Fourth Edition PART Managing Information Copyright ©2003 Prentice Hall, Inc Chapter 13 Understanding Principles of Accounting Copyright ©2003 Prentice Hall, Inc 13 - “I am incredibly nervous that we will implode in a wave of accounting scandals” ~ Sherron Watkins, Enron Vice President, four months prior to Enron’s collapse Copyright ©2003 Prentice Hall, Inc 13 - Key Topics The role of public and private accountants The CPA vision project The accounting equation and double-entry accounting Basic financial statements Key financial ratios Accounting in international businesses Copyright ©2003 Prentice Hall, Inc 13 - What Is Accounting? A A comprehensive comprehensive system system for for collecting collecting,, analyzing analyzing and and communicating communicating financial financial information information Users of accounting information: Business managers Tax authorities Employees and unions Government regulatory agencies Investors and creditors Copyright ©2003 Prentice Hall, Inc 13 - Accountants and Their Responsibilities Controller: Managers all of a firm’s accounting activities Financial Accounting Managerial Accounting Copyright ©2003 Prentice Hall, Inc 13 - Accountants and Their Responsibilities Certified public accountants (CPAs) Auditing and GAAP Tax services Management advisory services Non-certified public accountants Private accountants Copyright ©2003 Prentice Hall, Inc 13 - The CPA Vision Project Identifying issues for the future Global forces as drivers of change Recommendations A new direction Core services Core competencies Copyright ©2003 Prentice Hall, Inc 13 - Global Forces Impacting the New CPA Profession Technical Forces Economical Forces Political Forces Social Forces Human Resource Forces Regulatory Forces Copyright ©2003 Prentice Hall, Inc 13 - Key Tools of the Accounting Trade Accounting Equation Assets = Liabilities + Owners’ Equity Assets – Liabilities = Owners’ Equity Double-Entry Double-Entry Accounting Accounting Every Every transaction transaction affects affects two two accounts accounts Copyright ©2003 Prentice Hall, Inc 13 - 10 Financial Statements Balance Sheets Income Statements Statements of Cash Flows Copyright ©2003 Prentice Hall, Inc 13 - 11 Perfect Posters’ Balance Sheet Example ASSETS Copyright ©2003 Prentice Hall, Inc 13 - 12 Perfect Posters’ Balance Sheet Example LIABILITIES & OWNER'S EQUITY Copyright ©2003 Prentice Hall, Inc 13 - 13 Perfect Posters’ Income Statement Example Copyright ©2003 Prentice Hall, Inc 13 - 14 Statements of Cash Flows Cash flows from: Operations Investing Financing Copyright ©2003 Prentice Hall, Inc 13 - 15 Perfect Posters’ Sales Budget Example Copyright ©2003 Prentice Hall, Inc 13 - 16 Reporting Standards and Practices Revenue Recognition Matching Full Disclosure Copyright ©2003 Prentice Hall, Inc 13 - 17 Analyzing Financial Statements Solvency Ratios Profitability Ratios Activity Ratios Copyright ©2003 Prentice Hall, Inc 13 - 18 Short Term Solvency Ratios Current Ratio: Current Assets Current Liabilities Working Capital: Current Assets – Current Liabilities Copyright ©2003 Prentice Hall, Inc 13 - 19 Long-term Solvency Ratios Debt to Owners’ Equity Ratio: Debt Owners’ Equity Leverage: Ability to finance an investment through borrowed funds Copyright ©2003 Prentice Hall, Inc 13 - 20 Profitability and Activity Ratios Return on Equity: Earnings Per Share: Inventory Turnover Ratio: Copyright ©2003 Prentice Hall, Inc Net Income Total Owners' Equity Net Income # of Shares Outstanding Cost of Goods Sold Average Inventory 13 - 21 International Accounting Foreign Currency Exchange International Accounting Standards International Transactions Copyright ©2003 Prentice Hall, Inc 13 - 22 Chapter Review Explain the role of accountants, public and private Discuss the CPA Vision Project Explain the accounting equation and doubleentry accounting Describe the three basic financial statements Copyright ©2003 Prentice Hall, Inc 13 - 23 Chapter Review Explain how key financial ratios can help analyze the financial strength of a business Explain some of the special issues facing accountants at firms that international business Copyright ©2003 Prentice Hall, Inc 13 - 24