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Chapter 10 - Understanding financial information and accounting - Copy

The document provides an overview of accounting, including its definition, types (managerial and financial), and key concepts such as break-even analysis and financial statements. It outlines the accounting cycle, financial accounting tools, and the importance of auditing and tax accounting. Additionally, it discusses financial ratios for analyzing financial statements, including liquidity, leverage, profitability, and activity ratios.
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0% found this document useful (0 votes)
16 views

Chapter 10 - Understanding financial information and accounting - Copy

The document provides an overview of accounting, including its definition, types (managerial and financial), and key concepts such as break-even analysis and financial statements. It outlines the accounting cycle, financial accounting tools, and the importance of auditing and tax accounting. Additionally, it discusses financial ratios for analyzing financial statements, including liquidity, leverage, profitability, and activity ratios.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
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Understanding financial

information and accounting


lecture 8
What is accounting?
 The planning, recording, analyzing, and interpreting of
financial information to provide management and other
stakeholders the information they need to make good
decisions.
 Business executives must understand the financial position\
well being of a company in order to make informed

business decisions.
Managerial and financial accounting

 Managerial accounting – provides


information and analysis to managers within
the organization to assist them in decision
making.
Break-Even Point (BEP)

 BEP ( unit ) = Fixed Cost\ Contribution per unit

 Contribution per unit = selling price per unit – variable cost per unit

 BEP ($) = BEP unit * selling price per unit


Shu Chen plans to produce a new line of children’s scarves and is considering the scarves’
processing needs and market potential. She estimates that the variable cost for each product is
$25 and the fixed cost per year is $15,000. If Shu offers each scarf at a selling price of $30,
how many scarves must she sell to break even?

To compute the break-even quantity:


QBE =

QBE = = 3,000 scarves

This means Shu needs to sell 3,000 scarves to cover her costs.
 Financial accounting – generates information for use outside
the organization.
 Users- Internal user, external users
 Internal – owner, manager, employee
 Bank manager, government, potential investors,
Auditing

 The job of reviewing and evaluating the records used to prepare


a company’s financial statements is referred to as auditing.
Tax Accounting
 A tax accountant is trained in tax law and is responsible for
preparing tax returns or developing tax strategies to save the
company money.
Financial Accounting tools

 Bookkeeping
 Double-entry bookkeeping
 Journal
 Ledger
Bookkeeping
Journal

Date Detail Debit Credit


Computer 500000
cash 500000
Ledger

Date Detail $ Date Detail $

Date Detail $ Date Detail $


The Six-Step Accounting cycle
1. Analyzing and categorizing documents
2. Putting the information into journals
3. Posting that information into ledgers
4. Preparing a trial balance
5. Preparing the financial statements
6. Analyzing the financial statements
*Preparing the financial statement include a balance sheet,
income statement, and statement of cash flows.*

Balance Sheet / Statement of financial position


 The balance sheet , which reports the firms financial
condition on a specific date.
 The balance sheet detail what the company owns and owes
on a certain day.
Income Statement / Profit and loss statement

 The income statement which summarizes revenues, cost of goods


sold, and expenses for a specific period of time and highlights the
total profit or loss the firm experienced during that period.

 The income statement shows what a firm sells its products for and
what its selling costs are over a specific period.
Cash flows
 The statement of cash flows, which provides a summary
of money coming into, and going out of, the firm and
tracks a company’s cash receipts and cash payments.
 The statement of cash flows highlights the difference
between cash coming into and cash going out of a
business.
Accounting Equation
Assets = Capital + Liabilities

 Assets = Fixed assets and Current assets


 Fixed assets= Land, Building, Motorcar, Machinery
 Current assets= Closing stock, Cash, Bank, Debtor or Account
receivable
 Intangible assets – long-term assets that have no real
physical form, but do have value.
 Patents, trademarks, copyrights, and goodwill
 Liabilities = Current liabilities and Long-term liabilities
 Current liabilities = Bank overdraft, Creditor or Account
Payable
 Long-term liabilities = Loan\bank loan, Mortgage, Bond
Payable
 Capital
Income statement
 Revenues is the value of what is received from goods
sold, services rendered, and other financial sources. It
could be other sources of revenue. (eg, rent)
 Gross sales are the total of all sales the firm completed.
 Net sales are gross sales minus returns, discounts, and
allowances.
 Cost of goods sold is a measure of the cost of
merchandise sold, or the cost of the raw material and
supplies used for producing items for sale.
Income statement

 Gross Profit –Gross profit is how much a firm earned


by buying and selling merchandise without expenses.
 Operating expenses – The cost involved in operating a
business such as rent, salaries, supplies, utilities,
insurance.
Income statement
 Expenses can generally be classified into two categories: selling
and general expenses.

 Selling expenses are expenses related to the marketing and


distribution of the firm’s goods or services, such as salaries of
salespeople, advertising and supplies.

 General expenses are the administrative expenses of the firm,


such as office salaries, depreciation, insurance and rent.

 Net income is referred to as net earnings or net profit.


Certificate in Financial Accounting 03/24/2025 29
Certificate in Financial Accounting 03/24/2025 30
Statement of Cash Flows

 Tracks the inflow and outflow of cash over a period, detailing how
changes in balance sheet accounts affect cash and cash equivalents.

 It's crucial for assessing a company's liquidity and ability to meet


short-term obligations.

 It involves analyzing operating, investing, and financing activities to


ensure adequate cash for operations, investments, and debt
obligations.
Analyzing financial statements: ratio analysis

 Liquidity Ratios – the word liquidity refers to how fast an asset can
be converted to cash in order to pay a company’s short- term debts.

Current assets
 Current ratio =
Current liabilities
Leverage ratios
 Debt
to owners’ equity ratio measures the degree to which the
company is financed by borrowed funds that must be repaid.

 Debt to owners’ equity ratio= Total liabilities\ Owners’ equity


Profitability ratio

 Profitability ratios measure how effectively a firm is using its various


resources to achieve profits. Three of the more important ratios are
earnings per share, return on sales and return on equity.
 Earning per share, EPS = Net income after taxes\ Number of common
stocks outstanding
Profitability ratio
 Return on Sales = Net income \ Net Sales

 Return on equity = Net income after tax\ Total owners’


equity
Activity Ratios

The inventory turnover ratio measures the speed of inventory moving


through the firm and its conservation into sales.

Inventory Turnover = Cost of goods sold \ Average inventory


Thank You

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