chapter seventeen using accounting information. copyright © cengage learning. all rights reserved....

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.

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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


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



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

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Why Accounting Information Is Important (cont’d)

• What is an audit?

• Reform: The Sarbanes-Oxley Act of 2002

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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

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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

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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)

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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

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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

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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

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The Accounting Cycle

1. Analyzing source

documents

1. Analyzing source

documents

2. Recording transactions

2. Recording transactions

4. Preparing the trial balance

4. Preparing the trial balance

3. Posting transactions

3. Posting transactions

5. Preparing financial

statements

5. Preparing financial

statements

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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

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The Income Statement

• A summary of a firm’s revenues and expenses during a specified accounting period– Profit (cash surplus)

– Loss (cash deficit)

• Revenues

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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

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The Income Statement (cont.)

• Operating expenses

• Net income

• Net loss

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The Statement of Cash Flows

• Illustrates how the operating, investing, and financing activities of a company affect cash during an accounting period

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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

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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

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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

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chapter seventeen using accounting information. copyright © cengage learning. all rights reserved....

Documents

accounting information

accounting process

accounting equation

accounting software

accounting qualities

accounting industry

financial information

different accounting