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1
Accounting Information
for Business Decisions

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Living in the Information Age

Data
Data

Communication
Communication News
News

Commentary
Commentary Facts
Facts

Access
Access
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Living in the Information Age

Data
Data

Communication
Communication News
News
Timeliness
Independence
Freedom-of-
Commentary
Commentary Expression Facts
Facts

Access
Access
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Influence of Accounting
is a
Accounting
Accounting Identifies
Identifies
system that

Records
Records

information
Relevant
Relevant Communicates
Communicates
that is

Reliable
Reliable
to
tohelp
helpusers
usersmake
make
Comparable better
betterdecisions.
decisions.
Comparable

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Business Profit
Amounts
Amountsearned
earned from
from selling
selling
products
productsor
orservices
services

Sales
Sales
-- Expenses
Expenses Costs
Costsincurred
incurredwith
withsales
sales

Profit
Profit

Amounts
Amountsearned
earned
from
fromsales
salesless
less
expenses
expenses
incurred
incurred
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Nike’s Profit Breakdown

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Return and Risk

The
The lower
lower the
the risk
risk of
of our
our investment,
investment,
the
the lower
lower is
is our
our expected
expected return.
return.

Amount of
uncertainty
Profit  about the
Return Risk return we
Investment
$ ? expect to
earn

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Returns for Bonds with Different

Risks
Bonds
Bonds areare Exhibit
Exhibit1.2
1.2

written
written promises
promises U.S.
U.S.Treasury
Treasury

Bond Types
by
by organizations

Bond Types
Low
LowRisk
organizations Medium
Risk
MediumRisk
Risk
to
to repay
repay High
HighRisk
Risk
amounts
amounts loaned
loaned 0%
0% 2%
2% 4%
4% 6%
6% 8%
8% 10%
10%

to
to them
them with
Different Risk Levels

with
Different Risk Levels

interest.
interest. Source: The Wall Street Journal

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Focus of Accounting
 Identifying
 Recording
& Measuring

Reporting
& Analyzing

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Setting Accounting Rules

Unions
Unions AICPA
AICPA Lenders
Lenders
Securities
Securitiesand
and Investors
Investors Politicians
Politicians
Exchange
Exchange
Commission
Commission Accountants
Accountants Others
Others

All Provide input to

Financial
Financial Accounting
Accounting Standards
Standards Board
Board
Help set
Generally
Generally Accepted
Accepted Accounting
Accounting Principles
Principles
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Accounting and Technology

Reduces
Reducestime,
time,effort
effort
and
andcost
cost of
of
recordkeeping.
recordkeeping.

Improves
Improves clerical
clerical
accuracy.
accuracy.

Changes
Changesthetheway
waywe we
store,
store,process
processand
and
Technology summarize
summarizelarge
large
masses
massesofofdata.
data.
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Forms of Organization

Business

Law Offices
Sally’s
Grocery
Partnership
Corporation
Proprietorship
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Forms of Organization

Nonbusiness

Private
Government Nonprofit
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Characteristics of Business
Organizations
Characteristics
Characteristics Proprietorship
Proprietorship Partnership
Partnership Corporation
Corporation
Business
Businessentity
entity yes
yes yes
yes yes
yes
Legal
Legal entity
entity no
no no
no yes
yes
Limited
Limited liability
liability no
no no
no* yes
yes
Unlimited
Unlimited life
life no
no no
no yes
yes
Business
Businesstaxed
taxed no
no no
no yes
yes
One
One owner
owner allowed
allowed yes
yes no
no yes
yes

**Proprietorships
Proprietorshipsand andpartnerships
partnershipsset
set up
upas
asLLC’s
LLC’scan
can
limit
limittheir
theirliability.
liability.

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Corporation

Owners of a corporation are called

shareholders (or stockholders).

When a corporation issues only

one class of stock, we call it
common stock (or capital stock).

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Activities in Organizations
Financing
FinancingActivities
Activities
••Owner
Ownerfinancing
financing(equity)
(equity)
••Nonowner
Nonownerfinancing
financing
(liabilities)
(liabilities)

Financing

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Activities in Organizations
Investing
InvestingActivities
Activities
••Buying
Buyingresources
resources(assets)
(assets)
••Selling
Sellingresources
resources(assets)
(assets)

Investing Financing

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Activities in Organizations
Operating
Operatingactivities
activities
••Aimed
Aimedat
atselling
sellingproducts
products
and
andservices
services
••Result
Resultin
insales
salesand
andexpenses
expenses

Investing Financing

Operating
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Balance Sheet
AAbalance
balancesheet sheet reports
reportsononinvesting
investingandandfinancing
financing
activities.
activities. ItIt lists
listsamounts
amountsforforassets,
assets,liabilities,
liabilities,and
andequity
equity
at
ataa point
point in intime.
time. The
The relationship
relationship is
isreflected
reflectedininthe
the
Balance
BalanceSheet
Sheetequation:
equation:

Assets
Assets == Liabilities
Liabilities ++ Equity
Equity

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Income Statement
An
Anincomeincomestatement
statement reports
reportsonon operating
operatingactivities.
activities.
ItIt lists
listssales
sales(revenues),
(revenues),costs,
costs,and
and expenses
expensesover
over aa
period
period of
of time.
time. The
Therelationship
relationshipisisexpressed:
expressed:

Net
Net Income
Income == Revenues
Revenues -- Expenses
Expenses

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Statement of Retained Earnings

This
Thisstatement
statementreports
reportschanges
changesin inthe
the retained
retained
earnings
earningsofof the
thebusiness
businessover
overaa period
period of
of time.
time. ItIt
includes
includeschanges
changesdue
dueto
tonet
net income
incomeandand any
any
dividends
dividends paid
paidto
toshareholders.
shareholders.

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Statement of Cash Flows

The
Thestatement
statementofofcash
cashflows
flowsreports
reportson
oncash
cashflows
flowsfor
for
operating,
operating,investing,
investing,and
andfinancing
financingactivities
activitiesover
overaa
period
periodof
oftime.
time.

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Users of Accounting Information

Managerial
ManagerialAccounting
Accounting Financial
Financial Accounting
Accountingis
is
is
isaimed
aimedatat Internal
Internal aimed
aimed at
at External
ExternalUsers
Users
Users
Users

Managers Lenders
Officers Shareholders
Internal Auditors Governments
Sales Staff Labor Unions
Budget Officers External Auditors
Controllers Customers
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Internal Operating Functions

Research & Development

Purchasing

Human Resources
Accounting
Production Services

Distribution

Marketing

Servicing
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Ethics and Social Responsibility

Ethics

Beliefs that
Often coincide
separate right
with laws
from wrong Accepted
standards of
good and
bad
behavior
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Guidelines for Ethical Decision

Making
Identify Ethical Analyze Make Ethical
Concerns Options Decision

Use personal Consider all Choose the best

ethics to good and bad option after
recognize an consequences. weighing all
ethical concern. consequences.

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Social Responsibility
 Donations to nonprofit
organizations
 Programs to reduce
pollution
 Programs to improve
worker and consumer
safety
 Paid time off for workers

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Selected
Selected Opportunities
Opportunities in
in
Accounting
Accounting

Financial
Financial Managerial
Managerial Taxation
Taxation Accounting-
Accounting-
related
related
 Preparation  General  Preparation
 Statement Accounting  Planning  Lenders
Analysis  Cost Accounting  Regulatory  Consultants
 Auditing  Budgeting  Investigations  Analysts
 Regulatory  Consulting  Consulting  Traders
 Consulting  Controller  Managers
 Planning  Treasurer  Directors
 Criminal  Strategy  Underwriters
Investigation  Planners
 Appraisers
 FBI
Investigations
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Accounting Specializations
 Certified Public
Accountant (CPA)
 Certified Management
Accountant (CMA)
 Certified Internal Auditor
(CIA)
 Chartered Financial
Analyst (CFA)

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Return on Investment (ROI)

= Net income ÷ Avg. total assets

ROI
ROI is
is viewed
viewed asas an
an
indicator
indicator ofof operating
operating
efficiency.
efficiency.

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Typical
Typical Ratios
Ratios Used
Used in
in Decision
Decision
Analysis
Analysis

Liquidity
Liquidity&& Solvency
Solvency Profitability
Profitability Market
Market
Efficiency
Efficiency  Debt ratio  Profit margin ratio
Prospects
Prospects
 Current ratio  Equity ratio  Gross margin ratio  Price-earnings
 Acid-test ratio  Pledged assets  Return on total ratio
 A/R turnover to secured assets  Dividends yield
 Inventory liabilities  Return on common
turnover  Total asset stockholders’
 Days’ sales turnover equity
uncollected  Book value per
 Days’ sales in common share
inventory  Basic earnings per
 Total asset share
turnover

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End of Chapter 1

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