The Role Of

Accounting In Business
Exploring Business

Chapter 9
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 Chapter Objectives
Exploring Business

1. Define accounting and identify its

uses
2. Understand the three basic financial
statements
3. Apply breakeven analysis
4. Understand cash-basis vs. accrual
5. Evaluate a company’s performance
6. Discuss career opportunities in
accounting and its future

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Exploring Business
Stakeholders
“…parties who are interested
in the activities of the
business because they’re
affected by them…”

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 Accounting
Exploring Business

“…measuring and
summarizing business
activities, interpreting
financial statements, and
communicating the results
to management and other
decision makers.”
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 Fields of Accounting
Exploring Business

Management Accounting –
provides information to decision
makers inside the organization to
help operate the business
Financial Accounting – furnishes
information to individuals and
groups inside/outside the
organization to assess the firm’s
financial performance
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 Management Accounting
Exploring Business

“…provides…reports…
tailored to the needs
of individual managers…
(in a) relevant, accurate,
timely…format…(to aid) in
making decisions.”

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 Financial Accounting
Exploring Business

Statements
• Income Statement
• Balance Sheet
• Statement of Cash Flow
Generally Accepted
Accounting Principles
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 Users Of
Accounting Information
Exploring Business

Owners & Government

Managers Agencies

Other Users Investors &

Creditors
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 Understanding
Financial Statements
Exploring Business

Functions
Income Statement – What
sales and expenses are
and whether a profit is made
Balance Sheet – Indicates assets and
liabilities and amount invested in
company
Statement of Cash Flows – Shows
how much cash flows in and out
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 Income Statement
Exploring Business

Revenues and Expenses

Cost of Goods Sold
Operating Expenses
Gross Profit
Net Income
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 Stress-Buster
Income Statement
Exploring Business

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 Proposed
Income Statement #1
Exploring Business

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 Proposed
Income Statement #2
Exploring Business

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 Breakeven Analysis
Exploring Business

“…total sales revenue must

exactly equal all your
expenses…”
Fixed Costs
Variable Costs
Contribution Margin
Per Unit
Breakeven Point In Units
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 Proposed
Income Statement #3
Exploring Business

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 Balance Sheet
Exploring Business

“…tells what you have (and

where it came from) at a
specific point in time…”
Assets – Business resources
Liabilities – Debts owed to outside
entities
Owner’s Equity – Amount invested
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 Accounting Equation
Exploring Business

Assets = Liabilities + Owner’s Equity

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 Stress-Buster
Balance Sheet
Exploring Business

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 Stress-Buster
Balance Sheet #2
Exploring Business

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Exploring Business
Accrual Accounting
“…accountant records a
transaction when it occurs…”

Account Receivable
Account Payable
Inventory
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 Classified
Balance Sheet
Exploring Business

 Assets
 Current—Convert to cash within
a year
Long-Term—Hold for more than
a year
Liabilities
Current—Pay off within a year
Long-Term—Not due for more
than a year
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 College Shop
Balance Sheet
Exploring Business

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 College Shop
Income Statement
Exploring Business

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 End-of-Year
Balance Sheet
Exploring Business

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 Statement Of
Cash Flows
Exploring Business

“…tells…where cash came

from and where it went.”
Activities:
•Operating
•Investing
•Financing
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 Cash Flow Statement
Exploring Business

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 Comparative
Income Statement
Exploring Business

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 Income Statement With
Vertical Percentage Analysis
Exploring Business

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 Ratio Analysis
Exploring Business

Profit Margin

Management
Efficiency

Management Effectiveness
Financial Condition
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 Gross Profit Margin
Exploring Business

Gross Profit = Gross Profit

Margin Sales

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 Net Profit Margin
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Net Profit = Net Profit

Margin Sales

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 Comparative Balance Sheet
Exploring Business

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 Inventory Turnover
Exploring Business

Inventory = Sales
Turnover Inventory

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 Return On Assets
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Return On = Net Profit

Assets Total Assets

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 Current Ratio
Exploring Business

Current = Current Assets

Ratio Current Liabilities

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 Debt-To-Equity
Exploring Business

Total Debt = Total Liabilities

to Equity Total Equity

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 Interest Coverage
Exploring Business

Interest = Operating Income

Coverage Interest Expense

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 Challenges To
Accounting Profession
Exploring Business

Arthur Andersen
Enron
Sarbanes-Oxley
Act
Public Accounting
Oversight Board
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 Careers In Accounting
Exploring Business

“People Profession”
Skills
• Analytical
• Interpersonal
• Communication
Job Prospects
• Certified Public Accountants—Audits
• Private Accountants—Controller
• Certified Management Accountants

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