* * Chapter Seventeen Understanding Accounting and Financial Information Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

* * Accounting -- Recording, classifying, summarizing and interpretation of financial events and transactions in an organization to provide interested parties with needed financial information. Outside parties - like employees, owners, creditors, unions, investors and the government - make use of a firm’s accounting information. WHAT’S ACCOUNTING? What is Accounting? LG1 17-2

Accounting Disciplines The accounting profession is divided into five key working areas : Managerial accounting Financial accounting Auditing Tax accounting Governmental and not-for-profit accounting

Managerial accounting Provides information to managers inside the organization to assist them in decision making. Measuring and reporting costs of production, marketing, and other functions; preparing budgets (planning); checking whether or not units are staying within their budgets (controlling) and designing strategies to minimize taxes. A certified management accountant (CMA) is a professional accountant who has met certain requirements, passed a qualifying exam, and has been certified by the Institute of Certified Management Accountants.

Financial Accounting Provides financial information and analyses for people primarily outside the organization. The information goes not only to company owners, managers, and employees but also to creditors and lenders, customers, suppliers, government agencies and the general public. Annual report, a yearly statement of the financial condition, progress, and expectations of an organization. A professional accountant who has met certain requirements, passed qualifying examinations established by the American Institute of Certified Public Accountants (AICPA) is recognized as a certified public accountant (CPA).

The Institute of Chartered Accountants of Bangladesh (ICAB) is the national professional accountancy body in Bangladesh. It is the sole organisation in Bangladesh with the right to award the Chartered Accountant designation.professional accountancy bodyBangladeshChartered Accountant Institute of Cost and Management Accountants of Bangladesh.

* * The ACCOUNTING SYSTEM What is Accounting? LG1 17-7

* * Accounting Cycle -- A six-step procedure that results in the preparation and analysis of the major financial statements. The ACCOUNTING CYCLE The Accounting Cycle LG3 17-8

* * 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. BOOKKEEPING’S ROLE The Accounting Cycle LG3 17-9

* * Financial Statement -- A summary of all the financial transactions that have occurred over a particular period. FINANCIAL STATEMENTS Understanding Key Financial Statements LG3 Key financial statements of business are:  Balance sheet  Income statement  Statement of cash flows 17-10

 The Balance sheet, reports the firm’s financial condition on a specific date.  Income statement, summarizes revenues, cost of good, and expenses (including taxes), for a specific period and highlights the total profit or loss the firm experienced during that period.  Statement of cash flows, provides a summary of money coming into and going out of the firm that tracks a company’s cash receipts and cash payments.

* * Fundamental Accounting Equation -- The basis for the balance sheet. The equation must always be balanced and includes the formula: o Assets = Liabilities + Owners Equity The FUNDAMENTAL ACCOUNTING EQUATION The Fundamental Accounting Equation LG

Classifying Assets Assets: Economic resources owned by firm. Items can be tangible or intangible. Liquidity: Ease with which assets can be converted into cash. Classification of assets: 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.

* * Revenues 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 firms sells or the cost of raw materials and supplies it used in producing items for resale. Gross Profit -- How much a firm earned by buying (or making) and selling merchandise. ACCOUNTS of the INCOME STATEMENT The Income Statement LG4 (Continued) 17-21

* * Operating Expenses -- Expenses a firm incurs in selling goods and services such as rent, salaries and supplies. Depreciation -- The systematic write-off of the cost of a tangible asset over its estimated useful life. ACCOUNTS of the INCOME STATEMENT (Continued) The Income Statement LG

Critical thinking As a potential investor in a firm or perhaps the buyer of a business, would you be interested in evaluating the company’s financial statements? Why or why not? What key information would you seek from a firm’s financial statements?