Accounting

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Accounting

• PRINCIPLES AND PRACTICES
• MAINTAIN AND USE FINANCIAL RECORDS
• FINANCIAL ANALYSIS MANAGEMENT TOOLS
• FINANCIAL ANALYSIS AND DECISION MAKING

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Finance and Accounting

• accounting
• organizes a system of financial records
• records financial data
• prepares, analyzes and interprets financial
  statements
• work is guided by Generally Accepted Accounting
  Principles (GAAP)
• finance
• saving, investing, and using money by
  individuals, businesses, and governments
• is broader than accounting

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• Finance consists of three interrelated areas

• money and capital markets
• determining monetary needs and obtaining adequate
  cash
• investments
• analyzing and choosing among investment
  alternatives while considering returns and risks
• financial management
• applies management principles to financial
  decision-making for organizations

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PRINCIPLES OF ACCOUNTING

• equities
• the financial claims on a companys resources
• fundamental accounting equation
• Assets Liabilities Owners Equity
• assets
• resources used by a business in its operations
• liabilities
• claims against the business resources by those to
  whom the business has financial obligations
• owners equity
• financial interest in the business held by all
  owners

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PRINCIPLES OF ACCOUNTING

• accounts
• the financial records for each of the specific
  assets, liabilities, and categories of owners
  equity
• accounting transaction
• the act of recording a financial activity that
  results in a change in the value of an
  organizations resources
• financial activities are recorded as entries in
  the accounts
• all financial transactions must be recorded
• source document
• original record of a transaction
• journals
• business records
• journal entry
• identifies key information for the transaction

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ACCOUNTING PRINCIPLES

• Historic Costs
• Revenue Recognition
• accrual accounting
• recognizing revenue and expenses when they are
  incurred rather than when cash is received or
  spent
• Expense and Revenue Matching
• Full Disclosure
• Standard Practice and Conservatism

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PRIVATE AND PUBLIC RECORDS AND REPORTS

• Privately owned companies are not required to
  disclose financial information.
• Public companies must report financial
  information.
• annual report
• a statement of a companys operating and
  financial performance issued at the end of its
  fiscal year
• Form 10-K
• a form required by the SEC that may be even more
  detailed than an annual report

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THE STRUCTURE OF FINANCIAL MANAGEMENT

• board of directors
• provide business oversight
• establish corporate policy
• hire key executives
• review major business decisions
• chief executive officer (CEO)
• the top manager of a corporation
• executes the strategy and the policy of board of
  directors
• leads management and employees
• sets long-term operational direction

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• chief operating officer (COO)

• directs business operations
• chief financial officer (CFO)
• plans and manages financial resources
• treasurer
• manages cash, investments, and other financial
  resources
• manages relationships with investors and
  creditors
• controller
• in charge of accounting and financial records

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FINANCIAL MANAGEMENT DECISIONS

• Three major decisions define the work of
  financial managers
• what investments need to be made
• how investments should be financed
• how to efficiently manage investments
• asset planning
• decisions must be made regarding the best mix of
  assets to effectively support business objectives

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• Asset Financing

• equity financing
• offers investors an ownership interest in the
  company
• debt financing
• obtaining assets by borrowing money
• short term financing methods include
• trade credit
• operating loans
• commercial paper
• asset management
• assets, both fixed and liquid, need to be
  efficiently managed

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USING FINANCIAL RECORDS AND REPORTS

• Managers study financial reports to asses the
  following information
• the current values of important financial
  elements of the business
• the relationships among the current values
• determine their companys performance relative to
  comparable companies

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BALANCE SHEET

• retained earnings
• profits earned by a company that are not paid to
  shareholders as dividends
• working capital
• working capital current assets current
  liabilities
• shareholders equity
• the value of all classes of stock and retained
  earnings

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INCOME STATEMENT

• Comparing income statements over multiple time
  periods provides a strong assessment of a
  companys performance.
• improvements in efficiencies of generating
  revenues
• cost containment

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CASH FLOW STATEMENT

• Cash flow is the movement of cash into and out of
  a business.
• solvency
• the ability of a company to meet its financial
  obligations as they become due
• A company with an increasing positive cash flow
  is a healthy company.

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• cash from operating activities

• revenues from the primary work of the business
• cash from investing activities
• revenues earned from purchasing or selling assets
• cash from financing activities
• cash from the sale of stock and from taking on
  long- or short-term debt

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Understanding Financial Ratios

• financial ratios
• comparisons of financial data used to evaluate
  business performance
• ratio analysis
• the study of relationships in a companys
  finances in order to understand and improve
  financial performance

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LIQUIDITY RATIOS

• An important measure of a companys health is its
  ability to pay debts on time.
• need a favorable liquid position

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MARKET PERFORMANCE RATIOS

• Market performance ratios serve a variety of
  functions
• examine the overall financial performance of a
  business in contributing to shareholder value
• a metric of the effectiveness of executive
  leadership
• helps compare multiple companies

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Use Financial Ratios

• Comparing ratios over several time periods
  provides a better picture of the companys
  financial condition.
• Industry trends can also be analyzed using
  financial ratios.

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DEVELOP A FINANCIAL ANALYSIS PLAN

• 1. Organize financial records.
• 2. Determine key financial ratios.
• 3. Develop baseline data.
• 4. Identify comparative information sources.
• 5. Identify Benchmark Companies
• benchmark company
• a competitor with outstanding performance
• 6. Calculate ratios regularly.
• 7. Use ratio analysis as a tool to establish
  financial goals.

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SOURCES OF COMPARATIVE INFORMATION

• Financial information is relatively easy to
  obtain for public corporations.
• can compare companys to one another
• can analyze performance for investing decisions
• Information provided by trade associations
• may be provided only to members
• may have a usage fee