Overview Of Accounting

Running head: OVERVIEW OF ACCOUNTING

Overview of Accounting

Brenda Anderson-Comier

University of Phoenix

Introduction to Finance and Accounting

MBA/503

Jacob Matthews

Jan 8, 2007

Overview of Accounting

Brenda Comier, President of Comier & Comier, LLP, have been contracted to give an informational presentation to a group of small business owners (SBO) with no accounting or financial knowledge. The workshop is designed to help the small business owner understand and fulfill their accounting and finance responsibilities. This presentation will also give them an understanding that accounting involves the accumulation of historical information. Finance, on the other hand, involves analyzing the historical information and using it to plan and make future decisions. During the presentation, Brenda will identify the audiences, purposes, and natures of financial statements and managerial reports. Brenda will also explain the use of financial accounting information in making informed and ethical business decisions.

Financial Statements and Managerial Reports

Financial Statements are summaries of monetary data about an enterprise. Brenda identified the audience of financial statements and managerial reports to be:

* prospective investors

* shareholders

* Banks

* government regulators

* management,

* labor

The purpose of financial statements:

* To inform the audience of how the company performed.

* To show how much assets, liabilities, and equity it currently has.

The nature of financial statements is the numerical compilation of categorical objective aspects of the organization.

Managerial reports are different from the financial statements. Managerial reports:

* Objective analysis of finite categorical information used to evaluate adopted positions and to adjust those positions to better meet goals.

* The primary use

o Invalidate or validate assumptions

o Reduce financial risk.

* Management Reports can consist of:

o Comparative Balance Sheet

o Cash Flows,

o Statement of Changes in Financial Position, and

o Statement of Working Capital

Brenda explained to the SBO's that a financial manager must understand the basic concepts of accounting in order to use the tools the accountants provide. These tools are:

Income Statement

* Known as a profit and loss statement, is a major device for measuring the profitability of a firm over a period of time (Block & Hirt, 2005, p.25).

* Defines profitability as the net income after all expenses are paid according to the income statement.

* Expenses include :

o Operating expenses

 Cost of goods sold

 Selling and administrative expenses

 Depreciation

o Non-operating expenses

* Interest expense

* Taxes

* Preferred stock dividends

* Common Stocks dividends are subtracted out after net income is calculated, as they are not a tax-deductible expense.

* Three sources of capital

o Bondholders (paid interest expense)

o Preferred stockholders (paid dividends, before taxes)

o Common stockholders (paid common dividends, after taxes)

The Statement of Retained Earnings

* Net income can either be retained or paid out as dividends.

* Often included with:

o Income statement

o Balance Sheet

o Statement of Cash Flow

Price-Earnings Ratio (or P/E ratio)

* According to Block and Hirt (2005), P/E ratio refers to the multiplier applied to earnings per share (EPS) to determine current value of the common stock (p. 26).

* Way of measuring desirability of a stock

* Indicates expectations about future of a company

* Limitations - income and expenses are actual transactions that occur within a given time period rather than events that reflect changes in the value of the firm.

Balance Sheet

* Indicates what the company owns and how these assets are financed in the form of liabilities or ownership interest (Block & Hirt, p. 28).

* A snapshot of a company's financial position at a point in time.

* Lists the company assets in the order of their liquidity.

* Most liquid current asset - cash

* Least liquid - inventory

* Fixed assets - will not be converted to cash during one year.

* Long-term investments

* Plant and equipment

* The sum of current and fixed assets is total assets

* Assets