1. Small Business Accounting
Projecting and Evaluating
Performance
Chapter 13
McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

2. Learning Objectives
LO1 Review the basic concepts of accounting
LO2 Specify the requirements for a small business
accounting system
LO3 Explain the content and format of common
financial statements
LO4 Use accounting information as a tool for
managing your business effectively
LO5 Develop a complete set of budgets for your
business
LO6 Use accounting information to make better
business decisions
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3. Why Accounting Matters
 Proves what your business did financially
 Shows how much your business is worth
 Banks, creditors, development agencies,
and investors require it
 Provides easy-to-understand plans for
business operations
 You can’t know how your business is doing
without it
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4. Types of Accounting
 Managerial accounting
– Accounting methods that are specifically
intended to be used by managers for
planning, directing, and controlling a
business.
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5. Types of Accounting
 Tax accounting  Financial
– An accounting accounting
approach based – A formal, rule-based
on specific set of accounting
accounting principles and
requirements set procedures
by governmental intended for use by
taxing agencies. outside owners,
investors, banks, and
regulators.
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6. Basic Accounting Concepts
 Business entity  Going concern
concept concept
– The concept that a – The accounting
business has an concept that a
existence separate business is
from that of its expected to
owners. continue in
existence for the
foreseeable future.
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7. The Accounting Equation
 Accounting equation
– The statement that assets equal liabilities
plus owner’s equity (assets liabilities
owners’ equity).
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8. The Accounting Equation
 Asset
– something the business owns that will have
value in the future
 Liability
– a legal obligation to pay some amount at a
time in the future.
 Owners’ equity
– whatever value is left after all liabilities have
been paid.
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9. Revenues, Expenses, and Costs
 Cost  Expense
– The value given up – A decrease in
to obtain owners’ equity
something that you caused by
want. consuming your
product or service.
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10. Information Usefulness
Only two reasons to do accounting:
1.To produce information that is useful to
you for managing your business
2.To meet legal or contractual
requirements
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11. Why Does Accounting Matter?
 MACRS rate
– the Modified Accelerated Cost Recovery
System
– lets taxpayers depreciate more of the
cost earlier
 Depreciation
– Regular and systematic reduction in
income that transfers asset value to
expense over time.
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12. Accounting Systems for Small
Business
 Computerized systems simplify the
accounting process by providing
automatic error checking, entry
screens that look like the common
business forms, and automatic
production of financial statements and
management reports.
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13. Financial Reports
 Financial statements
– Formal summaries of the content of an
accounting system’s records of
transactions.
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14. Financial Reports
 Five common financial statements
– Income statement
– Statement of retained earnings
– Statement of owner’s equity
– Balance sheet
– Cash flow statement
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15. Flow of
Information
in
Financial
Statements
Figure 13.1
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16. Financial Reports
 Retained earnings
– The sum of all profits and losses, less all
dividends paid since the beginning of the
business.
 Articulate
– The concept that information flows from
the income statement through the
statements of retained earnings and
owners’ equity to the balance sheet.
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17. Everyday Financial Documents
and Similar Financial Reports
Figure 13.2
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18. Financial Reports
 Income statement
– A statement that lists revenues and
expenses and shows the amount of profit
a business makes for a specified period of
time.
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19. Organization of the
Income Statement
Figure 13.3
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20. Typical Single-Step Format
Income Statement
Figure 13.4A
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21. Typical Multiple-Step
Income Statement
Figure 13.4B
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22. Financial Reports
 Balance sheet
– A statement of what a business owns
(assets), what it owes to others (liabilities),
and how much value the owners have
invested in it (equity).
 Liquidity
– A measure of how quickly a company can
raise money through internal sources by
converting assets to cash.
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23. Organization of the
Balance Sheet
Figure 13.5
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24. Typical
Balance
Sheet
Figure 13.6 13-24

25. Balance Sheet
 Financial flexibility
– A business’s ability to manage cash flows
in such a manner that the company can
respond appropriately to unexpected
opportunities and needs.
 Financial strength
– The ability of a business to survive adverse
financial events.
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26. Cash Flow Statement
 Cash flow statement
– A statement of the sources and uses of cash
in a business for a specific period of time.
 GAAP
– Generally Accepted Accounting Principles
are the standardized rules for accounting
procedures
– used in all audits and submissions of
accounting reports to the government.
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27. Typical Cash Inflows and Outflows
on the Cash Flow Statement
Figure 13.7 13-27

28. Cash Flow Statement
 Operating activities  Financing activities
– Activities involved in – Activities through
producing and which cash is
selling goods and obtained from and
services. paid to lenders,
 Investing activities owners, and
investors.
– The purchase and
sale of land,
buildings,
equipment, and
securities.
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29. Uses of Financial Accounting
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30. Uses of Managerial Accounting
 External (cost)  Internal (cost)
factors factors
– Aspects of the – Aspects of or
world outside the choices within the
business which business which
could cause the could cause the
business’s costs to business’s costs to
change. change.
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31. Uses of Managerial Accounting
 Cost-volume-profit analysis
– A managerial accounting technique
which looks at the fixed and variable costs
of a business to arrive at a number of unit
sales (volume) to maximize profits.
– Variable, fixed costs
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32. Total Costs
Figure 13.8
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33. Breakeven Point
 Breakeven point
– The point at which
total costs equal
gross revenue.
Figure 13.11
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34. The Business Plan and the
Budget Process
 Budget
– A financial plan for the future, based on a
single level of operations; a quantitative
expression of the use of resources
necessary to achieve a business’s
strategic goals.
 Pro forma
– indicates estimated or hypothetical
information
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35. Budgeting Relationships
Figure 13.2
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36. The Business Plan and the
Budget Process
 Master budget
– A budget which consists of sets of
budgets that detail all projected receipts
and spending for the budgeted period.
– also referred to as a comprehensive
budget
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37. The Business Plan and the
Budget Process
 Cost of goods sold budget
– A schedule that shows the predicted cost
of product actually sold during the
accounting period.
 Activity-based cost estimates
– An accounting method which assigns
costs based on the different types of work
a business does in order to sell a particular
product or service.
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38. Controlling
 Variance
– The difference between an actual and
budgeted revenue or cost
 Variance analysis
– The process of determining the effect of
price and quantity changes on revenues
and expenses.
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39. Controlling
 Favorable/unfavorable variance
– A label applied to variances to indicate
their effect upon the income statement;
– Favorable variances would result in profits
being greater than budgeted, all other
things being equal;
– Unfavorable variances would result in
profits being less than budgeted, all other
things being equal.
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40. Decision Making
To make good decisions we need:
1.Good information
2.Efficient ways to condense information
so it is understandable
3.Methods to help compare
alternatives.
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