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CH. 8 Accounting

by: Ashli Rutledge

CH. 8 Accounting BUS100

Ashli Rutledge

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BUS 100 Professor Olsen From the Kelly/Williams BUSN: Introduction to Business, Edition 8 Lecture and book notes from the chapter. Outline of each section with important details and definitio...
Introduction to Business
Professor Olsen
Class Notes
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This 7 page Class Notes was uploaded by Ashli Rutledge on Tuesday November 3, 2015. The Class Notes belongs to BUS100 at Central Michigan University taught by Professor Olsen in Fall 2015. Since its upload, it has received 17 views. For similar materials see Introduction to Business in Business at Central Michigan University.

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Date Created: 11/03/15
Ch.8 LECTURE: Guest Instructor: Amy Swaney Accounting: Decision Making by the Numbers Financial Acct: external users (investors, creditors, suppliers, gov’t) -historical costs from past decisions -standard reports prepared quarterly and/or annually -focus on financial data Managerial Acct: internal users (managers, board of directors) -oriented to future costs and decisions -reports prepared as needed for making timely decisions -both financial and nonfinancial data 4 Basic Financial Statements: 1. Income Statement 2. Statement of Retained Earnings 3. Balance Sheet 4. Statement of Cash Flows Income Statement: Net income= Revenues- Expenses Revenues: sales of goods or services to customers. Revenues are recorded at sale whether or not cash is received.  Revenue Recognition Principle Expenses: costs of doing business including labor materials, ads, utilities. Expenses are recorded when the products are sold.  Matching Principle Balance Sheet: Assets= Liabilities + Stockholders’ Equity Assets: resources owned by the company Liabilities: resources owned to creditors Stockholders’ Equity: resources owned to stockholders What happens when the company borrows $1k? Assets (cash) increases by $1k Liabilities (loan) increases by $1k This is Double Entry Accounting Management Accounting for Decision Making Direct Costs: costs that can be easily traced to the end product ex: meat, spices, labor, utilities. Indirect Costs: not easily traced to product ex: store manager wages Variable Costs: vary directly with the level of production ex: meat, spices, labor, utilities. Fixed Costs: remain the same when the level of production changes within some relevant range ex: store manager wages Costing Methods: GET REST OF NOTES BUSN: Introduction to Business. Kelly/ Williams Book. Student Edition 8 Ch. 8 Accounting: Decision Making by the Numbers 8-1 Accounting: Who Needs it—and Who Does it? pg. 118 Accounting: is a system for recognizing, organizing, analyzing and reporting information about financial transactions that affect an organization. The goal of this system is t provide its users with relevant, timely information that helps them make better economic decisions. Who needs accounting? Well those who want to make good decisions. Business stakeholders rely heavily on accounting information that its sometimes called, “Language of business”. 8-1a Accounting: Who Uses It? pg. 118 Key Users: -Managers: Marketing managers, need the info for sales in various regions and for various product lines. Financial mangers need up to date facts about debt, cash, inventory, and capital. -Stockholders: as owners of the company have a keen interest. -Employees: strong financial performance would help employees make their case. -Creditors -Suppliers: companies that provide supplies want to know that the company can pay for the orders it places. Government Agencies: critical for meeting the reporting requirements of the IRS, SEC, and other federal and state agencies. 8-1b Accounting: Who Does It? pg. 119 Roles accountants play: Public accountants: tax preparation, external auditing or management consulting. Management accountants: work within a company and provide analysis, prepare reports and financial statements. Government Accountants: accounting for local, state, or federal government agencies. Some work for the IRS to audit tax returns or other government agencies, like SEC or FDIC. To insure that the national financial institutions comply with the rules and regulations governing their behavior. 8-2 Financial Accounting: Intended for Those on the Outside Looking In pg. 120 Financial accounting: branch of accounting that prepares financial statements for use by owners, creditors, supplies and other external stakeholders. These stakeholders are interested in the financial performance of the firm as a whole, how it has changed over a period of several years or to compare its results to other firms in the same industry. 8-2a Role of the Financial Standards Accounting Board: pg. 120 Generally accepted accounting principles (GAAP): a set of accounting standards that is used in the preparation of financial statements. The U.S SEC has legal authority to set and enforce accounting standards. Financial Accounting Standards Board (FASB): private board that establishes the generally accepted accounting principles used in the practice of financial accounting. This board has seven members appointed by the Financial Accounting Foundation. Each member serves for five years and can be re-appointed to serve one additional term. GAAP & FASB aim to insure that financial statements are: - Relevant: must contain information that helps the user understand the firm’s financial performance and condition - Reliable: they must provide information is objective, accurate, and verifiable. - Consistent: must provide financial statements based on the same core assumptions and procedure over time. GAAP requires it to clearly identify and describe these changes. - Comparable: must present accounting statements in a reasonably standardized way, allowing users to track the firm’s financial performance over a period of years and compare its results with those for other firms. The FASB is constantly modifying, clarifying, and expanding GAAP as business practice evolve and new issues arise. 8-2b Ethics in Accounting: Caterpillar = $580 Million Waste Management= $1.5 Billion Hewlett Packard= $8.8 Billion Examples of accounting fraud were debts were hidden or earnings overstated by half a billion to $11 billion or more. Wake up call to the accounting profession that their ethical training and standards needed major improvement. Then the board passed new ethic requirements. 8-3 Financial Statements: Read All About Us one of the major responsibilities of financial accounting is the preparation of three basic financial statements: balance sheet, income statement, and state of cash flows. These financial statements provide external stakeholders with a broad picture of an organization’s financial condition and its recent financial performance. 8-3a The Balance Sheet: What We Own and How We Got It Balance sheet: summarizes a firm’s financial position at a specific point in time, reporting the value of the firm’s assets, liabilities, and owner’s equity. Accounting equation: assets= liabilities + owner’s equity  Assets: are things of value that the firm own. Balance sheets classify assets into two: current assets & accounts receivable current assets- cash accounts receivable- money owed to the company inventory- products- used at the company prepaid expenses- insurance or prepaid advertising, that have been paid before they are due. Property, plant, and equipment- company’s land, buildings, machinery, equipment, and other long term assets. Accumulated depreciation- the company’s carrying value Intangible assets- no physical existence, can’t touch them, but they still have value. Ex: copyrights, patents, trademarks.  Liabilities: indicate what the firm owes to non- owners or the claims non-owners have against the firm’s assets. Balance sheets classify liabilities into two: current liabilities and long- term liabilities Current liabilities- are debts that come due within a year of the date on the balance sheet. Long term liabilities- debts that don’t come due until more than a year after the date on the balance sheet.  Owner’s (or Stockholder’s) Equity: refers to the claims the owners have against their firm’s assets. Specific accounts listed in the owner’s equity section of a balance sheet depend on the form of business ownership. common stock- is a key owners’ equity account for corporations. Owners’ equity- the claims a firm owners have against their company’s assets. (labeled ‘stockholder’s equity’ on balance sheets of corporations) 8-3b The Income Statement: So, How Did We Do? Income statement: summarizes the financial results of a firm’s operations over a given period of time. Formula for finding Net Income: Revenue- Expenses= Net Income  Revenue: increase in the amount of cash and other assets like (accounts receivable) the firm earns in a given time period as a result of its business activities. Accountants use accrual-basis-accounting: method of accounting that recognizes revenue when it is earned and matches expenses to the revenues they helped produce.  Expenses: indicates the cash a firm spends, or other assets it uses up to, carry out the business activities necessary to generate its revenue.  Net Income: profit or loss the firm earns in the time period covered by the income statement. -if income is positive it’s a profit -if income is negative it’s a loss 8-3c The Statement of Cash Flows: Show Me the Money statement of cash flows: financial statement that identifies a firm’s sources and uses of cash in a given accounting period. The statement identifies the amount of cash flowed into and out the firm from three types of activities: 1. Cash flows from operating activities show the amount of cash that flowed into the company from the sale of goods, or services as well as cash from dividends and interest received from ownership of the financial securities of other firms. 2. Cash flows from investing activities show the amount of cash received from the sale of fixed assets (land and buildings) and financial assets bought as long-term investments. 3. Cash flows from financing activities show that cash the firm received from issuing additional shares of its own stock or from taking out long term loans. 8-3d Other Statements: What happened to the Owners’ Stake? Statement of retained earnings: simple statement that shows how retained earnings have changed from one accounting period to the next. 8-4 Interpreting Financial Statements: Digging Beneath the Surface 8-4a The Independent Auditor’s Report Getting a Stamp of Approval U.S securities laws require publicly traded corporations in the US to have independent CPA firm perform an annual external audit of their financial statements. (CPA: accounting firm that specializes in providing public accounting services) Purpose of an audit is to verify that the company’s financial statements are in according to the generally accepted accounting principles and fairly present the financial condition of the firm. The results of an audit are presented in an independent auditor’s report, that’s included in the annual report the firm sends to its stockholders. 8-4b Checking Out the Notes to Financial Statements: What’s in the Fine Print? Annual reports include notes that disclose additional information about the firm’s operations, accounting practices, and special circumstances that clarify and supplement the numbers reported on the financial statements. Notes explain the specific accounting methods used to recognize revenue, value inventory, depreciate fixed assets, pension plans, and employee health insurances. Another important section of the annual report is “Management’s Discussion and Analysis”: top management team provides it take on the financial condition of the company. 8-4c Looking for Trends in Comparative Statements SEC requires publicly traded corporations to provide comparative financial statements. Balance sheet, income statement, and statement of cash flows must list two or more years of figures side by side. Comparative balance sheets allow users to trace what has happened to key assets and liabilities over the past two or three years. Comparative income statements show whether the firm’s net income increased or decreased and what has happened to revenues and expenses over recent years. Horizontal analysis: identifying changes in key account values over time. 8-5 Budgeting: Planning for Accountability budgeting: management tool that explicitly shows how a firm will acquire and use the resources needed to achieve its goals over a specific time period. Advantages of budgeting: -helps managers specify how they intend to achieve their goals. -encourages communication and coordination among. -serves a motivational tool. -helps managers evaluate progress and performance. 8-5a Preparing the Budget: Top-Down or Bottom-Up? Two approaches to budget preparation: 1. Top management prepares the budget with little or no input from middle and supervisory managers known as— top-down budgeting. 2. Organizations that use a participatory process allow middle and supervisory managers to participate actively in the creation of the budget known as— bottom-up budgeting. 8-5b Developing the Key Budget Components: One Step at a Time operating budgets: budgets that identify projected sales and production goals and the various costs the firm will incur to meet these goals. Financial budgets: focus on the firm’s financial goals and identify the resources needed to achieve these goals. Two main financial budget documents are the cash budget and capital expenditure budget. Cash budget identifies short term fluctuations in cash flows, helping managers identify times when the firm might face cash flow problems. Capital expenditure identifies the firm’s planned investments in major fixed assets and long- term projects. Budgeted balance sheet: is the last financial budget; shows ho the firm’s operations, investing, and financing activities are expected to affect all of the asset, liability, and owner’s equity accounts. Master budget: organizes the operating and financial budgets into a unified whole, representing the firm’s overall plan of action for a specified time period. 8-5c Being Flexible: Clearing Up Problems with Static static budget: based on a single assumed level of sales. Excellent for planning but are weak when measuring progress, evaluate performance and identify problem areas that need correcting. Managerial (or management) accounting: branch of accounting that provides reports and analysis to managers to help them make informed business decisions. To avoid problems the develop a flexible budget. It’s a budget that isn’t based on a single assumed level of sales. The flexibility enables managers to make more meaningful comparisons between actual costs and budgeted costs. 8-6 Inside Intelligence: The Role of Managerial Accounting: designed to meet the needs of a company’s managers, though in recent years many firms have empowered other employees and given them access to some of this information as well. Measuring and assigning costs, and developing budgets play a crucial role in managerial decisions making. 8-6a Cost Concepts: A Cost for All Reasons: A firm’s management accounting system helps managers throughout an organization measure costs and assign them to products, activities, and even whole divisions. Accountants define cost as the value of what is given up in exchange for something else. Cost concepts commonly used by managerial accountants: -Out-of-pocket costs: (also called explicit costs): usually easy to measure because they involve actual expenditures of money or other resources. Examples: raw materials, rent, office space -Implicit costs: do not involve a monetary payment; its sometimes what is given up is the opportunity to use an asset in some alternative way. Example: lawyers setting up a partnership in a building that their partners already owns. -Fixed costs: don’t change when the firm changes its level of production. Example: interest on a bank loan, property insurance premiums, rent on office space. -Variable costs: costs that rise when the firm produces more its goods and services. Example: labor, supplies, and utilities. 8-6b Assigning Costs to Products: As (Not So) Simple as ABC? -Direct costs: those that can be directly traced to the production of the product. Example: wage payments made to workers directly involved in producing a good or service would be a direct cost for that product. -Indirect costs: costs a firm incurs for plant maintenance, quality control, or depreciation on office equipment. Activity-based costing (ABC): managerial accountants have developed more sophisticated ways to allocate costs. First stage: to identify specific activities that create indirect costs and determine the actors that “drive” the costs of these activities. Second stage: to tie these cost drivers to the production of specific goods. Last stage: Once the relationships between cost drivers and specific products are identified, they can be used to determine how much of each indirect cost is assigned to each product.


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