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Accounting for MBAs Edition 2 June 8, 2015
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Page ii Kay Stice [email protected] Brigham Young University Jim Stice [email protected] Brigham Young University This personal copy of the textbook was printed at MyEducator.com on June 8, 2015. Please do do not distribute, republish, or share with others. It is for personal use only. c 2015 MyEducator. All Rights Reserved. Disclaimer: Please note that printing to PDF is an experimental MyEducator feature. This book may contain formatting errors or even omit content because our conversion process is still under development. Please use this book only as a secondary resource to the regular web site reader.
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Contents 1 The Nature and Purpose of Financial Accounting 1 1.1 What is Accounting and Why Does it Exist? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.2 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.2.1 Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.2.2 Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1.2.3 Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1.3 Who Uses Financial Accounting Information? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.3.1 Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.3.2 Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.3.3 Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.3.4 Suppliers and Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1.3.5 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1.3.6 Competitors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1.3.7 Government Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1.3.8 Politicians . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.3.9 The Press . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.4 The Need for Financial Accounting Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.5 Other Important Accounting-Related Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1.5.1 Securities and Exchange Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1.5.2 American Institute of Certified Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . 14 1.5.3 Public Company Accounting Oversight Board . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 1.5.4 Internal Revenue Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 1.5.5 International Accounting Standards Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 1.6 Right Now Is an Exciting Time to Be Studying Accounting . . . . . . . . . . . . . . . . . . . . . . . . 16 1.7 Review of Key Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 1.8 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2 Overview of the Financial Statements 21 2.1 The Need for Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 2.2 Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 2.2.1 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 2.2.2 Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 2.2.3 Owners’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 2.2.4 Balance Sheet Format . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 2.2.5 The Accounting Equation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 2.2.6 Concepts and Conventions Related to the Balance Sheet . . . . . . . . . . . . . . . . . . . . . 34 2.3 Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 2.3.1 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 2.3.2 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 2.3.3 Gains and Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 2.3.4 Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 iii
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Page iv 2.3.5 Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 2.3.6 Concepts and Conventions Related to the Income Statement . . . . . . . . . . . . . . . . . . . 38 2.4 Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 2.4.1 Operating Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 2.4.2 Investing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 2.4.3 Financing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 2.5 Notes to the Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 2.5.1 Summary of Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 2.5.2 Additional Information about Summary Totals . . . . . . . . . . . . . . . . . . . . . . . . . . 43 2.5.3 Disclosure of Information Not Recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 2.5.4 Supplementary Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 2.6 The External Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 2.7 Other Accounting Concepts and Conventions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 2.7.1 Relevance and Reliability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 2.7.2 Comparability and Consistency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 2.7.3 Conservatism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 2.7.4 Materiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 2.7.5 Articulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 2.8 Review of Key Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 2.9 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 3 Introduction to Financial Statement Analysis 51 3.1 The Need for Financial Statement Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 3.2 Widely Used Financial Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 3.2.1 Debt Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 3.2.2 Current Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 3.2.3 Return on Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 3.2.4 Asset Turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 3.2.5 Return on Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 3.2.6 Price-Earnings Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 3.3 Common-Size Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 3.4 DuPont Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 3.4.1 Profitability Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 3.4.2 Efficiency Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 3.4.3 Leverage Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 3.5 Cash Flow Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 3.5.1 Usefulness of Cash Flow Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 3.5.2 Cash Flow to Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 3.5.3 Cash Flow Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 3.5.4
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