1. Uses of Accounting Information and the Financial Statements
Chapter 1
Uses of Accounting Information and the Financial Statements

2. What Is Accounting?
Accounting is an information system that measures, processes, and communicates financial information about an economic entity
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Supplies information for reasoned choices among alternative uses of scarce resources in business and economic activities
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3. Economic Entity: Business
Economic unit that aims to sell goods and services to customers
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Provides adequate return to owners
Examples: Wal-Mart, Best Buy, Wendy’s
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4. Why Is Accounting Important to Business?
To achieve
business goals
To carry on
business activities
Profitability
Liquidity
Operating
Investing
Financing
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5. Meeting Business Goals
Profitability
Is the business earning enough income to attract and hold investment capital?
Liquidity
Does the business have enough cash to pay debts when they are due?
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6. Conducting Business Activities
Operating Activities
Investing Activities
Financing Activities
Selling goods and services to customers
Employing managers and workers
Buying and producing goods and services
Paying taxes
Buying land, buildings, and equipment
Purchasing other resources necessary to operate the business
Selling these resources when no longer needed
Obtaining capital from creditors
Securing loans
Gathering funds from owners
Repaying creditors
Paying returns to owners
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7. Performance Measures
Indicate whether managers are achieving business goals and whether business activities are well managed
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Should be crafted in a way that motivates managers to act in the best interests of the owners of the business
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8. Performance Measures: Ratios
Used to compare a company’s financial performance from
one year to the next
Helpful when making comparisons among companies
Return on Assets = how much is earned on each dollar invested in assets
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9. Who Needs Accounting Information?
Internal Users
External Users
Stockholders
Creditors
Government regulators
Employees
Managers
Management Accounting
Information about past performance and what can be expected in the future
Financial Accounting
Financial statements report on profitability and liquidity to evaluate the success of a business
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10. Components of Accounting
System
Design
Record Transactions:
Bookkeeping
Accounting
Analyze & Interpret
Information
Communicate
Information
Processing can be done:
Manually,
By computer, or
Using a management information system
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11. Importance of Ethics in Financial Reporting
Users of reports depend on the good faith of those who prepared the reports
Users rely on the accuracy of the reports and the disclosure of all relevant facts
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Investors make decisions based on the reliability of the reports
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12. Sarbanes-Oxley Act Violations can result in criminal penalties
Chief executives and chief financial officers of all publicly traded U.S. companies must attest to the accuracy and completeness of their quarterly statements and annual reports filed with the SEC
Violations can result in criminal penalties
Want to learn more about the legislation?
On the Web
Sarbanes-Oxley.com
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13. Management Responsibility
What assurance does management give that a company’s reports are not false or misleading?
Research: Find the current year’s annual report for CVS on the company’s website and locate the “Management’s Report.” What language is used?
CVS’s SEC Filings
On the Web
We are responsible for establishing and maintaining effective internal control over financial reporting the unauthorized acquisition, use or disposition of assets are prevented or timely detected and that transactions are authorized, recorded and reported properly to permit the preparation of financial statements in accordance with GAAP and receipt and expenditures are duly authorized.
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14. Who Uses Accounting Information?
Management
Those With Direct Financial Interests
Those With Indirect Financial Interests
Finance
Investment
Operations & Production
Marketing
Human Relations
Accounting
Tax Authorities
Regulators
Labor Unions
Customers
Economic Planners
Investors
Creditors
Banks
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15. If You Were a Manager…
Making good financial decisions requires reliable accounting information.
Does my company have enough cash?
Which products are most profitable?
Is the rate of return to owners adequate?
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16. Users with Direct Financial Interests
Creditors
Require financial data to assess whether a company will have the cash to repay debt before making a loan
Investors
Require financial information to analyze the past success and potential earnings of a business
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17. Users with Indirect Financial Interests
Tax Authorities – require special tax returns and recordkeeping
Regulatory Agencies – publicly traded companies must report periodically to the SEC
Labor Unions, Consumer Groups, Customers, and Other Groups – the financial performance and prospects of businesses affect the economy, environment, and public policy
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18. Making an Accounting Measurement
What is measured?
Business
transactions
Economic events that affect the financial position of a business
Sale of goods
Loss from theft
Collection of loan
Wear and tear on machinery
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19. Concept of Money Measure
All business transactions are recorded in terms of money.
The monetary unit used depends on the country in which the business resides.
An exchange rate is used to translate one currency to another for international transactions.
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20. Concept of Separate Entity
A business is considered distinct from its creditors and customers as well as its owners
Business
reports &
accounts
Personal
reports &
accounts
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21. Forms of Business Sole Proprietorship Partnership Corporation
One owner
Owner takes all profits and losses
Owner is liable for all business obligations
Two or more owners
Partners share in profits and losses
One partner can obligate the business to another party
Must be dissolved if ownership changes
Business unit chartered by the state with articles of incorporation; legally separate from owners (stockholders)
Stockholders enjoy limited liability
Life of corporation is unlimited
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22. The Corporation as a Separate Entity
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23. Organization of a Corporation
Stockholders
Elect a board of directors and own shares of stock
Board of Directors
Determines corporate policy, declares dividends, and appoints corporate officers
Management
Carries out corporate policies and manages the business
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24. In a recent survey, 78% of boards
Corporate Governance
Oversight of a corporation’s management and ethics by the board of directors
Ethical practices are in the best interest of the business
Companies with codes of ethics tend to have higher stock prices than those without codes
Use of audit committees helps ensure that adequate systems are in place to safeguard resources
In the News:
In a recent survey, 78% of boards
of directors
established
ethical
standards
for their
companies
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25. Financial Position
Economic resources (cash, inventory, buildings) and the claims against those resources at a particular point in time
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Economic Resources = Creditors’ Equities
+ Stockholders’ Equity
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26. Building the Accounting Equation
Economic Resources = Creditors’ Equities
+ Stockholders’ Equity
In accounting
terms…
Assets = Liabilities + Stockholders’ Equity
The two sides of the equation must always be in balance.
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27. Assets
Economic resources expected to benefit the company’s future operations
Inventory, land, equipment, buildings (physical items)
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Cash, accounts receivable (monetary items)
Patents, trademarks, copyrights (nonphysical)
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28. Liabilities
Obligations to pay cash, transfer assets, or provide services to other entities in the future
May take the form of accounts payable, taxes payable, loans, or wages owed to employees
Liabilities are claims recognized by law
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29. Stockholders’ Equity Claims of the owners of a corporation to
the assets of the business
Stockholders’ Equity
Contributed Capital
Retained Earnings (RE)
Amount that stockholders invest in the business
Generated by business operations and kept for use in the business
Capital Stock
Expenses and
dividends
decrease RE
Revenues
increase RE
Par value
Add’l paid-in capital
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30. Communicating Financial Information
Four primary financial statements
Income Statement
Balance Sheet
Statement of Retained Earnings
Statement of
Cash Flows
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31. Income Statement
Often considered the most important financial statement
Summarizes revenues and expenses over an accounting period
Shows whether the goal of profitability was achieved
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32. Statement of Retained Earnings
Shows changes in retained earnings over an accounting period
Use this figure to prepare the balance sheet
Net income figure from income statement
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33. Shows financial position on a certain date
Balance Sheet
Shows financial position on a certain date
Ending balance of retained earnings from statement of retained earnings
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34. Statement of Cash Flows
Shows cash inflows and outflows for an accounting period
Net income from income statement
Matches cash account on balance sheet
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35. What Are GAAP?
Generally accepted accounting principles (GAAP) encompass the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.
GAAP are constantly growing, changing, and improving
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36. GAAP and the Audit
Audits are performed to determine that financial statements have been prepared in accordance with GAAP
Audits are performed by independent CPAs
The CPA renders an opinion about whether the statements present fairly or conform in all material respects to GAAP
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37. Organizations That Influence GAAP
Financial Accounting Standards Board (FASB)
Primary source of GAAP
Public Company Accounting Oversight Board (PCAOB)
International Accounting Standards Board (IASB)
GAAP
Securities and Exchange Commission (SEC)
American Institute of Certified Public Accountants (AICPA)
Governmental Accounting Standards Board (GASB)
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38. Professional Conduct
Key to the accountant’s reputation for independence and competence
The AICPA’s code of professional ethics governs conduct of CPAs
Is the accountant honest and candid? Does he or she put aside personal gain in service of the public trust?
Integrity
Is the accountant impartial and intellectually honest?
Objectivity
Does the accountant avoid all relationships that impair or appear to impair his or her objectivity?
Independence
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39. Discussion: Ethics on the Job
Carla McDonald is a CPA working on an audit with Trevor Industries. Teresa Wong, the staff accountant with Trevor Industries, invites her and her audit team to dinner at an expensive restaurant and insists on picking up the check.
Q. If Carla allows Teresa to pick up the check, has she violated any ethical standard? Why or why not?
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