Chapter 14
The Role of Accountants and Accounting
Information
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LEARNING OUTCOMES
After reading this chapter, you should be able to:
Explain the role of accountants and distinguish between the kinds
of work done by public accountants, private accountants,
management accountants, and forensic accountants.
Explain how the accounting equation is used.
Describe the three basic financial statements and show how they
reflect the activity and financial condition of a business.
Explain the key standards and principles for reporting financial
statements.
Describe how computing financial ratios can help users get more
information from financial statements to determine the financial
strengths of a business.
Discuss the role of ethics in accounting.
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What’s in It for Me?
By understanding this chapter’s discussion of
accountants, their methods, and their
responsibilities, you’ll benefit in three ways:
1. if you’re thinking about starting your own business,
you’ll discover your obligations for reporting your
firm’s financial status
2. As an employee or union member, you’ll see how to
evaluate your company’s financial condition and its
prospects for the future
3. As an interested citizen, you’ll learn about
accounting ethics and regulatory requirements for
maintaining public trust in the business system
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What Is Accounting?
Accounting Defined:
 A comprehensive system for collecting, analyzing
and communicating financial information
 Bookkeeping: the recording of transactions
Users of Accounting Information:
 Business managers
 Employees and unions
 Investors and creditors
 Tax authorities
 Government regulatory agencies
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Who Are Accountants
and What Do They Do?
Controller
 Manages all of a firm’s accounting activities
Types of Accounting Systems
 Financial Accounting
Concerned with external information users—the firm’s
external stakeholders
 Prepares income statements, balance sheets, and other
financial reports published for shareholders and the public

 Managerial (Management) Accounting

Serves internal users (managers) by providing information to
make departmental decisions, monitor projects, and plan
future activities
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Who Are Accountants and
What Do They Do? (cont’d)
Certified Public Accountants (CPAs)
 Licensed, offering services to the public
Auditing (GAAP)
 Tax services
 Management advisory services

Noncertified Public Accountants
Private Accountants
 Work exclusively for a firm as accountants
Management Accountants
 Certified management accountant (CMA)
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Who Are Accountants and
What Do They Do? (cont’d)
Forensic Accountants
 Assist in the investigation of business and financial
issues that may have application to a court of law
 Investigative Accounting
Identifying financial evidence that may be pertinent
 Analyzing financial evidence
 Presenting accounting conclusions and their legal
implications

 Litigation Support

Certified Fraud Examiner: A specialty area within forensic
accounting
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The CPA Vision Project
Identifying issues for the future
Global forces as drivers of change
Recommendations
A new direction
 Core services
 Core competencies
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Federal Restrictions on CPA Services
and Financial Reporting: Sarbox
Sarbanes-Oxley Act of 2002 (Sarbox)
 Enacted to restore public trust in corporate
accounting practices as a direct response to
corporate financial abuses
 Restricts non-audit services that CPAs can provide
Sarbox Compliance Requirements
 CFOs and CEOs must pledge that the company’s
finances are correct and face severe penalties
noncompliance
 Whistleblowers must be protected
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The Accounting Equation
The Accounting Equation
 Assets = Liabilities + Owners’ Equity
 Assets – Liabilities = Owners’ Equity (or Net Worth)
Asset
 Any economic resource that is expected to benefit a
firm or an individual who owns it
Liability
 A debt that the firm owes to an outside party
Owners’ Equity
 Money that owners would receive if they sold all of a
company’s assets and paid all of its liabilities
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Financial Statements
Balance Sheets
 Supply detailed information about:
Assets
– Current assets: Cash/assets that can be converted into cash
within a year
– Fixed assets: Capital that has long-term use or value
– Intangible assets: Patents, trademarks, copyrights, etc.
 Liabilities
– Current liabilities: debts that must be paid within one year,
including accounts payable
– Long-term liabilities: debts not due for at least a year
 Owners’ Equity
– Paid-in (invested) capital
– Retained earnings (net profits)

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Financial Statements (cont’d)
Income Statement (Profit and Loss Statement)
 Its description of revenues and expenses results in a
figure showing the firm’s annual profit or loss

Revenues: the funds that flow into a business from the sale
of goods or services

Cost of revenues: shows the costs of obtaining the
revenues from other companies during the year

Cost of goods sold: costs of obtaining materials to make
products sold during the year

Gross profit: considers revenues and cost of revenues from
the income statement

Operating expenses: resources that must flow out of a
company if it is to earn revenues
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Financial Statements (cont’d)
Statements of Cash Flows
 Describes yearly cash receipts and cash payments
Cash Flows from Operations: Concerns main operating
activities: cash transactions involved in buying and selling
goods and services
 Cash Flows from Investing: Net cash used in or provided
by investing
 Cash Flows from Financing: Net cash from all financing
activities

The Budget
 A detailed report on estimated receipts and
expenditures for a future period of time
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Financial Statements Review
Balance Sheet
Assets – Liabilities = Owners’ Equity
Income Statement
Revenues – Expenses = Profit (or Loss)
Statement of Cash Flows
Cash In and Cash Out
Budget
Estimate – Actual = Variance
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Reporting Standards and Practices
Generally Accepted Accounting Principles
(GAAP)
 Revenue recognition: Formal recording and reporting
of revenues at the appropriate time
 Full disclosure

Financial statements should not include just numbers but
should also furnish management’s interpretations and
explanations of those numbers so that users can better
understand information in the statements
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Solvency Ratios
Short-Term
Current Ratio:
Current Assets
Current Liabilities
Leverage: The ability to finance an investment
through borrowed funds
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Solvency Ratios
Long-Term
Debt to Owners’ Equity Ratio:
Debt
Owners’ Equity
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Profitability and Activity Ratios
Return on Equity:
Net Income
Total Owners' Equity
Net Income
Earnings Per Share:
Inventory Turnover Ratio:
# of Shares Outstanding
Cost of Goods Sold
Average Inventory
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Bringing Ethics into the
Accounting Equation
Why Accounting Ethics?
 To maintain public confidence in business
institutions, financial markets, and the products and
services of the accounting profession
AICPA’s Code of Professional Conduct
 Maintained and enforced by the AICPA
 The AICPA identifies six ethics-related areas with
which accountants must comply to maintain
certification
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Overview of the Code of Ethics for CPAs
Membership in the American Institute of Certified Public
Accountants is voluntary. By accepting membership, a
certified public accountant assumes an obligation of selfdiscipline above and beyond the requirements of laws and
regulations.
• Responsibilities
• The Public Interest
• Integrity
• Objectivity and Independence
• Due Care
• Scope and Nature of Services
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