1. Understanding Accounting and Financial Information
Chapter 17
Understanding Accounting and Financial Information
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. LEARNING GOALS
Chapter
Seventeen
Demonstrate the role that accounting and financial information play for a business and for its stakeholders.
Identify the different disciplines within the accounting profession.
List the steps in the accounting cycle, distinguish between accounting and bookkeeping, and explain how computers are used in accounting.
Explain how the major financial statements differ.
Demonstrate the application of ratio analysis in reporting financial information.
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3. SIGGI HILMARSSON Siggi’s Yogurt
Profile
Hilmarsson missed an Icelandic treat called skyr, a thick, strained, protein-rich yogurt.
He perfected his yogurt and contacted a former professor for help with financing.
Distribution raised cost problems that affected cash flow.
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4. WHAT’S ACCOUNTING?
What is Accounting?
LG1
Accounting -- Recording, classifying, summarizing and interpreting of financial events and transactions in an organization to provide interested parties needed financial information.
Outside parties - like employees, owners, creditors, unions, investors and the government - make use of a firm’s accounting information.
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5. The ACCOUNTING SYSTEM
What is Accounting?
LG1
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6. MANAGERIAL ACCOUNTING
LG2
Managerial Accounting -- Provides information and analysis to managers inside the organization to assist them in decision making.
Managerial accounting is involved with:
Costs of production
Costs of marketing
Preparation and control of budgets
Minimizing tax liabilities
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7. USERS of ACCOUNTING INFORMATION
Managerial Accounting
LG2
Users
Type of Report
Government tax authority
Tax reports
Government regulatory agencies
Required reports
People interested in the organization’s income
Financial statements found in annual reports
Managers of the firm
Financial statements and internally distributed financial reports
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8. FINANCIAL ACCOUNTING
Financial Accounting
LG2
Financial Accounting -- Financial information and analyses are generated for people primarily outside the organization. Outside users are interested in these questions:
Is the organization profitable?
Is it able to pay its bills?
How much debt does it owe?
Annual Report -- A yearly statement of the financial condition, progress, and expectations of the firm.
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9. HOW to READ an ANNUAL REPORT
Financial Accounting
LG2
Key things to watch for and read:
Management’s discussion and analysis of operations
Balance sheet
Income statement
Statement of cash flows
Auditor’s opinion
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10. PUBLIC vs. PRIVATE ACCOUNTANTS
Financial Accounting
LG2
Private Accountants -- Work in a single firm, government agency, or nonprofit organization.
Public Accountants -- Provide accounting services to individuals or businesses.
Certified Public Accountants (CPAs) -- Accountants who have passed a series of examinations established by the American Institute of Certified Public Accountants (AICPA) and met a states requirements for education and experience.
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11. Photo Courtesy of: Nancy Pelosi
DODD-FRANK ACT
Financial Accounting
LG2
Dodd-Frank Wall Street Reform and Consumer Protection Act increased financial regulation by increasing the power of the Public Company Accounting Oversight Board.
Act was brought on by the recent financial crisis.
Photo Courtesy of: Nancy Pelosi
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12. AUDITING CHECKS ACCURACY
LG2
Auditing -- Reviewing and evaluating the information used to prepare a company’s financial statements.
Independent Audit -- An evaluation and unbiased opinion about the accuracy of a company’s financial statements.
Certified Internal Auditors (CIAs) -- Accountants who have a bachelor’s degree and two years of experience in internal auditing and pass an exam administered by the Institute of Internal Auditors.
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13. SPECIALIZED ACCOUNTANTS
Tax Accounting and Not-for-Profit Accounting
LG2
Tax Accountants -- Accountants trained in tax law and are responsible for preparing tax returns or developing tax strategies.
Government and Not-for-Profit Accounting -- Support for organizations whose purpose is not generating a profit, but serving others according to a duly approved budget. .
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14. The ACCOUNTING CYCLE
The Accounting Cycle
LG3
Accounting Cycle -- A six-step procedure that results in the preparation and analysis of the major financial statements.
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15. BOOKKEEPER’S ROLE
The Accounting Cycle
LG3
Bookkeeping -- The recording of business transactions. Bookkeepers divide a firm’s transactions into meaningful categories and post them into a record book or computer program called a journal.
Double-Entry Bookkeeping -- Bookkeepers record all transactions in two places so they can check one list of transactions against the other for accuracy.
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16. BOOKKEEPER’S TOOLS
The Accounting Cycle
LG3
Ledger -- A specialized accounting book or program where all information is in one place.
Trial Balance -- A summary of all the information in the account ledgers.
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17. TECHNOLOGY and ACCOUNTING
Accounting Technology
LG3
Computerized accounting programs post information instantly and from remote locations.
Intuit’s QuickBooks and Sage’s Peachtree address the specific needs of small businesses.
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18. FINANCIAL STATEMENTS
Understanding Key Financial Statements
LG3
Financial Statement -- A summary of all the financial transactions that have occurred over a particular period.
Key financial statements of business are:
Balance sheet
Income statement
Statement of cash flows
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19. The FUNDAMENTALS ACCOUNTING EQUATION
The Fundamental Accounting Equation
The FUNDAMENTALS ACCOUNTING EQUATION
LG4
Fundamental Accounting Equation -- The basis for the balance sheet.
The equation must always be balanced and includes the formula:
Assets = Liabilities + Owners Equity
Balance Sheet -- The financial statement that reports a firm’s financial condition at a specific time.
Assets -- Economic resources owned by a firm. Items can be tangible or intangible.
Liquidity -- Ease with which assets can be converted into cash.
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20. CLASSIFYING ASSETS
Classifying Assets
LG4
Current Assets -- Items that can or will be converted to cash within one year.
Fixed Assets -- Long-term assets that are relatively permanent such as land, buildings, or equipment.
Intangible Assets -- Long-term assets that have no physical form but do have value such as patents, trademarks, and goodwill.
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21. CLASSIFYING LIABILITIES
Liabilities and Owners’ Equity Accounts
LG4
Liabilities -- What the business owes to others - its debts.
Accounts Payable -- Current liabilities a firm owes for merchandise or services purchased on credit.
Notes Payable -- Short or long-term liabilities a business promises to pay by a certain date.
Bonds Payable -- Long-term liabilities that the firm must pay back.
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22. OWNERS’ EQUITY ACCOUNTS
Liabilities and Owners’ Equity Accounts
LG4
Owners’ Equity -- The amount of the business that belongs to the owners minus any liabilities of the owners.
Retained Earnings -- Accumulated earnings from the firm’s profitable operations that are reinvested in the business.
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23. The INCOME STATEMENT
The Income Statement
LG4
Income Statement -- The financial statement that shows a firm’s bottom line - that is, its profit after costs, expenses, and taxes.
Net Income/Net Loss -- The revenue left over after costs and expenses.
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24. The INCOME STATEMENT The formula for the income statement: Revenue
LG4
The formula for the income statement:
Revenue
Cost of Goods Sold
= Gross Profit
Operating Expenses
= Net Income before Taxes
Taxes
= Net Income or Net Loss
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25. ACCOUNTS of the INCOME STATEMENT
Cost of Goods Sold
LG4
Revenue is the monetary value a firm received for goods sold, services rendered or other payments.
Cost of Goods Sold (or Manufactured) -- Measures the cost of merchandise the firm sells or the cost of raw materials and supplies it used in producing items for resale.
Gross Profit (or Gross Margin) -- How much a firm earned by buying (or making) and selling merchandise.
(Continued)
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26. ACCOUNTS of the INCOME STATEMENT (Continued)
Operating Expenses
ACCOUNTS of the INCOME STATEMENT (Continued)
LG4
Operating Expenses – Cost involved in operating a business, such as rent, salaries and supplies.
Depreciation -- The systematic write-off of the cost of a tangible asset over its estimated useful life.
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27. WHAT’S COMING and GOING at the COLLEGE BOOKSTORE (Spotlight on Small Business)
Generally Accepted Accounting Principles (GAAP) sometimes permits accountants to use different method of accounting for inventory.
FIFO: First-In, First-Out
LIFO: Last-In, First-Out
Each valuation can affect income and ending inventory valuation.
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28. The STATEMENT of CASH FLOWS
LG4
Statement of Cash Flows -- Reports cash receipts and cash disbursements related to the three major activities of a firm:
Operations
Investments
Financing .
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29. UNDERSTANDING CASH FLOW
The Need for Cash Flow Analysis
LG4
Cash Flow -- The difference between cash coming in and cash going out of a business.
Managing cash flow is a key consideration of a business and can be particularly challenging for small and seasonal businesses.
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30. BARKING UP the WRONG FINANCIAL STATEMENT (Making Ethical Decisions)
You’re the only accountant employed by a small, struggling dog food company.
The company requests a bank loan to keep operations going and your boss suggests you record some revenue early.
This is against accounting principles, but you know if you don’t get the loan, you may lose your job. What do you do?
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31. USING FINANCIAL RATIOS
Analyzing Financial Performance Using Ratios
LG5
Ratio Analysis -- The assessment of a firm’s financial condition using calculations and financial ratios developed from the firm’s financial statements.
Key ratios include:
Liquidity ratios
Leverage ratios
Performance ratios
Activity ratios
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32. COMMONLY USED LIQUIDITY RATIOS
LG5
Liquidity ratios measure a firm’s ability to turn assets into cash to pay its short-term debts.
Two key ratios are:
Current ratio
Acid-test ratio
This information is found on the firm’s balance sheet.
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33. LEVERAGE RATIOS
Leverage (Debt) Ratios
LG5
Leverage ratios measure the degree to which a firm relies on borrowed funds in its operations.
Key ratios include:
Debt to Owner’s Equity Ratio
This information is found on the firm’s balance sheet.
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34. PROFITABILITY RATIOS
Profitability (Performance) Ratio
LG5
Profitability ratios measure how effectively a firm’s managers are using the firm’s various resources to achieve profits.
Key ratios include:
Basic earnings per share
Return on sales
Return on equity
This information is found on the firm’s balance sheet and income statement.
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35. ACTIVITY RATIOS
Activity Ratio
LG5
Activity ratios measure how effectively management is turning over inventory.
Key ratios include:
Inventory turnover ratio
This information is found on the firm’s balance sheet and income statement.
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36. ACCOUNTANTS of the WORLD UNITED (Reaching Beyond Our Borders)
Multinational companies must adapt their accounting reporting to the rules of multiple countries.
Many countries have adopted International Financial Reporting Standards (IFRS) and are pushing to make them standard.
The U.S. Securities & Exchange Commission believes there should be such a standard. .
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