Accounting and Finance

1. > > > > > > > >
Understanding
Accounting and
Financial Statements

2. Explain the functions and importance
of accounting, and identify the three
basic activities involving accounting.
Describe the roles of the financial
players in an organization and what
they do
Explain the functions and major
components of the four principal
financial statements: the balance
sheet, the income statement, the
statement of owner’s equity, and the
statement of cash flows.
Discuss how financial ratios are used to
analyze a company’s financial strengths
and weaknesses.
Describe the role of budgets in a
business.
Develop your financial intellgence and
understand better the whole aspects of a
business
Learning Goals
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3. Accounting
Accounting is the process of measuring, interpreting, and
communicating financial information to support internal and
external business decision making.

4. Business & Accounting
• Accounting is the universal language of Business and
Finance.
• More CEO’s from fortune 500 companies have come up
through the ranks of accounting than from any other area
in business. Currently: 54%
• Small businesses usually fail because of poor
accounting understanding.
• Marriages usually fail because of poor financial
management (80% of divorces are $$$$ related.)
• If you want to get ahead in business & marriage
determine that you are going to understand accounting
basics.

5. • Open book management - sharing sensitive financial
information with employees and teaching them how to
understand and use financial statements.
• Viewing financial information may help them better
understand how their work contributes to the
company’s success.
• Outsiders use financial data to evaluate investment
opportunities.
Open Book
Management

6. Business Activities
Involving Accounting
• Financing activities provide necessary funds to start a
business and expand it after it begins operating.
• Investing activities provide valuable assets required to
run a business.
• Operating activities focus on selling goods and services,
but they also consider expenses as important elements
of sound financial management.

7. The Players
• Chief Financial Officer (CFO) is involved in
management and strategy of the organization from a
financial perspective.
• Treasurer is responsible for banking relationships, cash
flow management, forecasting, investor relations, equity
and capital structure decisions.
• Controller has an internal focus- is responsible for
providing reliable and accurate financial reports including
general accounting, financial reporting, business
analysis, financial planning, asset management and
internal control.

8. The Accounting
Cycle
Accounting process - set of activities involved in
converting information about transactions
into financial statements.

9. Income Statement
ü Income Statement (Profit & Loss Statement)-
financial record of a company’s revenues and
expenses, and profits over a period of time.
ü Tries to measure whether the products or services that
a company provides are profitable when everything is
added up.
ü Reports profit or loss.
ü Focus on revenues and costs associated with
revenues.

10. Sample Income Statement

11. Income Statement – Example
Louise Jones’ Income Statement
(Month of Sept. 2016)
Revenue:
Income from Job $500
Income from Pell Grant 2000
Total Revenue: $2500
Expenses:
Clothes Expense $300
Rent Expense 200
Food Expense 50
Tuition Expense 1200
Misc. Expense 250
Total Expenses: $2000
Net Income for September: $ 500

12. Profit
§ Gross Profit- total revenues from sales- cost of
goods sold or services sold. It is what is left over after
the company has paid direct costs incurred in making
the product or delivering the service
§ Operating Profit (EBIT)- is gross profit minus
operating expenses, inlcuding depreciation and
amortization. It shows the profit made from running the
business.
§ Net Profit- is the bottom line of income statement,
what is left after all costs and expenses are
substracted from revenue.

13. • Assets - anything of value owned or leased by a business.
• Liability - claim against a firm’s assets by a creditor.
• Owner’s equity - all claims of the proprietor, partners, or
stockholders against the assets of a firm, equal to the excess of
assets over liabilities.
• Basic accounting equation - relationship that states that
assets equal liabilities plus owners’ equity.
• Double-entry bookkeeping - process by which accounting
transactions are entered; each individual transaction always has
an offsetting transaction.
The Accounting Equation

14. ü Balance sheet - statement of a firm’s financial
position—what it owns and the claims against its
assets (what is owns and what it ows)—at a particular
point in time.
ü Photograph of firm’s assets together with its liabilities
and owner’s equity
ü Follows the accounting equation:
Assets- Liabilities= Owners Equity
Balance Sheet

15. Sample Balance Sheet

16. Example (Simplified)
Louise Jones’ Business or Personal Records
Balance Sheet
•
• Assets:
– Current:
• Cash at Home $100
• Cash Deposits in Bank 500
– Fixed:
• Wardrobe 2000
• Equipment 1000
• Car 5000
– Total Assets: $8,600
• Liabilities:
– Current:
• Credit Card Payable $500
– Long Term:
• Note Payable (on Car) $2000
– Total Liabilities $2,500
• Capital, Louise Jones: 6,100
• Total Liabilities & Owners Equity: $8,600

17. Statement of
Owner’s Equity
ü Statement of Owner’s Equity - is designed to show
the components of the change in equity from the end
of one fiscal year to the end of the next.
ü Begins with the amount of equity shown on the
balance sheet.
ü Net income is added, and cash dividends paid to
owners are subtracted.

18. Sample Statement of
Owner’s Equity

19. Assessing Company’s
Health
ü Is the company solvent? - Do it’s assets outweigh its
liabilities, so that owner’s equity is a positive number?
ü Can the company pay its bills? – comparing current
assets (particularly cash) with current liabilities.
ü Has owner’s equity been growing over time? –
comparing owner’s equity in the balance sheets over
a period of time.

20. The Statement of
Cash Flows
ü Statement of cash flows - a firm’s cash receipts and
cash payments that presents information on its
sources and uses of cash.
ü 3 categories of accounts- cash inflows and outflows
from: operating activities, investing activities and
financing activities.

21. Cash is King
§ Turning profit into cash- Cash is a reality check for
how the business is run.
§ Cash is different from Profit (and you need both)
§ You will need real money to run a business, pay
people, pay your bills for electricity, phones,
computers, suppliers, etc. You can’t pay for all this
with profits.

22. Sample Statement of
Cash Flows

23. Financial Ratios Analysis
Ratio analysis - tool for measuring a firm’s liquidity, profitability,
and reliance on debt financing, as well as the effectiveness of
management’s resource utilization.

24. Liquidity Ratios
Acid-test (or quick)
ratio measures the
ability of a firm to meet
its debt payments on
short notice.
Cash and equivalents
+ short-term investments
+ accounts receivable
Total current liabilities
Current ratio compares
current assets to current
liabilities.
Total current assets
Total current liabilities

25. Activity Ratios
Inventory turnover
ratio indicates the
number of times
merchandise moves
through a business.
Cogs
Average of inventory
Total asset turnover ratio
indicates a business ability
to generate sales in
reaction to its total assets
Net sales
Average of total assets

26. Profitability Ratios
Profitability ratios measure the organization’s overall financial
performance by evaluating its ability to generate revenues in excess of
operating costs and other expenses.

27. • Leverage ratios measure the extent to which a firm relies on
debt financing.
• Total liabilities to total assets ratio 50 percent indicates that a
firm is relying more on borrowed money than owners’ equity.
Leverage Ratios

28. • Budget - planning and control tool that reflects a
firm’s expected sales revenues, operating expenses,
and cash receipts and outlays for un upcoming
accounting period.
• Management estimates of expected sales, cash
inflows and outflows, and costs.
• Budgets are a financial blueprint that serves as a
financial plan.
• Cash budget - tracks the firm’s cash inflows and
outflows.
Budgets

29. • Outlines a plan for managers and employees
• Fortifies effective pricing and spending efforts
• Benefits :
• Requires planning
• Enhaces communication
• Reinforces accountability
• Identifies problems
• Motivates employees
Importance of
Budgeting

30. Sample Budget

31. Quiz – Use a Pencil Today
• Which financial report is a “snapshot” of the of the financial status of a
business or a family…..and is given a specific date?
• Which financial report is a “moving picture” of the business/enterprise for a
period of time?
• What does a balance sheet balance?
• What are the two kinds of accounts found on an Income Statement?
• On what financial report(s) is the “cash” account found?
• What are the three subtitles of a income statement. (name them in the order
they are given on the report)
• If the bank wanted to know your “Net Worth” what report would they ask
for?
• Capital in a corporation is entitled ?