Chapter 12: The Role of Accounting in Business
Link to Chapter 12: The Role of Accounting in Business
Course Outcomes/Goals -
- Describe the different uses of accounting information.
- Assess a company’s financial position using accounting statements and ratio analysis.
12.1 The Role of Accounting
It is often said that accounting is the "language of business." Why is that?
In groups of two, find answers to the following questions. Using Google Forms, create a quiz (five question or more) that covers the information you found.
- What is accounting?
- What are the different uses of accounting information?
Add your Google Forms to this collaborative page. You will then quiz other teams to see how well they do. We'll discuss this together afterward.
12.2 Understanding Financial Statements
What financial information would you need to know to run a business?
The image above illustrates four important financial statements that business use to determine the health of their company.
Balance Sheet & Income Statement
Use this document to skim, question, and discuss the Income Statement and Balance Sheet sections from Ch 12.2. We will then discuss key terms together as a group.
Use this page about linking the income statement and balance sheet and Ch 12.2 as a reference. Read over the page and familiarize yourself with key terms. In groups of three to four, analyze the health of Best Buy using their balance sheet (pg. 55) and income statement (pg 56 & 57) found in their annual report. Make a case for Best Buy's health or decline (slide, doc, etc.) using specific evidence. Add your case to the collaborative page.
Statement of Owner’s Equity & Statement of Cash Flows
What does it mean to be house poor?
We will use your book to talk about the statement of owner's equity and explore Best Buy's statements. Also, we will look at how financial statements relate to each other. We'll talk about the statement of cash flows from Ch 12.3 and again use that information to explore Best Buy's statements.
12.4 Ratio Analysis
According to your book, ratio analysis is, "... a technique for evaluating a company’s financial performance." We are using the ratio to show relationships between two numbers. We will look at the definition and first part of the video on this page (comparing over time and industries). There are many different financial ratios and we will only focus on a few.
Gross Profit Margin
First, we'll look at this link that breaks down how gross profit margin is used. We will also look at the example in your book. We'll look at Hasbro's profit margin using their financial data. Find their most recent annual report (cost of goods sold vs cost of sales).
Net Profit Margin
A company's profit per dollar of sales. This link from Investopedia explains net profit margin. We will also look at the example in your book. This link talks about the difference between net profit and net earnings. Use Hasbro's financial statements to figure out their net profit margin (net sales vs net revenues).
Explaining Gross Vs. Net Profit Margin - We'll watch the video and check out the link for an explanation of the difference between Gross Profit Margin and Net Profit Margin.
Inventory Turnover
According to your book, "You don't make money from unsold inventory." We'll look at the example and information for this ratio in your book. We would compare this ratio to the industry average. Figure out the inventory turnover for Hasbro.
Return on Assets
Again, we'll look at the example and info from your book. Return on assets looks at management effectiveness and identifies how much profit management is able to generate from the money invested by owners. We would compare this ratio to the industry average. Figure out the return on assets for Hasbro.
Current Ratio
Let's look at the example in your book. The current ratio looks at how well a company is able to meet financial obligations. We would compare this ratio to the industry average. Figure out the current ratio for Hasbro.
Debt-to-Equity Ratio
We'll first look at this article from the Harvard Business Review on debt to equity ratios. We will also look at the example and info from your book. We would compare this ratio to the industry average. Figure out the debt to equity ratio for Hasbro.
What Have the Ratios Told Us?
What are the basic things every businessperson needs to do to be successful? We'll look in your book for the answer.
Here is one site that can be used to check industry standards.
The Assignment
Choose a company and find their most recent financial statements. Send me a link to the financial statements you use. Calculate the six ratios we covered using your company's financial statements. Using evidence from the ratios, describe the company's health. You can team up with one other person to complete this assignment.
Ch 12 Quiz
Use this link to take your quiz.