USING ACCOUNTING
INFORMATION
By Udayanga & Habeeb
Why is Accounting information important?
Definition for accounting:
“A process of systematically collecting, analyzing and
reporting financial information.”
Managers, employees, lenders, suppliers, stockholders, and the
government agencies all rely on the information contained in the
three financial statements. There are
•Balance sheet
•Income statement
•Statement of cash flows
http://www.articlesbase.com/careers-articles/why-is-accounting-so-important-796991.html
Why is Accounting information important? (cont’d)
The firms accounting system provides information that can
be complied for the entire firm; for each product; for each
division and department and generally in a way that will
help those who manage the organization.
The people who use accounting information
•The primary uses of accounting information are the
managers. They use these information to make their
decisions as well as set goals to the organization.
•Lenders also use the accounting information to see the firms
financial side to lend either short time or long time loans.
•Suppliers also need the accounting information before they
supply the raw materials. This is to see whether they will
extend credit to the firm.
The people who use accounting information (cont’d)
•Stockholders are provided with a summary of the
firms financial position annually.
•Government agencies need the accounting
information in order to prepare the tax amount.
Careers in accounting
There are many jobs available in the accounting area.
Many different jobs. Some of them are;
1) Private accountant; they are employed by a specific
organization. Medium or larger firms employee one or
more private accountants. Their job is normally to design its
accounting information system, manage its accounting
department, and provide managers with advise and
assistance.
http://www.careers-in-accounting.com/
Careers in accounting (cont’d)
They also perform the following to their employers.
i.
General accounting- recording business transactions and
prepare financial statements.
ii. Budgeting- helping manager to prepare the budget for sales
and various expenses.
iii. Cost accounting- determining the cost for a specific product or
service.
iv. Tax accounting- planning ax strategies and producing tax
returns to the firm.
v. Internal auditing- reviewing the companies financial status and
determine whether they have achieved their goals.
Careers in accounting (cont’d)
2) Public accountant- they work on a fee basis for clients and may
be self employed or be the employee of an accounting firm.
CPA- certified public accountants. And experience
individuals who has met state requirements for accounting
education. This is a well paid job. In USA a CPA’s income range of
an hour is $50 to $300. this is a very hard job. They are always
up to the current situation in the business field. Only a CPA can
audit the financial statements in a corporation's annual repot and
express an opinion. They are always consulted with business firms
troubled financially or in management of the firm.
Accounting Process
Information is defined as data presented in a form useful
for a specific purpose. Accounting system transforms raw
data in to useful financial information.
The accounting equation;
Assets = liabilities + owners equity
Accounting Process (cont’d)
Let us learn some accounting equations terms;
•Assets; these are resources owned by the business. Eg- cash,
inventory, real estate.
•Liabilities; firms long term and short term debts (what is
owned by others).
•Owner equity: the share owned by the founder or the father
of the business.
The Accounting life cycle
The accounting life cycle contains 5 stages.
a) Analyzing Source Documents
b) Recording Transactions
c) Posting Transactions
d) Preparing the Trial Balance
e) Preparing the Financial statements and Closing the Books
Double Entry Books
This is a system in which each
financial transaction is recorded
as two separate accounting
entries to maintain the balance
in the accounting system.
(assets = liabilities + owners
equity)
The Balance Sheet
A financial statement that summarizes a company's assets,
liabilities and shareholders' equity at a specific point in time.
These three balance sheet segments give investors an idea as
to what the company owns and owes, as well as the amount
invested by the shareholders.
The balance sheet must follow the following formula:
Assets = Liabilities + Shareholders' Equity
http://www.investopedia.com/terms/b/balancesheet.asp
Assets
Asset as we know is all the belonging of the firm. When
stating on the balance sheet we must state it according to the
most liquid to the least liquid. Liquidity means assets
converting into money.
There are three types of assets. They are ;
i) Current Assets
ii) Fixed Assets
iii) Intangible Assets
Current Assets
A balance sheet account that represents the value of all
assets that are reasonably expected to be converted into
cash within one year in the normal course of business.
Current assets include cash, accounts receivable, inventory,
marketable securities, prepaid expenses and other
liquid assets that can be readily converted to cash.
In the United Kingdom, current assets are also known as
"current accounts".
http://www.investorwords.com/1245/current_assets.html
Fixed Assets
Land, buildings, equipment, machinery, vehicles, leasehold
improvements, and other such items. Fixed assets are not consumed or
sold during the normal course of a business but their owner uses them
to carry on its operations. In accounting, 'fixed' does not necessarily
mean 'immovable;' any asset expected to last, or be in use for, more
than one year is considered a fixed asset. On a balance sheet, these
assets are shown at their book value (purchase price less
depreciation).
http://www.businessdictionary.com/definition/fixed-asset.html#ixzz10sbobnI7
Intangible Assets
Something of value that cannot be physically
touched, such as a brand, franchise, trademark, or
patent. opposite of tangible asset.
http://www.investorwords.com/2525/intangible_asset.html#ixzz10sdtHaXM
Liabilities
An obligation that legally binds an individual or
company to settle a debt. When one is liable for a
debt, they are responsible for paying the debt or
settling a wrongful act they may have committed.
http://www.investorwords.com/2792/liability.html#ixzz10seXa2j3
Owner’s Equity
Owner's Equity—along with liabilities—can be thought of as a
source of the company's assets. Owner's equity is sometimes
referred to as the book value of the company, because owner's
equity is equal to the reported asset amounts minus the reported
liability amounts.
Owner’s Equity (cont’d)
Owner's equity may also be referred to as the
residual of assets minus liabilities. These references
make sense if you think of the basic accounting
equation:
Assets = Liabilities + Owner's Equity
and just rearrange the terms:
Owner's Equity = Assets – Liabilities
The Income Statement
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An income statement is a summary of a firms revenue and
expenses during a specific accounting period – one month,
three months, six months, or a year
Show if the company is making a profit or a loss.
Sometimes called Profit and Loss account (PnL)
Measuring Income
Some important terms
Revenues – Dollar amount earned by selling good and
services
 Cost of Goods Sold (COGS) – Total cost of merchandise
sold. Dollar amount equal to:
Beginning Inventory + Net purchases – Ending Inventory
 Gross Profit – Sales revenue less COGS
 Operating Expenses – All business costs other than Cost of
Goods Sold
 Net Income – The profit earned during a period after all
expenses have been deducted from revenues

Sample Income Statement
Statement of Cash Flows
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A statement that shows how the operating, investing, and
financing activities of a company affect cash during an
accounting period – one month, three months, six months, or a
year.
Shows cash receipts and cash payment
Organized around 3 activities: Operations, Investing, Financing
Sources of Cash Flows
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Cash Flows from Operating activities
Cash Flows from Investing activities
Cash Flows from Financing activities
Usefulness of the Statement of Cash flows
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Ability to generate future cash flows.
Ability to pay dividends and meet obligations.
Reasons for the difference between net income and net cash
provided (used) by operating activities.
Cash invested and financing transactions during the period.
Types of Cash inflow and outflow
Sample Cash Flow Statement
Evaluating Financial Health

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Three characteristics of a company:
1) liquidity
2) profitability
3) solvency
In order to obtain information as to whether the amount:
1) represents an increase over earlier years or
2) is adequate in relation to the company’s need for
cash, or
3) the amount of cash must be compared with other
financial statement data.
Financial Ratio classifications
Comparing Accounting Data
Financial Ratios
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Ratio analysis expresses the relationship among selected items
of financial statement data.
A ratio expresses the mathematical relationship between one
quantity and another.
Profitability Ratios
Short-term financial Ratios
Activity Ratios
Debt-to-owner’s equity Ratios
Profitability Ratios
Earning Per Share (EPS)
 Earnings per share (EPS) is a measure of net income earned
on each share of common stock.
EARNINGS
PER SHARE
NET INCOME
=
———————————-———-—————————
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Profit Margin
 The profit margin ratio is a measure of the percentage of
each dollar of sales that results in net income.
PROFIT MARGIN ON SALES =
NET INCOME
——————
NET SALES
Short-term financial ratios
Current Ratio
 The current ratio (working capital ratio) is a widely used
measure for evaluating a company’s liquidity and shortterm debt-paying ability.
CURRENT RATIO =
CURRENT ASSETS
———————————
CURRENT LIABILITIES
Acid-test ratio
 The acid-test ratio (quick ratio) is a measure of a
company’s short-term liquidity.
CASH + MARKETABLE SECURITIES + RECEIVABLES (NET)
ACID-TEST RATIO = ————————————————————————
CURRENT LIABILITIES
Activity Ratio
Two activity ratios permit managers to measure how many
times each year a company collects its accounts receivables
or sells inventory
Accounts Receivable Turnover
 The receivables turnover ratio is used to assess the
liquidity of the receivables.
 It measures the number of times, on average, receivables
are collected during the period
NET CREDIT SALES
RECEIVABLES TURNOVER = —————————————AVERAGE NET RECEIVABLES
Activity Ratio
Inventory Turnover
 The inventory turnover ratio measures the number of times,
on average, the inventory is sold during the period.
 Its purpose is to measure the liquidity of the inventory.
INVENTORY TURNOVER =
COST OF GOODS SOLD
————————————
AVERAGE INVENTORY
Debt-to-owner’s equity Ratios
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Used to determine whether a firm has too much debt.
The higher the ratio, the riskier the situation is for lenders.
A high ratio may make borrowing money difficult
TOTAL LIABILITIES
DEBT-TO-OWNER’S EQUITY RATIO = ————----------——----------------OWNER’S EQUITY
Thank
You
Udayanga Wijesekara & Mohamed Habeeb