Chapter Seventeen Using Accounting Information

Copyright © Cengage Learning. All rights reserved. Learning Objectives 1.Explain why accounting information and audited financial statements are important. 2.Identify the people who use accounting information and possible careers in the accounting industry. 3.Discuss the accounting process. 4.Read and interpret a balance sheet. 5.Read and interpret an income statement. 6.Describe business activities that affect a firm’s cash flow. 7.Summarize how managers evaluate the financial health of a business. 17| 2

Chapter 17 Outline –Why Accounting Information Is Important Recent Accounting Problems for Corporations and Their Auditors Why Audited Financial Statements Are Important Reform: The Sarbanes-Oxley Act of 2002 –Who Uses Accounting Information? The People Who Use Accounting Information Different Types of Accounting Careers in Accounting –The Accounting Process The Accounting Equation The Accounting Cycle Copyright © Cengage Learning. All rights reserved.17| 3

Chapter 17 Outline (cont’d) –The Balance Sheet Assets Liabilities and Owners’ Equity –The Income Statement Revenues Cost of Goods Sold Operating Expenses Net Income –The Statement of Cash Flows Copyright © Cengage Learning. All rights reserved.17| 4

Chapter 17 Outline (cont’d) – Evaluating Financial Statements Using Annual Reports to Compare Data for Different Accounting Periods Comparing Data with Other Firms’ Data Profitability Ratios Short-Term Financial Ratios Activity Ratios Debt-to-Owners’ Equity Ratio Northeast’s Financial Ratios: A Summary Copyright © Cengage Learning. All rights reserved.17| 5

Copyright © Cengage Learning. All rights reserved. Why Accounting Information Is Important Recent accounting problems for corporations and their auditors –Pressure on corporate executives to look good to analysts and investors Why audited financial statements are important –Bankers, creditors, investors, and government agencies rely on an auditor’s opinion 17| 6

Copyright © Cengage Learning. All rights reserved. Why Accounting Information Is Important (cont’d) What is an audit? Reform: The Sarbanes-Oxley Act of | 7

Copyright © Cengage Learning. All rights reserved. Who Uses Accounting Information The people who use accounting information –Managers are primary users –Lenders require financial information before lending –Stockholders want to know whether to invest or how well their investment is doing –Government agencies require a variety of information 17| 8

Copyright © Cengage Learning. All rights reserved. Careers in Accounting Qualities to be successful in accounting –Be responsible, honest, ethical –Have a strong background in financial management –Know how to use a computer and accounting software –Be able to communicate with people who need accounting information 17| 9

Copyright © Cengage Learning. All rights reserved. Careers in Accounting (cont’d) Private Accountant –Employed by a specific organization –Services performed for the employer General accounting (recording transactions and preparing statements) Budgeting (for sales and operating expenses) Cost accounting (determining costs of producing products and services) Tax accounting (planning strategy and preparing returns) Internal auditing (reviewing finances and operations against goals) 17| 10

Copyright © Cengage Learning. All rights reserved. Careers in Accounting (cont’d) Public Accountant –Provides services to clients on a fee basis –Self-employed or employee of an accounting firm Certified Public Accountant (CPA) –Has met state requirements for accounting education and experience and has passed a rigorous two-day accounting examination prepared by the AICPA –Participates in continuing-education programs to maintain certification 17| 11

Copyright © Cengage Learning. All rights reserved. The Accounting Process The accounting equation Assets = Liabilities + Owners’ equity –Assets—the resources that a business owns (e.g., cash, inventory, equipment, and real estate) –Liabilities—the firm’s debts –Owners’ equity—the difference between assets and liabilities (what would be left for the owners if the firm’s assets were sold and the money used to pay off its liabilities) Double-entry bookkeeping system : Each financial transaction is recorded as two separate accounting entries to maintain the balance of the accounting equation 17| 12

Copyright © Cengage Learning. All rights reserved. The Accounting Process (cont’d) The accounting cycle –Done on a regular basis Done at the end of the period –Preparing the trial balance of all general ledger accounts –Preparing financial statements and closing the books 17| 13

Copyright © Cengage Learning. All rights reserved. The Accounting Cycle 1. Analyzing source documents 2. Recording transactions 4. Preparing the trial balance 3. Posting transactions 5. Preparing financial statements 17| 14

Copyright © Cengage Learning. All rights reserved. The Balance Sheet A summary of the dollar amounts of a firm’s assets, liabilities, and owners’ equity accounts at the end of a specific accounting period (also called statement of financial position) Assets Liabilities Owners’ or stockholders’ equity 17| 15

Copyright © Cengage Learning. All rights reserved. The Income Statement A summary of a firm’s revenues and expenses during a specified accounting period –Profit (cash surplus) –Loss (cash deficit) Revenues 17| 16

Copyright © Cengage Learning. All rights reserved. The Income Statement (cont.) Cost of goods sold –The dollar amount equal to beginning inventory plus net purchases less ending inventory Cost of goods sold Beginning inventory Net purchases Ending inventory =+– Gross profit –A firm’s net sales less the cost of goods sold 17| 17

Copyright © Cengage Learning. All rights reserved. The Income Statement (cont.) Operating expenses Net income Net loss 17| 18

Copyright © Cengage Learning. All rights reserved. The Statement of Cash Flows Illustrates how the operating, investing, and financing activities of a company affect cash during an accounting period 17| 19

Copyright © Cengage Learning. All rights reserved. Evaluating Financial Statements Identify trends in sales, profits, borrowing, and other business variables Determine whether the firm is on track to meet long-term goals 17| 20

Copyright © Cengage Learning. All rights reserved. Comparing Data with Other Firms’ Data Comparisons are possible because of GAAP Managers can get a general idea of a firm’s relative effectiveness and its standing within the industry Data are available from annual reports of public corporations Industry averages are available from Dun & Bradstreet, Standard & Poor’s, industry trade associations 17| 21

Copyright © Cengage Learning. All rights reserved. Financial Ratios Numbers that show the relationship between two elements of a firm’s financial statements Can be compared with –The firm’s own past ratios –Ratios of competitors –Industry averages Information to calculate ratios is found on a firm’s balance sheet and income statement 17| 22