Business a changing world 7e by ferrell chap014

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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


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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
($ millions)

2008 Revenues
($ millions)

“Big Four”
PricewaterhouseCoop
ers

$7,616

$25,150

Ernst & Young

$14,500

$21,000

Deloitte & Touche

$6,8750

$9,800

KPMG

$4,100

$19,800

Grant Thornton

$635

$1,075

BDO Seidman

$365

$589

McGladrey & Pullen

No data

$1,300

Second-Tier Firms

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
Things of
value that
a firm
owns

=

Liabilities
A firm’s
debts and
obligations

+

Owners’ Equity
The difference
between a firm’s
assets and its
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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