Chapter 17 – Understanding Accounting and Financial Information
17–41
b. It is selling its goods and services, but isn’t
getting paid in time to turn around and pay its
own bills.
c. When the firm’s credit limit is reached, the
bank may refuse further loans.
d. Too often, the company goes into BANK-
RUPTCY because there is no cash available
when it is most needed.
4. Accountants can advise the firm whether it needs
cash and, if so, how much.
learning goal 5
Demonstrate the application of ratio analysis in reporting financial information.
firm’s financial statements.
2. FINANCIAL RATIOS are helpful in analyzing the
3. They also provide key insights into the firm’s per-
turn assets into cash to pay its short-term debts.
1. Short-term debts are expected to be repaid within
Chapter 17 – Understanding Accounting and Financial Information
MAKING
ethical
decisions
(Text page 481)
PPT 17-40
Barking Up the
Wrong Financial
Statement
(See complete PowerPoint slide notes on page 17.65.)
progress
assessment
(Text page 481)
PPT 17-41
Progress Assessment
(See complete PowerPoint slide notes on page 17.65.)
lecture link 17–10
STAYING ALIVE IN TOUGH
ECONOMIC TIMES
Having enough cash on hand is especially critical for entre-
preneurs during tough economic times. (See the complete lec-
ture link on page 17.52 of this manual.)
PPT 17-42
Using Financial Ratios
(See complete PowerPoint slide notes on page 17.66.)
2. The CURRENT RATIO is the ratio of a firm’s cur-
rent assets to its current liabilities.
a. Current ratio = Current assets
Current liabilities
a. Acid-test ratio =
Chapter 17 – Understanding Accounting and Financial Information
critical thinking
exercise 17-4
CALCULATING FINANCIAL
RATIOS (ADVANCED)
This exercise directs students to use the financial reports of
a company to calculate key financial ratios. (See complete ex-
ercise on page 17.86 of this manual.)
PPT 17-43
Commonly Used Liquidity Ratios
(See complete PowerPoint slide notes on page 17.66.)
critical thinking
exercise 17-5
COMPARING INDUSTRY RATIOS
(BASIC)
An investor is considering investing in a regional hotel
chain. This exercise lets students compare the financial results
for four possible investments. (See complete exercise on page
17.90 of this manual.)
PPT 17-44
Leverage Ratios
(See complete PowerPoint slide notes on page 17.67.)
Chapter 17 – Understanding Accounting and Financial Information
D. PROFITABILITY (PERFORMANCE) RATIOS meas-
sources to achieve profits.
1. EARNINGS PER SHARE (EPS) is an important
requires companies to report their quarterly
earning per share two ways: basic and dilut-
Net sales
4. RETURN ON EQUITY (ROE) measures how
Chapter 17 – Understanding Accounting and Financial Information
PPT 17-45
Profitability Ratios
(See complete PowerPoint slide notes on page 17.67.)
Chapter 17 – Understanding Accounting and Financial Information
a. The higher the RISK involved in an industry,
the higher the RETURN investors expect on
tory, the higher the return.
Chapter 17 – Understanding Accounting and Financial Information
TEXT FIGURE 17.9
Accounts in the Balance Sheet and
Income Statement
(Text page 485)
This figure shows the major accounts included on the in-
come statement and the balance sheet.
lecture link 17–11
USING YOUR COMPUTER IN
SMALL-BUSINESS
ACCOUNTING
The computer can be a priceless tool for a small-business
owner. (See the complete lecture link on page 17.77 of this
manual.)
PPT 17-46
Activity Ratios
(See complete PowerPoint slide notes on page 17.67.)
bonus case 17-2
MANAGING BY THE NUMBERS
This case discusses how financially knowledgeable workers
helped improve one company’s finances. (See the complete
case, discussion questions, and suggested answers beginning
on page 17.94 of this manual.)
REACHING BEYOND
our borders
(Text page 486
PPT 17-47
Accountants of
the World United
(See complete PowerPoint slide notes on page 17.68.)
PPT 17-48
Timeline for the Move to IFRS
(See complete PowerPoint slide notes on page 17.68.)
progress
assessment
(Text page 486)
PPT 17-49
Progress Assessment
(See complete PowerPoint slide notes on page 17.68.)
17–49
PPT 17-1
Chapter Title
PPT 17-2
Learning Goals
PPT 17-3
Learning Goals
PPT 17-4
Siggi Hilmarsson
PPT 17-5
Name That Company
Companies: Intuit’s QuickBooks and Sage’s
Peachtree
PPT 17-6
What’s Accounting?
Chapter 17 – Understanding Accounting and Financial Information
PPT 17-7
The Accounting System
1. For students who are not taking an accounting
class this slide can help them understand an ac-
counting system from a production perspective:
• Inputs: Sales documents, purchasing doc-
uments, payroll records travel expenses,
etc.
• Processing: Entries are made to journals;
then transferred into ledgers; and finally
summarized and reviewed to compile a
trial balance.
• Outputs: Development of financial state-
ments such as the balance sheet, income
statement, and statement of cash flows,
prepared for management personnel within
the company as well as interested parties
outside the company.
2. It is very important for students to understand
the importance of integrity when calculating
numbers. Generally accepted accounting princi-
ples (GAAP) outline procedures that are gener-
ally accepted in the accounting field.
3. Ask the students, What role did questionable ac-
counting procedures play with Enron, Fannie
Mae, and WorldCom?
PPT 17-8
Accountants’ Responsibilities
1. One of the biggest uses of accountants by busi-
ness is taxes and auditing. Explain to the class
that the theme of “integrity of numbers” is criti-
cal for business.
2. In addition to the reasons listed on the slide, ac-
countants can offer businesses the following
17–52
PPT 17-9
Managerial Accounting
PPT 17-10
Users of Accounting Information
1. This slide (based on Figure 17.2) gives the stu-
dents an overview of the importance of accounting
information when managing a business. Account-
ing procedures are the foundation for controlling
mechanisms that businesses put in place to meas-
ure performance and plan for the future. Account-
ing influences decisions for managers in the fol-
lowing ways:
• Understanding cost behavior and perform
cost–volume profit analysis
strategic business decisions
• Learning how to integrate technology into
decision making
Chapter 17 – Understanding Accounting and Financial Information
PPT 17-11
Financial Accounting
PPT 17-12
How to Read an Annual Report
1. This slide presents the key areas to read when ana-
lyzing a company’s annual report.
2. It is important that students understand that the an-
nual report is more than a balance sheet but con-
tains different areas that are just as important.
3. The auditor’s opinion is a critical area for students
to understand. Basically there are four different
types of opinion letters that can be submitted. They
A. Unqualified opinion: An unqualified opin-
ion letter involves a certification made by
the independent CPA firm that the compa-
ny’s financial statements were prepared in
conformity with GAAP, and fairly repre-
sented the firm’s financial condition on the
C. Adverse opinion: This is the most serious
of all the opinion letters that can accompa-
When a CPA firm discovers information
during the course of its audit that demon-
strates material noncompliance with
PPT 17-12
How to Read an Annual Report
(continued)
D. Disclaimer of opinion: Due to scope limi-
tations, a CPA may be unwilling to ex-
press any opinion about the accuracy of a
customer’s financial statements. A dis-
claimer of opinion letter means the CPA
does not assume responsibility for the ac-
curacy of the company’s financial state-
ments. (Source:
www.encyclopediaofcredit.com.)
PPT 17-13
Public versus Private Accountants
This slide helps highlight the difference in public and
private accounting. This may be a good time to discuss
what accounting or finance careers will do for students:
• Develop them into a well-rounded business
executives
• Help them learn how to analyze and forecast
financial goals through utilization of historical
data, competitor information and financial da-
ta/information
• Make an impression at a multibillion-dollar
corporation
• See the company increase its financial vitality
by being a part of the financial planning and
reporting process
(Source: www.Retailology.com.)
Chapter 17 – Understanding Accounting and Financial Information
PPT 17-14
Ways to Improve Accounting Practices
1. This slide charts how to improve accounting prac-
tices.
2. If the events of the last 10 years have taught us any-
thing, it is that accurate financial data is critical for
creditors, investors, and managers to make in-
formed decisions.
3. The federal government has reacted with the pas-
sage of Sarbanes-Oxley. This law, which went into
effect in 2002, has five major components:
• Section 302: Periodic statutory financial re-
ports are to include certifications that the sign-
ing officers have reviewed the report; the re-
port does not contain any material untrue
statements or material omission or be consid-
ered misleading; the financial statements and
related information fairly present the financial
condition and the results in all material re-
spects; the signing officers are responsible for
internal controls and have evaluated these in-
ternal controls within the previous 90 days and
have reported on their findings; a list is
(continued)
Chapter 17 – Understanding Accounting and Financial Information
17–56
PPT 17-14
Ways to Improve Accounting Practices
(continued)
provided of all deficiencies in the internal con-
trols and information on any fraud that in-
volves employees who are involved with in-
ternal activities; and any significant changes in
internal controls or related factors that could
have a negative impact on the internal controls
are reported.
• Section 401: Financial statements published
by issuers are required to be accurate and pre-
sented in a manner that does not contain incor-
rect statements.
• Section 404: Issuers are required to publish in-
formation in their annual reports concerning
the scope and adequacy of the internal control
structure and procedures for financial report-
ing.
• Section 409: Issuers are required to disclose to
the public, on an urgent basis, information on
material changes in their financial condition or
operations.
• Section 802: Imposes penalties or fines and/or
up to 20 years’ imprisonment for altering, de-
stroying, mutilating, concealing, or falsifying
records, documents, or tangible objects with
the intent to obstruct, impede, or influence a
legal investigation.
(Source: www.soxlaw.com.)
PPT 17-15
Chapter 17 – Understanding Accounting and Financial Information
17–57
PPT 17-16
Auditing Checks Accuracy
PPT 17-17
Fighting Accounting Fraud Line-by-Line
PPT 17-18
Specialized Accountants
Chapter 17 – Understanding Accounting and Financial Information
PPT 17-19
Progress Assessment
1. Managerial accounting provides information and
analysis to the managers inside the organization
and helps them make better-informed decisions.
Managerial accounting is concerned with meas-
uring and reporting cost of production, market-
ing, and other functions; preparing budgets;
making sure business units stay within their
budgets; and designing strategies to minimize
taxes. Financial accounting differs from mana-
gerial accounting in that financial accounting
generates information for people primarily out-
side the organization.
2. The private accountant works for a single firm,
government agency, or nonprofit organization
while public accountants work for accounting
firms that provide accounting services for a fee.
Public accountants provide services to individu-
als or businesses that include designing an ac-
counting system, selecting software to run the
accounting system, and analyzing an organiza-
tion’s financial performance.
3. Auditors are responsible for examining the fi-
nancial health of the organization as well as
looking into the operational effectiveness and ef-
ficiencies of the organization. An independent
audit is an audit conducted by public account-
ants who provide an evaluation and unbiased
opinion about the accuracy of a company’s fi-
slides:
• Can you explain the differences between ac-
counting and bookkeeping?
17–59
PPT 17-21
Bookkeeper’s Role
PPT 17-22
Bookkeeper’s Tools
With this slide (based on Figure 17.4) students are
provided with the step-by-step progression of the ac-
counting cycle. Place particular emphasis on the ac-
counting cycle to give the student an overview of report-
ing requirements. To start a discussion with students ask
the following questions before showing the next few
slides:
• Can you explain the differences between ac-
counting and bookkeeping?
• What’s the difference between an accounting
journal and a ledger?
• Why does a bookkeeper prepare a trial balance?
PPT 17-23
Technology and Accounting
Chapter 17 – Understanding Accounting and Financial Information
17–60
PPT 17-24
Progress Assessment
1. A bookkeeper classifies and summarizes the
firm’s financial data, while an accountant inter-
prets the data, prepares financial statements, and
reports the information to management.
2. The purpose of an accounting journal is to divide
the firm’s transactions into meaningful catego-
ries to keep information organized and manage-
able. A ledger transfers information from an ac-
counting journal so managers can find infor-
mation about a single account in one place.
3. A bookkeeper prepares a trial balance to ensure
the figures in the account ledgers are correct and
balanced.
4. Computer software post information from jour-
nals instantaneously even from remote locations
so financial information is readily available
whenever the organization needs it.
PPT 17-25
Financial Statements
Students often do not understand that financial state-
ments are more than a balance sheet but also incorporate
the income statement and statement of cash flows
PPT 17-26
The Fundamental Accounting Equation
.