Using Financial
Information and Accounting
Chapter 14
I. Purpose of Accounting
A. Who uses financial reports and accouning information?
1. Financial reports give information about a company’s
past, present and future performance to:
a. Managers - use reports to make decisions about firm’s
operations
b. Employees - to see the financial wealth of the org., to see
how individual efforts helped
c. Investors and customers -use reports to make
investment and purchasing decisions
d. Suppliers, creditors, and government agencies - use reports
to determine their relationship with the org.
II. Types of Accountants
A. Public Accountants - independent accountant
who serves organizations & individuals on a fee
basis; offers a wide range of services
1. auditing
2. Tax returns
3. Financial statement preparation
4. consulting
B. Private Accountants
C. Fund and not-for-profit accountants
(charities, hospital, gov’t, schools)
III. Basic Accounting Procedures
A. The Accounting Equation
Assets = Liabilities + Owners’ Equity
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assets
liabilities
owners’ equity
revenues
expenses
net income
double-entry bookkeeping (debits, credits)
B. The Accounting Cycle
1. Analyze business
transaction documents
2. Record business
transactions in journal
3. Post entries
to ledgers
4. Prepare trial balance
5. Prepare financial
statements &
management reports
6. Analyze reports
IV. The Balance Sheet
• Summarizes a firm’s financial position at a
specific point in time (on a specific date)
A. Assets (resources)
current, fixed, intangible, depreciation
B. Liabilities (obligations)
current, long-term
C. Equity(Assets minus obligations)
retained earnings
V. The Income Statement
• Summarizes the firm’s revenues & expenses
and shows total profit or loss over a period
of time
A. Revenues
gross sales, net sales
B. Expenses
cost of goods sold, operating expenses
C. Net profit or loss
VI. The Statement of Cash Flows
• Summarizes the money flowing into and out
of a firm for a period of time
A. Sources of cash flow:
1. operating activities
2. investment activities
3. financing activities
VII. Analyzing Financial Statements
A. Ratio analysis: calculating & interpreting financial
ratios taken from financial reports to assess a firm.
1. liquidity ratios - measures firm’s ability to
pay its short-term debt
a. current ratio
b. acid-test (quick) ratio
c. net working capital
Ratio Analysis (Cont’d)
2. Activity Ratios - indicates how efficiently the
firm uses its assets to generate revenue
a. accounts receivable turnover
b. inventory turnover
3. Profitability ratios - measures operating success
a. net profit margin
b. return on equity
c. earnings per share
4. Debt ratios - measures a firm’s ability to
pay its long-term debt
a. debt to equity ratio
VIII. Trends in Accounting
• Accountants expand their role
– more involvement in operations, advise clients
on systems, software, and acctg. regulations
• Valuing knowledge assets
– R&D, brands, trademarks, employee talent
• Tightening the GAAP
– reducing loopholes, cleaning up records