Scribd
Upload
42 views18 pages

Chap 2 On

Uploaded by

Md Arifuzzaman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
42 views18 pages

Chap 2 On

Uploaded by

Md Arifuzzaman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 18

2

Review of
Accounting

Chapter

McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
What is Accounting?
• Accounting provides financial information about a business
• Of interest to stakeholders in business:
– shareholders
– managers
– creditors
– governments
• Information is used to make decisions about a business
• Financial statements summarize accounting information
• Most important financial statements:
– Income Statement
– Balance Sheet
– Statement of Cash Flows
Income Statement
• Device to measure the profitability of a firm
over a period of time
• An Income Statement shows profitability for a time
period (ex.; 1 year)
– It is presented in a stair-step or progressive
fashion to examine profit or loss after each type
of expense item is deducted

Revenues
Less: Expenses
Equals: Net Income

2-3
PPT 2-5

Classifications on the Income Statement


Sales
– Cost of Goods Sold
Step 1 = Gross Profit
– Operating Expenses
Step 2 = Operating Profit
– Interest Expense
Step 3 = Earnings Before Taxes
– Income Taxes
Step 4 = Earnings Aftertaxes
Income Statement (cont’d)

2-5
Limitations of the Income Statement
• Income gained/lost during a given period is a
function of verifiable transactions
– Increase in the value of land
– Elimination of a competitor
– Stockholders, hence, may perceive only a much smaller
gain/loss from actual day-to-day operations
• Flexibility in reporting transactions might result in
differing measurements of income gained from
similar events at the end of a time period

2-6
Statement of Retained Earnings

2-7
PPT 2-9
The Balance Sheet

A Balance Sheet (B/S) shows what a firm


owns and how it is financed at a point in
time (ex.; December 31)
Remember the ALOE!

Assets = Liabilities + Owners’ Equity


PPT 2-10

Classifications on the Balance Sheet


Assets:what a business Liabilities: what a business owes
owns Current Liabilities
Current Assets –Ex: Accounts payable
–Due within 1 year
–Ex: Accounts receivable,
Inventory Long-term Liabilities
–Due some time after 1 year
–Will be sold or used up
Equity: what the owner(s) have
within 1 year invested in the business
Capital Assets Shareholders’ Equity
–Ex: Building –Capital stock
–Retained earnings
Statement of Financial Position
(Balance Sheet)

2-10
Limitations of Financial Statements PPT 2-14

• Based on past transactions rather than future


forecasts
• May not recognize important economic changes as
they occur
– increase in property values
– new competition
• Variety of accounting policies and methods are
used
– amortization
– inventory valuation
Statement of Cash Flows
• Emphasizes critical nature of cash flow to
the operations of the firm
– It represents cash/cash equivalents items easily
convertible to cash within 90 days
• Cash flow analysis helps in combating
discrepancies faced through accrual method
of accounting

2-12
Indirect Method

2-13
Cash Flows from Operating
Activities

2-14
Determining Cash Flows from
Investing Activities
• Investing activities:
– Long-term investment activities in mainly plant
and equipment
• Increasing investments represent a use of funds
• Decreasing investments represent a source of funds

2-15
Determining Cash Flows from
Financing Activities
• Financial activities apply to the
sale/retirement of:
– Bonds
– Common stock
– Preferred stock
– Other corporate securities
– Payment of cash dividends
• Sale of firm’s securities is a source of funds
• Payment of dividends and repurchase of securities is
a use of funds
2-16
Overall Statement
Combining the Three Sections

2-17
Analysis of the Overall Statement
• How are increases in long-term assets being
financed?
• Preferably, adequate long-term financing
and profits should exist
• Short-term funds may be used to carry long-
term needs – could be a potential high-risk
situation
– Example: trade credit and bank loans

2-18

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy