Payable 23,600
Total Liabilities 36,200
Owner’s Equity:
Anna Rodriguez, Capital 85,500
Total Liabilities & Owner’s Equity $121,700
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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

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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

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Key Balance Sheet Terms

• Assets
– Current assets
– Accounts receivable
• Liabilities
– Accounts payable
– Accrued expenses
• Owner’s equity

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The Statement of Cash Flow
• Explains how the company’s cash changed
from the beginning of the accounting period
to the end

• Three categories:
1. Cash from (used for) operating activities
2. Cash from (used for) investing activities
3. Cash from (used for) financing activities

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Ratio Analysis

• Profitability ratios
• Asset utilization ratios
• Liquidity ratios
• Debt utilization ratios
• Per share data

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Profitability Ratios
Profit margin = Net income
Sales
Return on = Net income
assets
Assets
Return on = Net income
equity
Equity

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Asset Utilization Ratios

Receivables = Sales
turnover
Receivables

Inventory turnover = Sales

Inventory

Total asset turnover = Sales

Total assets
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Liquidity Ratios

Current ratio = Current assets

Current liabilities

Quick ratio = Current assets -

inventory
Current liabilities

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Debt Utilization Ratios

Debt to total assets = Total debt

Total assets

Times interest = Income before interest &

earned taxes
Interest expense

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Per Share Data

Earnings per = Net income

share
Number of shares
outstanding

Dividends per = Total dividends paid

share
Number of shares
outstanding

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 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

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