Zusammenfassung Chapter 14 PDF

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English Book Chapter 14: -

Introduction: o The Big Four refer to the four largest accounting firms o The Big Four audit more than 80 percent of all U.S. public companies. o All businesses—from a small family farm to a giant corporation—use the language of accounting to make sure they track their use of funds, measure profitability, and budget for future expenditures.

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The nature of Accounting: o Simply stated, accounting is the recording, measurement, and interpretation of financial information. o The Financial Accounting Standards Board has been setting the principles and standards of financial accounting and reporting o Securities and Exchange Commission’s (SEC) Public Company Accounting Oversight Board (PCAOB).

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Accountants: o Public Accountants. ▪ Individuals and businesses can hire a certified public accountant (CPA), an individual who has been certified by the state in which he or she practices to provide accounting services ranging from the preparation of financial records and the filing of tax returns to complex audits of corporate financial records. o certified public accountant (CPA): ▪ an individual who has been state certified to provide accounting services ranging from the preparation of financial records and the filing of tax returns to complex audits of corporate financial records. o When housing prices declined and people suddenly found that they owed more on their mortgages than their homes were worth, they began to default. o A growing area for public accountants is forensic accounting, which is accounting that is fit for legal review. o private accountants: ▪ accountants employed by large corporations, government agencies, and other organizations to prepare and analyze their financial statements. o certified management accountants (CMAs): ▪ private accountants who, after rigorous examination, are certified by the Institute of Management Accountants and who have some managerial responsibility.

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Accounting or Bookkeeping?

o Bookkeepers are responsible for obtaining and recording the information that accountants require to analyze a firm’s financial position. o Accountants, on the other hand, usually complete course work beyond their basic four- or five-year college accounting degrees. ▪ but to understand, interpret, and even develop the sophisticated accounting systems necessary to classify and analyze complex financial information. -

The Uses of Accounting information o Accountants summarize the information from a firm’s business transactions in various financial statements o While maintaining and even increasing short- run profits is desirable, the failure to plan sufficiently for the future can easily lead an otherwise successful company to insolvency and bankruptcy court. Basically, managers and owners use financial statements (1) to aid in internal planning and control and (2) for external purposes such as reporting to the Internal Revenue Service, stockholders, creditors, customers, employees, and other interested parties. o Internal Uses.: ▪ Managerial accounting refers to the internal use of accounting statements by managers in planning and directing the organization’s activities. o cash flow: ▪ the movement of money through an organization over a daily, weekly, monthly, or yearly basis. o managerial accounting: ▪ the internal use of accounting statements by managers in planning and directing the organization’s activities. o One common reason for a so-called cash crunch, or shortfall, is poor managerial planning. o Budget: ▪ an internal financial plan that forecasts expenses and income over a set period of time. ▪ “Top-down”: • master budgets begin at the upper management level and filter down to the individual department level, ▪ “bottom-up”: • budgets start at the department or project level and are combined at the chief executive’s office. ▪ principal value of a budget lies in its breakdown of cash inflows and outflows. o annual report: ▪ summary of a firm’s financial information, products, and growth plans for owners and potential investors.

single most important component of an annual report is the signature of a certified public accountant attesting that the required financial statements are an accurate reflection of the underlying financial condition of the firm. ▪ The primary external users of audited accounting information are government agencies, stockholders and potential investors, lenders, suppliers, and employees. o External Uses: ▪ Managers also use accounting statements to report the business’s financial performance to outsiders. • statements are used for filing income taxes, obtaining credit from lenders, and reporting results to the firm’s stockholders. o short-term lender: ▪ examines a firm’s cash flow to assess its ability to repay a loan quickly with cash generated from sales. o Long-term: ▪ lender is more interested in the company’s profitability and indebtedness to other lenders. ▪

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The Accounting Process o The Accounting Equation ▪ Assets: • a firm’s economic resources, or items of value that it owns, such as cash, inventory, land, equipment, buildings, and other tangible and intangible things. ▪ Liabilities: • debts that a firm owes to others. ▪ owners’ equity: • equals assets minus liabilities and reflects historical values. ▪ accounting equation: • assets equal liabilities plus owners’ equity.

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Double-Entry Bookkeeping o a system of recording and classifying business transactions that maintains the balance of the accounting equation. o In the final analysis, all business transactions are classified as assets, liabilities, or owners’ equity. However, most organizations further break down these three accounts to provide more specific information about a transaction. For example, assets may be broken down into specific categories such as cash, inventory, and equipment, while liabilities may include bank loans, supplier credit, and other debts.

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The Accounting Cycle o the four-step procedure of an accounting system: examining source documents, recording transactions in an accounting journal, posting recorded transactions, and preparing financial statements. o Step One: Examine Source Documents: ▪ Like all good managers, Anna Rodriguez begins the accounting cycle by gathering and examining source documents—checks, credit card receipts, sales slips, and other related evidence concerning specific transactions. o Step Two: Record Transactions.: ▪ Next, Anna records each financial transaction in a journal, which is basically just a time-ordered list of account transactions. While most businesses keep a general journal in which all transactions are recorded, some classify transactions into specialized journals for specific types of transaction accounts. o Journal: ▪ a time-ordered list of account transactions. o Step Three: Post Transactions.: ▪ Anna next transfers the information from her journal into a ledger. This process is known as posting. At the end of the accounting period (usually yearly, but occasionally quarterly or monthly), Anna prepares a trial balance, a summary of the balances of all the accounts in the general ledger. o Ledger: ▪ a book or computer file with separate sections for each account. o Step Four: Prepare Financial Statements: ▪ The information from the trial balance is also used to prepare the company’s financial statements. In the case of public corporations and certain other organizations, a CPA must attest, or certify, that the organization followed generally accepted accounting principles in preparing the financial statements. When these statements have been completed, the organization’s books are “closed,” and the accounting cycle begins anew for the next accounting period.

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Financial Statements o The end result of the accounting process is a series of financial statements. o The income statement, the balance sheet, and the statement of cash flows are the best-known examples of financial statements. o It is important to recognize that not all financial statements follow precisely the same format. o For example, sales and revenues are often interchanged, as are profits, income, and earnings.

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Income statement o a financial report that shows an organization’s profitability over a period of time—month, quarter, or year. o bottom line shows the overall profit or loss of the company after taxes. o Other names for the income statement include profit and loss (P&L) statement or operating statement. o The income statement indicates the firm’s profitability or income (the bottom line), which is derived by subtracting the firm’s expenses from its revenues. o Revenue: ▪ the total amount of money received from the sale of goods or services, as well as from related business activities. o cost of goods sold: ▪ the amount of money a firm spent to buy or produce the products it sold during the period to which the income statement applies. ▪ (remember that the costs directly attributable to selling goods or services are included in the cost of goods sold). o gross income: ▪ revenues minus the cost of goods sold required to generate the revenues. o Profit: ▪ the difference between what it costs to make and sell a product and what a customer pays for it. o Expenses: ▪ the costs incurred in the day-to-day operations of an organization. ▪ Three common expense accounts shown on income statements are (1) selling, general, and administrative expenses; (2) research, development, and engineering expenses; and (3) interest expenses ▪ Selling expenses include advertising and sales salaries. General and administrative expenses include salaries of executives and their staff and the costs of owning and maintaining the general office. Research and development costs include scientific, engineering, and marketing personnel and the equipment and information used to design and build prototypes and samples. Interest expenses include the direct costs of borrowing money. o Depreciation: ▪ the process of spreading the costs of long-lived assets such as buildings and equipment over the total number of accounting periods in which they are expected to be used. o Net income: ▪ the total profit (or loss) after all expenses, including taxes, have been deducted from revenue; also called net earnings. ▪ revenue. Generally, accountants divide profits into individual sections such as operating income and earnings before interest and taxes. o Revenues increase owners’ equity, while expenses decrease it.

o The resulting change in the owners’ equity account is exactly equal to the net income. o The basic accounting equation (Assets = Liabilities + Owners’ equity) will not balance until the revenue and expense account balances have been moved or “closed out” to the owners’ equity account. o Zeroing out the balances enables a company to count how much it has sold and how many expenses have been incurred during a period of time. o When a corporation elects to pay dividends, it decreases the cash account (in the assets category of the balance sheet) as well as a capital account (in the owners’ equity category of the balance sheet). o Owner equity account change because: ▪ of the sale of stock (or contributions/withdrawals by owners), the net income or loss, or the dividends paid.

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The Balance Sheet o balance sheet a “snapshot” of an organization’s financial position at a given moment. o balance sheet is, by definition, an accumulation of all financial transactions conducted by an organization since its founding. o long-established traditions, items on the balance sheet are listed on the basis of their original cost less accumulated depreciation, rather than their present values. o Stranded assets are assets that are not recoverable. ▪ Stranded assets create significant risk for companies and their shareholders. o Assets: ▪ All asset accounts are listed in descending order of liquidity —that is, how quickly each could be turned into cash. ▪ current assets: • that are used or converted into cash within the course of a calendar year; also called short-term assets. ▪ accounts receivable: • money owed a company by its clients or customers who have promised to pay for the products at a later date. • includes an allowance for bad debts that management does not expect to collect. • The bad-debts adjustment is normally based on historical collections experience and is deducted from the accounts receivable balance to present a more realistic view of the payments likely to be received in the future, called net receivables. ▪ Inventory may be held in the form of raw materials, work- in-progress, or finished goods ready for delivery.

Long-term or fixed assets represent a commitment of organizational funds of at least one year. ▪ Items classified as fixed include long-term investments, such as plants and equipment, and intangible assets, such as corporate “goodwill,” or reputation, as well as patents and trademarks. o Liabilities: ▪ current liabilities: • a firm’s financial obligations to short-term creditors, which must be repaid within one year. ▪ accounts payable: • the amount a company owes to suppliers for goods and services purchased with credit. ▪ accrued expenses: • all unpaid financial obligations incurred by an organization. • wages earned by employees but not yet paid and taxes owed to the government. o Owners’ Equity: ▪ includes the owners’ contributions to the organization along with income earned by the organization and retained to finance continued growth and development. ▪

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The Statement of Cash Flows o explains how the company’s cash changed from the beginning of the accounting period to the end. o takes the cash balance from one year’s balance sheet and compares it with the next while providing detail about how the firm used the cash. o The change in cash is explained through details in three categories: ▪ cash from (used for) operating activities, • calculated by combining the changes in the revenue accounts, expense accounts, current asset accounts, and current liability accounts. • If this amount is a positive number, as it is for Microsoft, then the business is making extra cash that it can use to invest in increased long-term capacity or to pay off debts such as loans or bonds. ▪ cash from (used for) financing activities, • calculated from changes in the long-term liability accounts and the contributed capital accounts in owners’ equity. • If this amount is negative, the company is likely paying off longterm debt or returning contributed capital to investors. ▪ and cash from (used for) investing activities. • calculated from changes in the long-term or fixed asset accounts.

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So a negative number in this category is not a bad thing.

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Ratio Analysis: o calculations that measure an organization’s financial health. o brings the complex information from the income statement and balance sheet into sharper focus so that managers, lenders, owners, and other interested parties can measure and compare the organization’s productivity, profitability, and financing mix with other similar entities. o profitability ratios: ▪ ratios that measure the amount of operating income or net income an organization is able to generate relative to its assets, owners’ equity, and sales. ▪ The numerator (top number) used in these examples is always the net income after taxes. ▪ profitability ratios include profit margin, return on assets, and return on equity. ▪ profit margin: • net income divided by sales. • shows the overall percentage of profits earned by the company. • The higher the profit margin, the better the cost controls within the company and the higher the return on every dollar of revenue. ▪ return on assets: • net income divided by assets. • shows how much income the firm produces for every dollar invested in assets. • company with a low return on assets is probably not using its assets very productively—a key managerial failing. ▪ return on equity: • net income divided by owners’ equity; also called return on investment (ROI). • shows how much income is generated by each $1 the owners have invested in the firm. • a low return on equity means low stockholder returns and may indicate a need for immediate managerial attention.

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Asset utilization Ratios o ratios that measure how well a firm uses its assets to generate each $1 of sales. o use asset utilization ratios to pinpoint areas of inefficiency in their operations. o receivables turnover: ▪ sales divided by accounts receivable.

indicates how many times a firm collects its accounts receivable in one year. ▪ demonstrates how quickly a firm is able to collect payments on its credit sales. o inventory turnover: ▪ sales divided by total inventory. ▪ indicates how many times a firm sells and replaces its inventory over the course of a year. ▪ high inventory turnover ratio may indicate great efficiency but may also suggest the possibility of lost sales due to insufficient stock levels. o total asset turnover: ▪ sales divided by total assets. ▪ measures how well an organization uses all of its assets in creating sales. ▪ It indicates whether a company is using its assets productively. ▪

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Liquidity Ratios o ratios that measure the speed with which a company can turn its assets into cash to meet short-term debt. o indicate the speed with which a company can turn its assets into cash to meet debts as they fall due. o ratios that are too high may indicate that the organization is not using its current assets efficiently. o current ratio: ▪ current assets divided by current liabilities. o quick ratio: ▪ (acid test) a stringent measure of liquidity that eliminates inventory. ▪ measures how well an organization can meet its current obligations without resorting to the sale of its inventory.

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Debt Utilization Ratios o ratios that measure how much debt an organization is using relative to other sources of capital, such as owners’ equity. o Because the use of debt carries an interest charge that must be paid regularly regardless of profitability, debt financing is much riskier than equity. o the managers of most firms tend to keep debt-to-asset levels below 50 percent. o debt to total assets ratio: ▪ a ratio indicating how much of the firm is financed by debt and how much by owners’ equity. o times interest earned ratio: ▪ operating income divided by interest expense.

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measure of the safety margin a company has with respect to the interest payments it must make to its creditors. A low times interest earned ratio indicates that even a small decrease in earnings may lead the company into financial straits.

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Per Share Data o data used by investors to compare the performance of one company with another on an equal, per share, basis. o earnings per share: ▪ net income or profit divided by the number of stock shares outstanding. ▪ important because yearly changes in earnings per share, in combination with other economy-wide factors, determine a company’s overall stock price. o dividends per: ▪ share the actual cash received for each share owned ▪ Thus, dividends result in double taxation: The corporation pays tax once on its earnings, and the stockholder pays tax a second time on his or her dividend income.

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Importance of Integrity in Accounting o strong compliance to accounting principles creates trust among stakeholders. o Accounting and financial planning is important for all organizational entities, even cities. o Integrity in accounting is crucial to creating trust, understanding the financial position of an organization or entity, and making financial decisions that will benefit the organization. o It is most important to remember that integrity in accounting processes requires ethical principles and compliance with both the spirit of the law and professional standards in the accounting profession. Most states require accountants preparing to take the CPA exam to take accounting ethics courses. Transparency and accuracy in reporting revenue, income, and assets d...