Accounting Basics Module 07

Module 07: Understanding Accounting and Financial Information - The Basics

• Accounting is the process of recording, classifying, summarizing, and interpreting financial events (transactions) to provide management and other interested parties with the information needed for good decisions.
• Stakeholders include internal parties like management, marketing staff, operations staff, and human resources management staff, and external like investors, creditors, government, and regulators.
• Financial events are transactions that have occurred, such as buying supplies, paying employees, receiving or repaying a loan, selling a product, or paying expenses like rent and insurance.
• Today's computerized accounting programs are helpful for small business owners who lack strong accounting support within their companies.
• Accounting and financial information is very important to a firm's operations.

Module 07: Understanding Accounting and Financial Information - Technology and Accounting

• Accounting software has simplified the accounting process.
• Inputs, processing, and outputs form the process.
• Advantages include efficiency, timeliness, consistency, and accuracy.
• Disadvantages include set up and customization.

Module 07: Understanding Accounting and Financial Information - Accounting Disciplines and Accounting Professionals

• There are different accounting disciplines that meet the needs of stakeholders.
• Managerial accounting reports include daily, weekly, and monthly reports (e.g., sales, production) alongside KPIs, internal F/S, budgets, and forecasts.
• Financial/External accounting includes quarterly or annual financial statements and annual reports used by lenders/creditors, investors, government, and regulators..
• Compliance/audit accounting includes the need for audit opinions, internal audit reports, and the monitoring of controls.
• Tax accounting produces tax returns and related tax reporting, tax opinions to meet the needs of the government and their management.
• Consulting and advisory accounting provides research reports, opinions, and consulting services to solve problems for individuals or businesses.
• Government and non-profit accounting applies public sector financial standards to government entities and the sharing of information with taxpayers, and financial information is available to donors.
• Private accountants serve single firms, government agencies, and non-profit organizations.
• Public accountants provide services to individuals and businesses in fields like compliance, audit, tax, and regulatory matters.

Module 07: Understanding Accounting and Financial Information - Accounting Rules and Principles

• Guidelines for proper and consistent reporting and disclosure of transactions include generally accepted accounting principles (GAAP), international financial reporting standards (IFRS), and accounting standards for private enterprises (ASPE)
• These rules ensure consistency, comparability, understandability, and accuracy.
• The basic framework outlines elements of the information to present and the format of presentation. The characteristics include relevance, faithful representation, comparability, verifiability, timeliness, and understandability and measurement and recognition.

Module 07: Understanding Accounting and Financial Information - Measurement and Recognition

• Measurement involves determining the monetary value of an asset or liability, such as a product at cost or market value at the time of purchase, or at a given point in time.
• Recognition involves the process of recording revenues when earned and expenses in the same period as the revenues they relate to (matching).

Module 07: Understanding Accounting and Financial Information - Financial Statements

• Balance Sheet: Shows a company's financial condition at a specific point in time, using the accounting equation (Assets = Liabilities + Owner's Equity). It includes assets (economic resources), liabilities (what the business owes), and owner's equity (investment by owners).
• Income Statement: Presents revenues and expenses for a period of time, calculating profit or loss. It includes elements like revenue, cost of goods sold, gross profit, operating expenses, and net income/loss after taxes.
• Cash Flow Statement: Illustrates cash receipts and disbursements over a period of time. It groups transactions into operating, investing, and financing activities.

Module 07: Understanding Accounting and Financial Information - Ratio Analysis

• Ratio analysis assesses a firm's financial condition and evaluates relationships between various accounts/activities, including identifying strengths and weaknesses and trends.
• Key Performance Indicators (KPIs) are used to assess business performance, financial stability and growth.
• Examples of financial ratios are liquidity, leverage, and profitability ratios.
• Liquidity ratios measure a company's ability to turn assets into cash and pay short-term debts (e.g., current ratio, acid-test ratio).
• Leverage ratios measure the extent to which a company relies on borrowed funds (e.g., debt to owners' equity).
• Profitability ratios measure how effective management is using resources to achieve profits (e.g., earnings per share, return on sales, return on equity).
• Activity ratios measure effectiveness at managing inventory (e.g., inventory turnover).