CHAPTER 8: ACCOUNTING: DECISION MAKING BY THE NUMBERS JACI BLUE, JAKE STREHLOW, MOLLY RABENA, RILEY BARNES, RAUL ARAMBULA, ZACH TAYLOR

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1 CHAPTER 8: ACCOUNTING: DECISION MAKING BY THE NUMBERS JACI BLUE, JAKE STREHLOW, MOLLY RABENA, RILEY BARNES, RAUL ARAMBULA, ZACH TAYLOR

2 ACCOUNTING: WHAT IS IT? A system for recognizing, organizing, analyzing, and reporting information about the financial transactions that affect an organization. The goal of this system is to provide its users with relevant, timely information that helps them make better economic decisions.

3 WHO USES IT? Managers: Need information about sales Stockholders: Interest in it s financial performance Employees: Strong financial performance=pay raises and hefty bonuses Creditors: Assess a firms creditworthiness based on financial statements Suppliers: Want to know if company can pay for orders Government agencies: Critical for meeting the report requirements

4 WHO DOES IT? Public accountants: Provide services Management accountants: Provide analysis Government accountant: Ensure that the government s own tax revenues and expenditures are recorded and reported in accordance with regulations and requirements. Financial Accounting: Addresses the needs of external stakeholders, including stockholders, creditors, and government regulators.

5 THE BALANCE SHEET The balance sheet summarizes a firm s financial position at a specific point in time. Though the balance sheets of different firms vary in specifics, all of them are organized to reflect the most famous equation in all of accounting so famous that it is usually referred to simply as the accounting equation: Assets=Liabilities+Owners Equity

6 THE BALANCE SHEET FOR MCDONALDS

7 THE INCOME STATEMENT The income statement summarizes the financial results of a firm s operations over a given period of time. Revenue Expenses = Net Income

8 INCOME STATEMENT FOR MCDONALDS

9 BUDGETING Budgeting is a management tool that explicitly shows how a firm will acquire and allocate the resources it needs to achieve its goals over a specific time period. Operating budgets are budgets that identify projected sales and production goals and the various costs the firm will incur to meet these goals. Financial budgets focus on the firm s financial goals and identify the resources needed to achieve these goals. Master budget organizes the operating and financial budgets into a unified whole, representing the firm s overall plan of action for a specified time period.

10 DEVELOPMENT OF THE MASTER BUDGET

11 PREPARING THE BUDGET: TOP-DOWN OR BOTTOM-UP THERE ARE TWO BROAD APPROACHES TO BUDGET PREPARATION. *TOP-DOWN BUDGETING: IN SOME ORGANIZATIONS, TOP MANAGEMENT PREPARES THE BUDGET WITH LITTLE OR NO INPUT FROM MIDDLE AND SUPERVISORY MANAGERS. *BOTTOM-UP BUDGETING: THESE ALLOW MIDDLE AND SUPERVISORY MANAGERS TO ACTIVELY PARTICIPATE IN THE CREATION OF THE BUDGET. THIS IS THE MORE COMMON APPROACH

12 FINANCIAL ACCOUNTING MANAGERIAL ACCOUNTING Purpose Primarily intended to provide information to external stakeholders, such as stockholders, creditors, and government regulators. Information provided by financial accounting is available to the general public. Primarily intended to provide information to internal stakeholders, such as the managers of specific divisions or departments. This information is proprietary meaning that it isn t available to the general public. Type of Information Presented Focuses almost exclusively on financial information. Provides both financial and nonfinancial information. Nature of Reports Prepares a standard set of financial statements. Prepares customized reports to deal with specific problems or issues. Timing of Reports Presents financial statements on a predetermined schedule (usually quarterly and annually). Creates reports upon request by management rather than according to a predetermined schedule. Adherence to Accounting Standards? Governed by a set of generally accepted accounting principles (GAAP). Uses procedures developed internally that are not required to follow GAAP. Time Period Focus Summarizes past performance and its impact on the firm s present condition. Provides reports dealing with past performance but also involves making projections about the future when dealing with planning issues.

13 THE BIG PICTURE Accounting provides vital information to both the internal and external stakeholders of a firm. The balance sheet, income statement, and statement of cash flows that are the main output of financial accounting help external stakeholders, such as owners and creditors, evaluate the financial performance of a firm. A basic knowledge of accounting concepts will help you succeed in just about any career path you choose!