BUSINESS 120 INTRODUCTION TO BUSINESS

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BUSINESS 120 INTRODUCTION TO BUSINESS

• ANALYZING USING FINANCIAL RESOURSES

Bruce Roberts, CPA, MBA Assistant
ProfessorAccounting Edgewood College
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INTRODUCTION

• You have covered
• Basics of business
• Forms of business ownership
• Management principles
• Production process
• Marketing concepts

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INTRODUCTION

• Now where does this section fit?
• After all this, how are we really doing?
• Somehow we must measure our results
• We should get some numbers
• Plus qualitative information
• Our information should be
• Relevant
• Accurate
• Timely
• We need an accounting of our results

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ACCOUNTING BACKGROUND

• What is accounting
• Identifying
• Recording
• Communicating and
• Interpreting the financial transactions
  results of an organization

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ACCOUNTING BACKGROUND

• Bookkeeping
• Process of identifying recording financial
  transactions
• Accounting
• Includes bookkeeping functions above
• Plus Communicating Interpreting
• History of accounting

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ACCOUNTING BACKGROUND

• The Accounting Profession
• Public (CPA) -- audit, tax, consulting,
• personal financial planning, forensic
• Private/Corporate (CMA) -- general, cost,
  financial statements, regulatory, tax, internal
  audit, analytical
• Governmental -- federal, state, county, city,
  agency
• Not-For-Profit -- hospital, college, charities,
  religious organizations

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ACCOUNTING BACKGROUND

• Generally Accepted Accounting Principles (GAAP)
• Accounting standards rules that create the
  framework of accounting
• FASB
• SEC
• Other nations have their own GAAP
• International Accounting Standards
• International Accounting Standards Board (IASB)
• Ethics in accounting
• Whats happened? World Com, Enron, Arthur
  Andersen
• Are there any heroes hereor just villains?

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THE ACCOUNTING EQUATION

• General definition A L E A L
  E
•   Assets - financial resources owned
•   Liabilities - financial obligations debts
  owed
•   Equity - owners net claim to assets
•   Change in equity (net income)
•   Revenues - sales and income received/accrued
•   Cost of sales - cost of products sold
• Expenses - expenses of operating the
  organization

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FINANCIAL STATEMENTS

• See your text pages
• 340 for Balance Sheet
• 342 for Income Statement
• 343 for Statement of Cash Flows
• Also see the following pages of your handout

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DEBITS CREDITS

• Now the big question How in the world are we
  going to keep track of all this stuff
• Answer - F. Pacioli and double entry accounting
• What is a debit?
• What is a credit?
• T Accounts

• Sample A/C
• Debit Credit Balance
• Increases Decreases Debit

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DEBITS CREDITS

• Debits Credits Balance
• Assets
• Increases Decreases Debit
• Liabilities
• Decreases Increases Credit
• Equity
• Decreases Increases Credit
• Revenue
• Decreases Increases Credit
• Expenses
• Increases Decreases Debit

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ACCOUNTING SYSTEMS

• The Books
• Journal - book of original entry
• recording transactions
• Ledger - where all transactions affecting a
  particular account are posted
• General ledger - the collection of all of the
  individual ledgers for the organization

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ACCOUNTING SYSTEMS

• Chart of Accounts - listing of all of the
  organizations accounts in numerical order
• 1000--Assets
• 2000--Liabilities
• 3000--Owners Equity
• 4000--Revenues
• 5000--Expenses

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ACCOUNTING SYSTEMS

• Sample Journal Entries
• Beginning Cash Balance 100,000
• 1) Cash Sales
• Dr Cash 150,000
• CrSales 150,000
• 2) Sales on Credit (accrual)
• Dr A/R 100,000
• Cr Sales 100,000
• 3) Accrue Expenses
• Dr Expenses 125,000
• Cr A/P 125,000
• 4) Pay Expenses
• Dr A/P 115,000
• Cr 115,000

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ACCOUNTING SYSTEMS

• The Trial Balance
• Listing of all the accounts and their balances
• Debits minus Credits must zero
• Then financial statements can be prepared

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TYPES OF ACCOUNTING

• Financial accounting
• External usersSEC, investors, analysts,
  creditors, suppliers, regulators, IRS, unions,
  etc.
• Complete classified F/S
• General purpose information for all users
• Generally condensed information
• GAAP basis
• Annually audited by independent CPAs

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TYPES OF ACCOUNTING

• Managerial accounting
• Internal use--mgt, officers, dept mgrs
• Monthly or as needed
• Much special purpose information
• May be very detailed
• Not only accounting information but various
  statistical data
• Not necessarily GAAP
• Unaudited

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TYPES OF ACCOUNTING

• Managerial accounting - contd
• Includes cost accounting systems and related
  pricing of products
• Budgeting and reporting
• Profitability analysis

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REPORTING TO THE PUBLIC

• Needed to properly efficiently allocate flow of
  world wide capital
• Example--Pfizer Annual Report--Public report to
  shareholders
• Financial Highlights
• Presidents letter
• Financial Review
• Managements Report
• Auditors Audit Committees Reports
• Consolidated Income Statement, Balance Sheet,
  Statement of Cash Flows
• Notes to F/S

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RATIO ANALYSIS (profitability)

• Return on Sales
• Net Income 65,841 3.8
• Net Sales 1,733,489
• Return on Equity
• Net Income 65,841 24.3
• Total Owners Equity 270,763
• Earning per Share (EPS)
• Net Income 65,841 3.05
• Average of Common 21,571
  
• Shares Outstanding

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RATIO ANALYSIS (liquidity)

• Current Ratio
• Current Asset 299,788 4.2 times
• Current Liabilities 71,058
• Quick Ratio
• Quick assets 228,892 3.2 times
• Current Liabilities 71,058

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RATIO ANALYSIS (activity)

• Inventory Turnover
• Cost of Goods Sold 1,513,314 24.0 times
• Average Inventory 63,166
• Accounts Receivable Turnover
• Net Sales 1,733,489 13.9
  times
• Average A/R 124,844

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RATIO ANALYSIS (leverage)

• Debt to Equity
• Total Liabilities 71,058 .26
• Total Equity 270,763
• Debt to Total Assets
• Total Liabilities 71,058 .21
• Total Assets 341,821

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Addendum To Text(See pages 334 and 335)

• Forces Impacting the Accounting Profession
• Technology was once looked upon as a threat to
  the accounting profession. It was predicted that
  it would cut jobs in the profession and eliminate
  accountants. This has not happened. Rather,
  technology is the friend of the accountant,
  reducing the drudgery type tasks and allowing
  accountants to expand their ability to perform
  analytical work on accounting data. This has
  resulted in accountants being more effective
  financial advisors to management. This has been
  true in the corporate, governmental and
  not-for-profit sectors. Thus, the demand for
  accountants has increased to the point where
  currently there is a nationwide shortage in
  accountants.

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Addendum To Text(See pages 334 and 335)

• Auditors and Clients Too Close for Comfort
• The authors observation regarding the possible
  conflict of interest of CPAs designing their
  clients systems and then putting on another hat
  and performing an audit of those systems
  disclosed a major flaw in the accounting
  professions approach to their role in service to
  their clients. Whereas the author said,
  Although no major problems have yet come to
  light. was a very wise statement. In the late
  1990s we had the computer and dot.com era of
  many new corporations, hundreds of millions of
  dollars of profits and a wildly increasing stock
  market. It was a big bubble partly created by
  fictitious and fraudulent financial reporting.
  When this was disclosed for a number of large
  companies, e.g., Enron, World Com, Aldelphia,
  HealthSouth, Lucent, Xerox, etc., etc., the stock
  market crashed in 2001/2002. People (and
  Congress) were angry. As a result, Congress
  passed the Sarbanes-Oxley of 2002 to perform the
  accounting progression and improve corporate
  governance. Therefore, CPAs can no longer
  perform both consulting and auditing services for
  the same client. The role of whistle blowers
  in the disclosure of the financial reporting
  abuses of this period was very important (see the
  World Com Article). We have progressed from the
  fraudulent financial period of the 1990s to the
  reform period of the 2000s.

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CURRENT ISSUES IN BUSINESS ACCOUNTING

• CPAs had conflict of interest (text p. 335)
• Consulting services vs audit services
• Was huge problemEnron World Com Arthur
  Andersen
• Ethics in business acctgcontibuted to large
  financial frauds
• VillainsKenneth Lay, Jeffrey Skilling, Bernie
  Ebbers
• HeroesSherron Watkins, Enron Cynthia Cooper,
  World Com (see article Three unlikely sleuths)
• ResultSarbanes Oxley Act of 2002
• Mgtheld responsible for F/S large fines jail
  terms
• AcctantsNo longer self-regulatedPCAOB/SEC

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A CAREER IN ACCCOUNTING

• CPApublic accounting, licensed by the State, Big
  4 firms, Second tier firms, regional firms
• Need 150 college credits
• CMAprivate/corporate organizations
• Governmental Accountingfederal government,
  GAO,FBI, IRS, WI agencies, WDR. Cities, Counties
• Not-for-ProfitsCharitable organizations,
  Churches, Insurance Trusts, Unions
• EWC GraduatesGood record CPA exam/getting jobs

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CONCLUSION

• Thanks for your attention
• Good luck in your college work careers
• Feel free to contact me if you have
• accounting or business career questions
• Broberts36_at_juno.net