Chapter 17 Understanding Accounting and Financial Information PDF

Because learning changes everything. ® Chapter 17 Understanding Accounting and Financial Information BUS 100 – Introduction to Business Alaa Hamade © 2022 McGraw Hill. All rights reserved. Authorized o...

Because learning changes everything. ® Chapter 17 Understanding Accounting and Financial Information BUS 100 – Introduction to Business Alaa Hamade © 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill.  The Role of Accounting Information What Is Accounting? Accounting — The recording, classifying, summarizing, and interpreting of financial events and transactions to provide management and other interested the information they need to make good decisions. The method used to record and summarize accounting data into reports is an accounting system. Stakeholders—such as employees, owners, creditors, unions, investors, and the government—make use of a firm’s accounting information. Accounting follows generally accepted accounting principles (GAAP). © McGraw Hill 2  The Accounting Cycle 1 Accounting Cycle — A six-step procedure that results in the preparation and analysis of the major financial statements. Bookkeeper’s Role 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. Journal entries are usually chronological. Double-entry bookkeeping — The practice of writing every business transaction in two places; done so they can check one list of transactions against the other for accuracy. © McGraw Hill 3  Figure 17.3 Steps in the Accounting Cycle classifying Access the text alternative for slide images. © McGraw Hill 4  The Accounting Cycle 2 Bookkeeper’s Tools Ledger — A specialized accounting book or computer program in which information from accounting journals is accumulated into specific categories and posted Why are ledgers used? so that managers can find all the information about one account in the same place. Trial balance — A summary of all the financial data in the account ledgers that ensures the figures are correct and balanced. © McGraw Hill 5 © McGraw Hill 6  The Accounting Cycle 3 Using Technology in Accounting Computerized accounting programs post information instantly and from remote locations. Accounting software, such as Intuit’s QuickBooks, address the specific needs of small businesses. © McGraw Hill 7  Understanding Key Financial Statements 1 Financial Statement A summary of all the financial transactions that have occurred over a particular period. Key financial statements of business are: Income statement The revenue a firm earned compared to its selling costs Balance sheet What the company owns and owes on a certain day Statement of cash flows The difference between cash coming and cash going out © McGraw Hill 8  Understanding Key Financial Statements 2 The Income Statement Income statement — The financial statement that shows a firm’s profit after costs, expenses, and taxes; it summarizes all of the resources that have come into the firm (revenue), all the resources that have left the firm, expenses, and the resulting net income or net loss. Net income or net loss — Revenue left over after all costs and expenses, including taxes, are paid. © McGraw Hill 9  Understanding Key Financial Statements 3 The Income Statement continued The formula for the income statement is: Revenue − Cost of goods sold = Gross profit (gross margin) − Operating expenses = Net income before taxes − Taxes = Net income or loss © McGraw Hill 10  Understanding Key Financial Statements 4 Revenue Revenue is the monetary value a firm received for goods sold, services rendered, or other payments. Cost of Goods Sold Cost of goods sold (or manufactured) — A measure of the cost of merchandise sold or cost of raw materials and supplies used for producing items for resale. Gross profit (or gross margin) — How much a firm earned by buying (or making) and selling merchandise. © McGraw Hill 11  Understanding Key Financial Statements 5 Operating Expenses Costs involved in operating a business, such as rent, utilities, and salaries. Selling expenses are related to the marketing and distribution of the firm’s goods or services, such as advertising, salespeople’s salaries, and supplies. General expenses are administrative expenses of the firm such as office salaries, insurance, and rent. © McGraw Hill 12  Understanding Key Financial Statements 6 Net Profit or Loss Revenue minus sales returns, costs, expenses, and taxes over a period of time. This is the bottom line. © McGraw Hill 13  EXAMPLE Income Statement – For the Year Ended Dec. 31, 2018 © McGraw Hill 14  Understanding Key Financial Statements 7 The Fundamental Accounting Equation Fundamental accounting equation — The basis for the balance sheet. The equation must always be balanced and includes the formula: Assets = Liabilities + Owners’ Equity. © McGraw Hill 15  Understanding Key Financial Statements 8 The Balance Sheet Balance sheet — Financial statement that reports a firm’s financial condition at a specific time and is composed of three major accounts: assets, liabilities, and owners’ equity. The assets are equal to, or balanced with, the liabilities and owners’ (or stockholders’) equity © McGraw Hill 16  Understanding Key Financial Statements 9 Classifying Assets Assets — Economic resources (things of value) owned by a firm; items can be tangible or intangible. Liquidity — The ease with which an asset can be converted into cash. Three categories of assets: 1. Current assets — Items that can or will be converted into cash within one year. Like inventory 2. Fixed assets — Assets that are relatively permanent, such as land, buildings, and equipment. 3. Intangible assets — Long-term assets (for example, patents, trademarks, copyrights) that have no physical form but do have value. © McGraw Hill 17  Understanding Key Financial Statements 10 Liabilities and Owners’ Equity Accounts Liabilities — What the business owes to others (debts). Common liability accounts: 1. Accounts payable — Current liabilities involving money owed to others for merchandise or services purchased on credit but not yet paid for. 2. Notes payable — Short-term or long-term liabilities that a business promises to pay by a certain date. 3. Bonds payable — Long-term liabilities that represent money lent to the firm that must be paid back. © McGraw Hill 18  Understanding Key Financial Statements 11 Liabilities and Owners’ Equity Accounts continued Owners’ equity — The amount of the business that belongs to the owners minus any liabilities owed by the business. The formula is assets minus liabilities. Retained earnings — The accumulated earnings from a firm’s profitable operations that were reinvested in the business and not paid out to stockholders in dividends. © McGraw Hill 19  EXAMPLE Balance Sheet – Dec. 31, 2018 © McGraw Hill 20  Understanding Key Financial Statements 12 The Statement of Cash Flows Statement of cash flows — Financial statement that reports cash receipts and disbursements related to a firm’s three major activities Three major activities of a firm: 1. Operations – running the business 2. Investments – the firm’s investment activities 3. Financing – debt, equity, or cash used to pay business expenses, past debts, or dividends © McGraw Hill 21  Understanding Key Financial Statements 13 The Need for Cash Flow Analysis 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. Buying goods on credit can be a problem. Lack of cash could be seriously problematic when short-term bills and debt comes due, even if there is a promise of future cash inflows © McGraw Hill 22 EXAMPLE Statement of Cash Flows–For the Year Ended Dec. 31, 2018 © McGraw Hill 23  Accounting Disciplines 1 Financial Accounting Accounting information and analyses prepared for people 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 an organization. © McGraw Hill 24  Accounting Disciplines 2 Financial Accounting continued Types of accountants: Private accountant — An accountant who works for a single firm, government agency, or nonprofit organization. Public accountant — An accountant who provides accounting services to individuals or businesses on a fee basis. Certified public accountant (CPA) — An accountant who passes a series of examinations established by the American Institute of Certified Public Accountants (AICPA). © McGraw Hill 25  Accounting Disciplines 3 Managerial Accounting Accounting used to provide information and analyses 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. © McGraw Hill 26  Accounting Disciplines 4 Auditing The job of 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. Auditors examine not only the financial health of an organization but also its operational efficiencies and effectiveness. © McGraw Hill 27  Accounting Disciplines 5 Tax Accounting Tax accountants — An accountant trained in tax law and responsible for preparing tax returns or developing tax strategies. Government and Not-for-Profit Accounting Accounting system for organizations whose purpose is not generating a profit but serving ratepayers, taxpayers, and others according to a duly approved budget. Government accounting standards are set by the Governmental Accounting Standards Board. © McGraw Hill 28