WEEK 12:

ACCOUNTING CONCEPTS

BUSN 102 – Özge Can

Understanding Accounting

Accounting Measuring, interpreting, and communicating

financial information to support internal and external decision-making

Cost accounting, tax accounting, financial analysis, forensic accounting

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Understanding Accounting

Financial Accounting: The area of accounting concerned with preparing

financial information for users outside the organization

Management Accounting: The area of accounting concerned with preparing

data for use by managers within the organization

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What Accountants Do?

Record economic activities (bookkeeping)

Prepare financial statements Analyze and interpret financial

information Prpepare financial forecasts and

budgets Prepare tax returns

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Private Accountants

Private Accountants In-house accountants employed by organizations

and businesses other than a public accounting firm (corporate accountants)

Certified Public Accountants (CPAs) Professionally licensed accountants who meet

certain requirements for education and experience and who pass a comprehensive examination

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Public Accountants

Public Accountants Professionals who

provide accounting services to other businesses and individuals for a fee

Audit Formal evaluation of

the fairness and reliability of a client’s financial statements

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Typical Finance Department:

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The Rules of Accounting

GAAP (Generally Accepted Accounting Practices) Standards and practices used by publicly held

corporations in the United States and a few other countries in the preparation of financial statements; on course to converge with IFRS

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The Rules of Accounting

External Auditors Independent accounting firms that provide

auditing services for public companies

International Financial Reporting Standards (IFRS) Accounting standards and practices used in many

countries outside the United States

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Fundamental Accounting Concepts

Assets: Any things of value owned or leased by a business

Liabilities: Claims against a firm’s assets by creditors

Owners’ Equity: The portion of a company’s assets that belongs to

the owners after obligations to all creditors have been met

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Fundamental Accounting Concepts Accounting Equation

The basic accounting equation, stating that assets equal liabilities plus owners’ equity

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Example:

A company has the following assets: (1) Fixed assets worth $30,000 and (2) investments worth $6,000. The company's total liabilities amount to $25,000.

What is the owner's equity of this company?

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Fundamental Accounting Concepts Double-Entry Bookkeeping

A method of recording financial transactions that requires a debit entry and credit entry for each transaction to ensure that the accounting equation is always kept in balance

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Fundamental Accounting Concepts Matching Principle

The fundamental principle requiring that expenses incurred in producing revenue be deducted from the revenues they generate during an accounting period

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Two Bases of Accounting:

Accrual Basis An accounting

method in which revenue is recorded when a sale is made and an expense is recorded when it is incurred

Cash Basis An accounting

method in which revenue is recorded when payment is received and an expense is recorded when cash is paid

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Depreciation An accounting procedure for systematically

spreading the cost of a tangible asset over its estimated useful life

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The Accounting Cycle:

1. Perform transactions2. Analyze and record transactions in a

journal3. Post journal entries to the ledger4. Prepare a trial balance5. Make adjusting entries, as needed6. Prepare an adjusted trial balance7. Prepare financial statements8. Close the books for the accounting period

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Three Financial Statements: Balance Sheet Income Statement Statement of Cash Flows

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Balance Sheet

Balance Sheet A statement of a firm’s

financial position on a particular date; also known as a statement of financial position

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Balance Sheet

Current Assets Cash and items that

can be turned into cash within one year

Fixed Assets Assets retained for

long-term use, such as land, buildings, machinery, and equipment

Property, plant, and equipment

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Balance Sheet Current Liabilities

Obligations that must be met within a year

Long-Term Liabilities Obligations that fall

due more than a year from the date of the balance sheet

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Balance Sheet

Retained Earnings The portion of shareholders’ equity earned by the

company but not distributed to its owners in the form of dividends

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Income Statement

Income Statement A financial record of a

company’s revenues, expenses, and profits over a given period of time

Profit and loss statement

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Income Statement

Expenses Costs created in the process of generating

revenues

Net Income Profit earned or loss incurred by a firm,

determined by subtracting expenses from revenues

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Income Statement

Cost of Goods Sold The cost of producing or acquiring a company’s

products for sale during a given period

Gross Profit (Gross Margin) The amount remaining when the cost of goods

sold is deducted from net sales

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Income Statement

Operating Expenses All costs of operation that are not included under

cost of goods sold General expenses - selling expenses

EBITDA Earnings before interest, taxes, depreciation, and

amortization

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Statement of Cash Flows

Statement of Cash Flows A statement of a

firm’s cash receipts and cash payments that presents information on its sources and uses of cash

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Analyzing Financial Staments Trend analysis Ratio analysis

Types of financial ratios: Profitability ratios Liquidity ratios Activity ratios Leverage (debt) ratios

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Profitability Ratios

Return on Sales The ratio between

net income after taxes and net sales

Profit margin

Return on Equity The ratio between

net income after taxes and total owners’ equity

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Profitability Ratios

Earnings per Share A measure of a firm’s profitability for each share

of outstanding stock, calculated by dividing net income after taxes by the average number of shares of common stock outstanding

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Liquidity Ratios

Working Capital Current assets

minus current liabilities

Current Ratio A measure of a

firm’s short-term liquidity, calculated by dividing current assets by current liabilities

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Liquidity Ratios

Quick Ratio A measure of a firm’s short-term liquidity,

calculated by adding cash, marketable securities, and receivables, then dividing that sum by current liabilities

Acid-test ratio

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Activity Ratios

Inventory Turnover Ratio A measure of the time a company takes to turn its

inventory into sales, calculated by dividing cost of goods sold by the average value of inventory for a period

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Activity Ratios

Accounts Receivable Turnover Ratio A measure of the time a company takes to turn its

accounts receivable into cash, calculated by dividing sales by the average value of accounts receivable for a period

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Leverage (Debt) Ratios

Debt-to-Equity Ratio A measure of the extent to which a business is

financed by debt as opposed to invested capital, calculated by dividing the company’s total liabilities by owners’ equity

Debt-to-Assets Ratio A measure of a firm’s ability to carry long-term

debt, calculated by dividing total liabilities by total assets

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Assignment #3 (Due: Next Week) Written Group Assignment Research online and find 1) the balance sheet

(“bilanço”) and 2) income statement (“gelir tablosu”) of a Turkish or foreign/international company for the year 2012.

Examine these two statements carefully in order to understand the financial situation of the company.

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Assignment #3 (Due: Next Week) After providing a copy of the two financial

statements in the paper, answer the following questions:

1. What are the amount of assets, liabilities and stockholders’ equity of the company?

2. Did the company show a profit in 2012? What is the sales revenue? What are their largest cost and expense items?

3. Overall, do you think this company financialy doing good? How do you understand this?

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