Understanding business 10th chapter 17 understanding accounting financial information

NAME that COMPANYChapter Seventeen Until the development of accounting software simplified the accounting process, accountants had to enter all financial information by hand.. Today acc

Understanding

Accounting and Financial

Information

Chapter 17

Copyright © 2013 by The McGraw-Hill Companies, Inc All rights reserved McGraw-Hill/Irwin

1 Demonstrate the role that accounting and financial

information play for a business and for its stakeholders.

2 Identify the different disciplines within the

accounting profession.

3 List the steps in the accounting cycle, distinguish

between accounting and bookkeeping, and explain how computers are used in accounting.

LEARNING GOALS

Chapter

Seventeen

4 Explain how the major financial statements differ.

5 Demonstrate the application of ratio analysis in

reporting financial information.

LEARNING GOALS

Chapter

Seventeen

17-3

• Hilmarsson missed an

Icelandic treat called skyr, a thick, strained, protein-rich yogurt

contacted a former professor for help with financing

problems that affected cash flow

SIGGI HILMARSSON

Siggi’s Yogurt

Profile

NAME that COMPANY

Chapter

Seventeen

Until the development of accounting software

simplified the accounting process, accountants had to enter all financial information by hand

Today accounting software makes it possible for businesses to have financial information available whenever they need it Name two companies that provide accounting software for small businesses

Name those companies!

17-5

• Accounting Recording, classifying, summarizing

and interpreting of financial events and transactions

in an organization to provide interested parties needed financial information.

creditors, unions, investors and the government - make use of a firm’s accounting information

WHAT’S ACCOUNTING?

What is

Accounting?

LG1

The ACCOUNTING SYSTEM

LG1

What is

Accounting?

17-7

• Managerial Accounting Provides information

and analysis to managers inside the organization to assist them in decision making.

- Costs of production

- Costs of marketing

- Preparation and control of budgets

- Minimizing tax liabilities

USERS of ACCOUNTING

INFORMATION

Government tax authority Tax reports

Managers of the firm Financial statements and

internally distributed financial

reports

LG2

Managerial

Accounting

• 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.

• Key things to watch for and read:

HOW to READ

an ANNUAL REPORT

- Management’s

discussion and analysis of operations

• 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 (A ICPA)

and met a states requirements for education and experience.

WAYS to IMPROVE ACCOUNTING PRACTICES

LG2

Financial

Accounting

• Dodd-Frank Wall Street Reform and Consumer

Protection Act increased financial regulation by increasing the power of the Public Company Accounting Oversight Board

• 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

AUDITING CHECKS ACCURACY

Auditing

LG2

• Sam E Antar, a CPA, was convicted of inflating

sales figures, money laundering, and inventory

fraud

how to prevent it and training auditors in forensic accounting

• Tax Accountants Accountants trained in tax law

and are responsible for preparing tax returns or developing tax strategies.

• What’s the key difference between managerial

and financial accounting?

from that of a public accountant?

• 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

• 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

• 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

• Computerized

accounting programs post information

instantly and from remote locations

address the specific needs of small

• How is the job of the bookkeeper different from

an accountant?

ledger?

maintaining and compiling accounting information?

PROGRESS ASSESSMENT

Progress

Assessment

• Financial Statement A summary of all the

financial transactions that have occurred over a particular period.

• Fundamental Accounting Equation The basis for the balance sheet.

includes the formula:

 Assets = Liabilities + Owners Equity

The FUNDAMENTAL ACCOUNTING EQUATION

• Balance Sheet The financial statement that

reports a firm’s financial condition at a specific time.

The BALANCE SHEET

The Balance

Sheet

LG3

17-27

• Assets Economic resources owned by a firm

Items can be tangible or intangible

• Liquidity Ease with which assets can be

converted into cash.

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.

• 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.

must pay back.

• 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

• What do we call the formula for the balance

sheet? What three accounts does it include?

liquidity?

short-term liabilities on the balance sheet?

it?

PROGRESS ASSESSMENT

Progress

Assessment

• 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.

The INCOME STATEMENT

The Income

Statement

LG4

17-33

The formula for the income statement:

= Net Income or Net Loss

The INCOME STATEMENT

LG4

The Income

Statement

• 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.

ACCOUNTS of the INCOME

• 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.

ACCOUNTS of the INCOME

• Generally Accepted Accounting Principles

(GAAP) sometimes permits accountants to use

different method of accounting for inventory

inventory valuation

WHAT’S COMING and GOING

at the COLLEGE BOOKSTORE

(Spotlight on Small Business)

17-37

• Statement of Cash Flows Reports cash

receipts and cash disbursements related to the three major activities of a firm:

• Cash Flow The difference between cash coming

in and cash going out of a business.

UNDERSTANDING CASH FLOW

The Need for

LG4

17-39

• You’re the only accountant employed by a small,

struggling dog food company

operations going and your boss suggests you

record some revenue early

know if you don’t get the loan, you may lose your job What do you do?

BARKING UP the WRONG FINANCIAL STATEMENT

(Making Ethical Decisions)

• What are the key steps in preparing an income

statement?

income on the income statement?

evaluating a firm’s operations?

PROGRESS ASSESSMENT

Progress

Assessment

17-41

• Ratio Analysis The assessment of a firm’s

financial condition using calculations and financial ratios developed from the firm’s financial statements.

USING FINANCIAL RATIOS

• Liquidity ratios measure a firm’s ability to turn

assets into cash to pay its short-term debts

Liquidity

Ratios

LG5

17-43

• Leverage ratios measure the degree to which a

firm relies on borrowed funds in its operations

- Debt to Owner’s Equity Ratio

• Profitability ratios measure how effectively a

firm’s managers are using the firm’s various resources to achieve profits

- Basic earnings per share

- Return on sales

- Return on equity

sheet and income statement

• Activity ratios measure how effectively

management is turning over inventory

- Inventory turnover ratio

LG5

• Multinational companies must adapt their

accounting reporting to the rules of multiple

countries

International Financial Reporting Standards (IFRS)

and are pushing to make them standard

believes there should be such a standard

ACCOUNTANTS

of the WORLD UNITED

(Reaching Beyond Our Borders)

17-47

• 2008: SEC offered proposed timeline

• 2009: 110 large companies have the option of using IFRS

• 2011: SEC assesses progress of IFRS

• 2013: Final decision on the move to IFRS

• 2014: Large public companies will be required to

report in IFRS (pending SEC decision)

• 2016: All companies will be required to report in

IFRS (pending SEC decision)

TIMELINE for the MOVE to IFRS

• What’s the primary purpose of performing ratio

analysis using the firm’s financial statements?