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Understanding business 10th chapter 17 understanding accounting financial information

Chapter 17

Understanding
Accounting
and Financial
Information

McGraw-Hill/Irwin

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


Chapter
Seventeen

LEARNING GOALS

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.
17-2


Chapter
Seventeen

LEARNING GOALS

4. Explain how the major financial statements differ.
5. Demonstrate the application of ratio analysis in
reporting financial information.

17-3


Profile

SIGGI HILMARSSON
Siggi’s Yogurt

• Hilmarsson missed an
Icelandic treat called skyr, a
thick, strained, protein-rich
yogurt.
• He perfected his yogurt and
contacted a former professor
for help with financing.
• Distribution raised cost
problems that affected cash
flow.
17-4


Chapter
Seventeen


NAME that COMPANY

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


What is
Accounting?

WHAT’S ACCOUNTING?

LG1

• Accounting -- Recording, classifying, summarizing
and interpreting of financial events and transactions
in an organization to provide interested parties
needed financial information.

• Outside parties - like employees, owners,
creditors, unions, investors and the government make use of a firm’s accounting information.

17-6


What is
Accounting?

The ACCOUNTING SYSTEM

LG1

17-7


What is
Accounting?
LG1

ACCOUNTANTS’
RESPONSIBILITIES

17-8


Managerial
Accounting

MANAGERIAL ACCOUNTING

LG2

• Managerial Accounting -- Provides information
and analysis to managers inside the organization to
assist them in decision making.

• Managerial accounting is involved with:
- Costs of production
- Costs of marketing
- Preparation and control of budgets
- Minimizing tax liabilities
17-9


Managerial
Accounting
LG2

USERS of ACCOUNTING
INFORMATION
Users

Type of Report

Government tax authority

Tax reports

Government regulatory
agencies

Required reports

People interested in the
organization’s income

Financial statements found in
annual reports

Managers of the firm

Financial statements and
internally distributed financial
reports

17-10


Financial
Accounting

FINANCIAL ACCOUNTING

LG2

• 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.
17-11


Financial
Accounting
LG2

HOW to READ
an ANNUAL REPORT

• Key things to watch for and read:
- Management’s
discussion and
analysis of operations
- Balance sheet
- Income statement
- Statement of cash
flows
- Auditor’s opinion

17-12


Financial
Accounting
LG2

PUBLIC vs. PRIVATE
ACCOUNTANTS

• 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.

17-13


Financial
Accounting
LG2

WAYS to IMPROVE
ACCOUNTING PRACTICES

17-14


Financial
Accounting

DODD-FRANK ACT

LG2

• Dodd-Frank Wall Street Reform and Consumer
Protection Act increased financial regulation by
increasing the power of the Public Company
Accounting Oversight Board.
• Act was brought on by the recent financial crisis.

Photo Courtesy of: Nancy Pelosi

17-15


Auditing

AUDITING CHECKS ACCURACY

LG2

• 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.
17-16


FIGHTING ACCOUNTING FRAUD
LINE-by-LINE
(Legal Briefcase)

• Sam E. Antar, a CPA, was convicted of inflating
sales figures, money laundering, and inventory
fraud.
• Today, he lectures companies concerning fraud,
how to prevent it and training auditors in forensic
accounting.
• Forensic accountants are trained as crime-scene
investigators.
17-17


Tax Accounting
and Not-for-Profit
Accounting

SPECIALIZED ACCOUNTANTS

LG2

• Tax Accountants -- Accountants trained in tax law
and are responsible for preparing tax returns or
developing tax strategies.

• Government and Not-forProfit Accounting -Support for organizations
whose purpose is not
generating a profit, but
serving others according to a
duly approved budget.
17-18


Progress
Assessment

PROGRESS ASSESSMENT

• What’s the key difference between managerial
and financial accounting?
• How’s the job of a private accountant different
from that of a public accountant?
• What’s the job of an auditor? What’s an
independent audit?

17-19


The
Accounting
Cycle

The ACCOUNTING CYCLE

LG3

• Accounting Cycle -- A six-step procedure that
results in the preparation and analysis of the major
financial statements.

17-20


The
Accounting
Cycle

BOOKKEEPER’S ROLE

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.
17-21


The
Accounting
Cycle

BOOKKEEPER’S TOOLS

LG3

• 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.
17-22


Accounting
Technology

TECHNOLOGY and ACCOUNTING

LG3

• Computerized
accounting programs
post information
instantly and from
remote locations.
• Intuit’s QuickBooks
and Sage’s Peachtree
address the specific
needs of small
businesses.
17-23


Progress
Assessment

PROGRESS ASSESSMENT

• How is the job of the bookkeeper different from
an accountant?
• What’s the purpose of accounting journals and a
ledger?
• Why does a bookkeeper prepare a trial balance?
• How has computer software helped businesses in
maintaining and compiling accounting
information?
17-24


Understanding
Key Financial
Statements

FINANCIAL STATEMENTS

LG3

• Financial Statement -- A summary of all the
financial transactions that have occurred over a
particular period.

• Key financial statements of
business are:
- Balance sheet
- Income statement
- Statement of cash flows

17-25


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