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

Chapter
Seventeen
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
4. Explain how the major financial statements differ.
5. Demonstrate the application of ratio analysis in reporting financial information.
17-3

Profile
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
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?
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?
LG1
17-7

What is
Accounting?
LG1
’
17-8

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
Government tax authority
Government regulatory agencies
People interested in the organization ’ s income
Managers of the firm
Type of Report
Tax reports
Required reports
Financial statements found in annual reports
Financial statements and internally distributed financial reports
17-10

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
• 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
• 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 (AICPA) and met a states requirements for education and experience.
17-13

Financial
Accounting
LG2
17-14

Financial
Accounting
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
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

(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
LG2
• Tax Accountants -Accountants trained in tax law and are responsible for preparing tax returns or developing tax strategies.
• Government and Not-for-
Profit Accounting --
Support for organizations whose purpose is not generating a profit, but serving others according to a duly approved budget.
17-18

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
LG3
• Accounting Cycle A six-step procedure that results in the preparation and analysis of the major financial statements.
17-20

The
Accounting
Cycle
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
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
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
• 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
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

The
Fundamental
Accounting
Equation
LG4
• Fundamental Accounting Equation -The basis for the balance sheet.
• The equation must always be balanced and includes the formula:
 Assets = Liabilities + Owners Equity
17-26

The Balance
Sheet
LG3
• Balance Sheet -The financial statement that reports a firm ’ s financial condition at a specific time.
17-27

Classifying
Assets
LG4
• Assets -Economic resources owned by a firm.
Items can be tangible or intangible.
• Liquidity -Ease with which assets can be converted into cash.
17-28

Classifying
Assets
LG4
• Current Assets -Items that can or will be converted to cash within one year.
• Fixed Assets -Long-term assets that are relatively permanent such as land, buildings, or equipment.
• Intangible Assets -Long-term assets that have no physical form but do have value such as patents, trademarks, and goodwill.
17-29

Liabilities and
Owners ’
Equity
Accounts
LG4
• Liabilities -What the business owes to others - its debts.
• Accounts Payable -Current liabilities a firm owes for merchandise or services purchased on credit.
• Notes Payable -Short or long-term liabilities a business promises to pay by a certain date.
• Bonds Payable -Long-term liabilities that the firm must pay back.
17-30

Liabilities and
Owners ’
Equity
Accounts
LG4
’
• Owners ’ Equity -The amount of the business that belongs to the owners minus any liabilities of the owners.
• Retained Earnings --
Accumulated earnings from the firm ’ s profitable operations that are reinvested in the business.
17-31

Progress
Assessment
• What do we call the formula for the balance sheet? What three accounts does it include?
• What does it mean to list assets according to liquidity?
• What ’ s the difference between long-term and short-term liabilities on the balance sheet?
• What ’ s owners ’ equity and how do we determine it?
17-32

The Income
Statement
LG4
• Income Statement --
The financial statement that shows a firm ’ s bottom line - that is, its profit after costs, expenses, and taxes.
• Net Income/Net Loss --
The revenue left over after costs and expenses.
17-33

The Income
Statement
LG4
• The formula for the income statement :
Revenue
Cost of Goods Sold
= Gross Profit
Operating Expenses
= Net Income before Taxes
Taxes
= Net Income or Net Loss
17-34

Cost of Goods
Sold
LG4
• Revenue is the monetary value a firm received for goods sold, services rendered or other payments.
• Cost of Goods Sold (or Manufactured) --
Measures the cost of merchandise the firm sells or the cost of raw materials and supplies it used in producing items for resale.
• Gross Profit (or Gross Margin) -How much a firm earned by buying (or making) and selling merchandise.
(Continued)
17-35

Operating
Expenses
LG4
( Continued )
• Operating Expenses –
Cost involved in operating a business, such as rent, salaries and supplies.
• Depreciation -The systematic write-off of the cost of a tangible asset over its estimated useful life.
17-36

(Spotlight on Small Business)
• Generally Accepted Accounting Principles
(GAAP) sometimes permits accountants to use different method of accounting for inventory.
• FIFO: First-In, First-Out
• LIFO: Last-In, First-Out
• Each valuation can affect income and ending inventory valuation.
17-37

The
Statement of
Cash Flows
LG4
• Statement of Cash Flows -Reports cash receipts and cash disbursements related to the three major activities of a firm:
1. Operations
2. Investments
3. Financing
17-38

The Need for
Cash Flow
Analysis
LG4
• Cash Flow -The difference between cash coming in and cash going out of a business.
• Managing cash flow is a key consideration of a business and can be particularly challenging for small and seasonal businesses.
17-39

(Making Ethical Decisions)
• You ’ re the only accountant employed by a small, struggling dog food company.
• The company requests a bank loan to keep operations going and your boss suggests you record some revenue early.
• This is against accounting principles, but you know if you don ’ t get the loan, you may lose your job. What do you do?
17-40

Progress
Assessment
• What are the key steps in preparing an income statement?
• What ’ s the difference between revenue and income on the income statement?
• Why is the statement of cash flows important in evaluating a firm ’ s operations?
17-41

Analyzing
Financial
Performance
Using Ratios
LG5
• Ratio Analysis -The assessment of a firm ’ s financial condition using calculations and financial ratios developed from the firm ’ s financial statements.
• Key ratios include:
Liquidity ratios
Leverage ratios
Performance ratios
Activity ratios
17-42

Liquidity
Ratios
LG5
• Liquidity ratios measure a firm ’ s ability to turn assets into cash to pay its short-term debts.
• Two key ratios are:
Current ratio
Acid-test ratio
• This information is found on the firm ’ s balance sheet.
17-43

Leverage
(Debt) Ratios
LG5
• Leverage ratios measure the degree to which a firm relies on borrowed funds in its operations.
• Key ratios include:
Debt to Owner ’ s Equity Ratio
• This information is found on the firm ’ s balance sheet.
17-44

Profitability
(Performance)
Ratio
LG5
• Profitability ratios measure how effectively a firm ’ s managers are using the firm ’ s various resources to achieve profits.
• Key ratios include:
Basic earnings per share
Return on sales
Return on equity
• This information is found on the firm ’ s balance sheet and income statement.
17-45

Activity Ratio
LG5
• Activity ratios measure how effectively management is turning over inventory.
• Key ratios include:
Inventory turnover ratio
• This information is found on the firm ’ s balance sheet and income statement.
17-46

(Reaching Beyond Our Borders)
• Multinational companies must adapt their accounting reporting to the rules of multiple countries.
• Many countries have adopted International
Financial Reporting Standards (IFRS) and are pushing to make them standard.
• The U.S. Securities & Exchange Commission believes there should be such a standard.
17-47

• 2008: SEC offered proposed timeline
• 2009: 110 large companies have the option of using
IFRS
• 2011: SEC assesses progress of IFRS
• 2013: Final decision on the move to IFRS
• 2014: Large public companies will be required to report in IFRS (pending SEC decision)
• 2016: All companies will be required to report in
IFRS (pending SEC decision)
Source: IFRS.org
, accessed July 2011.
17-48

Progress
Assessment
• What ’ s the primary purpose of performing ratio analysis using the firm ’ s financial statements?
• What are the four main categories of financial ratios?
17-49