Managing information

Fourth Edition
PART 5 . . . . . . . . . . . . . . . . . . . . . . . .

Managing Information

Copyright ©2003 Prentice Hall, Inc.


Chapter 13

Understanding Principles
of Accounting

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“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

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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
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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
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Accountants and Their Responsibilities
Controller:
Managers all of a firm’s
accounting activities
Financial Accounting
Managerial Accounting
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Accountants and Their Responsibilities
Certified public accountants (CPAs)
Auditing and GAAP
Tax services
Management advisory services

Non-certified public accountants
Private accountants

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The CPA Vision Project
Identifying issues for the
future
Global forces as drivers of
change
Recommendations
A new direction
Core services
Core competencies
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Global Forces Impacting the New CPA
Profession
Technical Forces
Economical Forces
Political Forces
Social Forces
Human Resource Forces
Regulatory Forces
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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
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Financial Statements
Balance Sheets
Income Statements
Statements of Cash
Flows

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Perfect Posters’

Balance
Sheet
Example
ASSETS

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Perfect Posters’

Balance
Sheet
Example
LIABILITIES
& OWNER'S
EQUITY

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Perfect Posters’

Income

Statement
Example

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Statements of Cash Flows
Cash flows from:
Operations
Investing
Financing
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Perfect Posters’

Sales
Budget
Example

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Reporting Standards and Practices

Revenue Recognition
Matching
Full Disclosure
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Analyzing Financial Statements

Solvency
Ratios

Profitability
Ratios

Activity
Ratios
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Short Term Solvency Ratios
Current Ratio:
Current Assets
Current Liabilities
Working Capital:
Current Assets – Current Liabilities

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Long-term Solvency Ratios
Debt to Owners’ Equity Ratio:
Debt
Owners’ Equity
Leverage:
Ability to finance an investment through
borrowed funds
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Profitability and Activity Ratios
Return on Equity:

Earnings Per Share:

Inventory Turnover Ratio:
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Net Income
Total Owners' Equity
Net Income
# of Shares Outstanding

Cost of Goods Sold
Average Inventory
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International Accounting
Foreign
Currency
Exchange

International
Accounting
Standards

International
Transactions
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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
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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 do international
business

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