Chapter 17 – Understanding Accounting and Financial Information
17-1
chapter
.
Understanding Accounting
and Financial Information
what’s new in this edition 17.3
brief chapter outline and learning objectives 17.5
lecture outline and lecture notes 17.7
PowerPoint slide notes 17.55
lecture enhancers 17.76
lecture enhancer 17–1: INNOVATING WITH OPEN BOOKS AND SHARED PROFITS 17.76
lecture enhancer 17-2: THE RISE IN FAIR VALUE ACCOUNTING 17.77
lecture enhancer 17-3: MANAGERIAL ACCOUNTING AND THE BUDGET PROCESS 17.77
lecture enhancer 17-4: COMING SOON—THE WIDE WORLD OF ACCOUNTING 17.79
lecture enhancer 17-5: NEW REGULATIONS HIT WALL STREET 17.80
lecture enhancer 17-6: CONSUMER PROTECTION AGENCY GAINS STEAM 17.80
lecture enhancer 17-7: USING THE STATEMENT OF CASH FLOWS 17.81
17
Chapter 17 – Understanding Accounting and Financial Information
17-2
critical thinking exercises 17.83
critical thinking exercise 17–1: ANNUAL REPORTS ONLINE 17.83
critical thinking exercise 17–2: THE PIZZA STAND 17.85
critical thinking exercise 17–3: PREPARING FINANCIAL STATEMENTS 17.89
critical thinking exercise 17–4: CALCULATING FINANCIAL RATIOS 17.92
(ADVANCED)
critical thinking exercise 17–5: COMPARING INDUSTRY RATIOS (BASIC) 17.97
bonus cases 17.100
bonus case 17–1: THE BEST–LAID PLANS OFTEN GO AWRY 17.100
bonus case 17–2: MANAGING BY THE NUMBERS 17.102
Chapter 17 – Understanding Accounting and Financial Information
17-3
what’s new in
this edition
additions to the 11th edition:
• Getting to Know John Raftery of Patriot Contractors
• Name That Company: Intuit
• Adapting to Change: Elementary, Mr. Auditor, Elementary
• Reaching Beyond Our Borders: Speaking a Universal Accounting Language
• Video Case: Goodwill Industries
revisions to the 11th edition:
• Making Ethical Decisions: Would You Cook the Books?
• Spotlight on Small Business: The In’s and Out’s of Valuing Inventory
• Statistical data and examples throughout the chapter were updated to reflect current information.
deletions from the 10th edition:
• Getting to Know Siggi Hilmarsson
• Name That Company: QuickBooks and Peachtree
• Legal Briefcase
• Reaching Beyond Our Borders
Chapter 17 – Understanding Accounting and Financial Information
17-4
Chapter 17 – Understanding Accounting and Financial Information
17-5
brief chapter outline
and learning objectives
CHAPTER 17
UNDERSTANDING ACCOUNTING AND FINANCIAL
INFORMATION
Getting to Know JOHN RAFTERY of PATRIOT CONTRACTORS
learning objective 1
Demonstrate the role that accounting and financial information play for
a business and for its stakeholders.
I. THE ROLE OF ACCOUNTING INFORMATION
A. What Is Accounting?
learning objective 2
Identify the different disciplines within the accounting profession.
II. ACCOUNTING DISCIPLINES
A. Managerial Accounting
B. Financial Accounting
C. Auditing
D. Tax Accounting
E. Governmental and Not–for-Profit Accounting
learning objective 3
List the steps in the accounting cycle, distinguish between accounting
and bookkeeping, and explain how computers are used in accounting.
III. THE ACCOUNTING CYCLE
A. Using Technology in Accounting
learning objective 4
Explain how the major financial statements differ.
Chapter 17 – Understanding Accounting and Financial Information
17-6
IV. UNDERSTANDING KEY FINANCIAL STATEMENTS
A. The Fundamental Accounting Equation
B. The Balance Sheet
C. Classifying Assets
D. Liabilities and Owners’ Equity Accounts
E. The Income Statement
F. Revenue
G. Cost of Goods Sold
H. Operating Expenses
I. Net Profit or Loss
J. The Statement of Cash Flows
K. The Need for Cash Flow Analysis
learning objective 5
Demonstrate the application of ratio analysis in reporting financial in-
formation.
V. ANALYZING FINANCIAL PERFORMANCE USING RATIOS
A. Liquidity Ratios
B. Leverage (Debt) Ratios
C. Profitability (Performance) Ratios
D. Activity Ratios
VI. SUMMARY
Chapter 17 – Understanding Accounting and Financial Information
17-7
Getting to Know JOHN RAFTERY of PATRIOT CONTRAC-
TORS
Used accounting knowledge and military experience to start his own business.
learning objective 1
Demonstrate the role that accounting and financial information play for a business
and for its stakeholders.
I. THE ROLE OF ACCOUNTING INFORMATION
A. Financial information is the HEARTBEAT OF COM-
PETITIVE BUSINESS MANAGEMENT.
1. You have to know something about accounting if
you want to understand business.
2. You need to LEARN BASIC ACCOUNTING
TERMS and understand basics of how accounts
are kept.
3. To run a business effectively you need to be able
to read, understand, and analyze accounting re-
ports and financial statements.
4. Accounting reports and financial statements are
as revealing of the HEALTH OF A BUSINESS as
pulse rate and blood pressure reports are in re-
vealing the health of a person.
B. WHAT IS ACCOUNTING?
Accounting software makes financial information available whenever the organization needs it.
We specialize in software that addresses the accounting needs of small businesses that are
often very different from major corporations. Name that company.
(Students should read the chapter before guessing the company’s name: QuickBooks.)
Chapter 17 – Understanding Accounting and Financial Information
17-8
PPT 17-1
Chapter Title
Copyright © 2015 by the McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Understanding
Accounting
and
Financial
Information
CHAPTER 17
PPT 17-2
Learning Objectives
LEARNING OBJECTIVES
17-2
1. Demonstrate the role that accounting and financial
information play for a business and 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.
PPT 17-3
Learning Objectives
LEARNING OBJECTIVES
17-3
4. Explain how the major financial statements differ.
5. Demonstrate the application of ratio analysis in
reporting financial information.
PPT 17-4
John Raftery
JOHN RAFTERY
Patriot Contractors
17-4
• Served in the Marines and
used his G.I. Bill to study
accounting.
• Completed an
entrepreneurship program
for veterans and launched
Patriot Contractors.
• He credits his knowledge of
accounting with the growth of
his business.
PPT 17-5
Name That Company
NAME that COMPANY
17-5
Accounting software makes financial information
available whenever the organization needs it.
We specialize in software that addresses the
accounting needs of small businesses that are
often very different from major corporations.
Name that company!
(See complete PowerPoint slide notes on page 17.55.)
lecture enhancer 17–1
INNOVATING WITH OPEN BOOKS
AND SHARED PROFITS
A little investment can go a long way to improving efficiency
and profit margins. This is sometimes forgotten during reces-
sions. (See the complete lecture enhancer on page 17.76 of this
manual.)
Chapter 17 – Understanding Accounting and Financial Information
17-9
1. ACCOUNTING is the recording, classifying,
summarizing, and interpreting of financial events
and transactions to provide management and
other interested parties with the information they
need to make good decisions.
a. FINANCIAL TRANSACTIONS include
i. Buying and selling goods and services
ii. Acquiring insurance
iii. Paying employees
iv. Using supplies
b. An ACCOUNTING SYSTEM is the method
used to record and summarize accounting
data into reports.
2. PURPOSES OF ACCOUNTING:
a. To give managers basic financial information
so they may make better decisions.
b. To report financial information to PEOPLE
OUTSIDE THE FIRM such as owners, credi-
tors, suppliers, employees, investors, and
the government.
learning objective 2
Identify the different disciplines within the accounting profession.
II. ACCOUNTING DISCIPLINES
A. Accounting has been called the LANGUAGE OF
BUSINESS.
1. Accounting is also the language used to report
financial information about nonprofit organiza-
Chapter 17 – Understanding Accounting and Financial Information
17-10
PPT 17-6
What’s Accounting?
WHAT’S ACCOUNTING?
17-6
LO 17-1
• 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.
lecture enhancer 17–2
THE RISE IN FAIR VALUE AC-
COUNTING
This form of accounting was once looked down upon for its
role in the 1929 depression. Now its on the rise again. (See the
complete lecture enhancer on page 17.77 of this manual.)
PPT 17-7
The Accounting System
TEXT FIGURE 17.1
The Accounting System
The ACCOUNTING SYSTEM
17-7
LO 17-1
PPT 17-8
Accountants’ Responsibilities
ACCOUNTANTS’
RESPONSIBILITIES
17-8
LO 17-1
Chapter 17 – Understanding Accounting and Financial Information
17-11
tions.
2. Five key areas of the accounting profession are:
a. Managerial accounting
b. Financial accounting
c. Auditing
d. Tax accounting
e. Governmental and not-for-profit accounting
B. MANAGERIAL ACCOUNTING
1. MANAGERIAL ACCOUNTING is accounting
used to provide information and analyses to
managers within the organization to assist them
in decision making.
2. Managerial accounting is concerned with:
a. MEASURING AND REPORTING COSTS of
production, marketing, and other functions
b. PREPARING BUDGETS (planning)
c. Checking whether or not units are STAYING
WITHIN THEIR BUDGETS (controlling)
d. DESIGNING STRATEGIES TO MINIMIZE
TAXES
3. A CERTIFIED MANAGEMENT ACCOUNTANT
(CMA) is a professional accountant who has met
certain educational and experience require-
ments, passed a qualifying exam in the field,
and been certified by the Institute of Certified
Management Accountants.
C. FINANCIAL ACCOUNTING
Chapter 17 – Understanding Accounting and Financial Information
17-12
PPT 17-9
Managerial Accounting
MANAGERIAL ACCOUNTING
17-9
LO 17-2
• 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
lecture enhancer 17–3
MANAGERIAL ACCOUNTING AND
THE BUDGET PROCESS
In addition to the balance sheet, income statement, and cash
flow statement, managers need other forms of financial infor-
mation, especially information for budgeting and cost account-
ing. (See the complete lecture enhancer on page 17.77 of this
manual.)
PPT 17-10
Users of Accounting Information
TEXT FIGURE 17.2
Users of Accounting Information
and the Required Reports
USERS of ACCOUNTING
INFORMATION
17-10
LO 17-2
Chapter 17 – Understanding Accounting and Financial Information
17-13
1. FINANCIAL ACCOUNTING is accounting in-
formation and analyses prepared for people out-
side the organization (owners and prospective
owners, creditors and lenders, employee unions,
customers, suppliers, governmental units, and
the general public).
a. These EXTERNAL USERS are interested in
the organization’s profits and other financial
information.
b. Much of this information is contained in the
company’s ANNUAL REPORT, a yearly
statement of the financial condition, pro-
gress, and expectations of an organization.
2. It is critical for firms to keep accurate financial in-
formation.
a. A PRIVATE ACCOUNTANT is an account-
ant who works for a single firm, government
agency, or nonprofit organization.
b. A PUBLIC ACCOUNTANT is an accountant
who provides his or her accounting services
to individuals or businesses on a fee basis.
c. PUBLIC ACCOUNTANTS help firms by:
i. Designing an accounting system for a
firm
ii. Helping select the correct computer and
software to run the system
iii. Analyzing the financial strength of an or-
ganization
Chapter 17 – Understanding Accounting and Financial Information
17-14
PPT 17-11
Financial Accounting
FINANCIAL ACCOUNTING
17-11
LO 17-2
• 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.
critical thinking
exercise 17-1
ANNUAL REPORTS ONLINE
This exercise asks the students to explore the annual report of
a specific company by visiting the company’s website. (See
the complete exercise on page 17.83 of this manual.)
PPT 17-12
How to Read an Annual Report
• Key things to watch for and read:
HOW to READ
an ANNUAL REPORT
17-12
LO 17-2
– Ma nagement’s
discussion and
analysis of operations
– Ba lance sheet
– Income statement
– Statement of cash
flows
– Au ditor’s opinion
PPT 17-13
Public versus Private Accountants
PUBLIC vs. PRIVATE
ACCOUNTANTS
17-13
LO 17-2
• 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.
Chapter 17 – Understanding Accounting and Financial Information
17-15
3. A CERTIFIED PUBLIC ACCOUNTANT (CPA)
is an accountant who has passed a series of ex-
aminations established by the American Institute
of Certified Public Accountants (AICPA).
4. Professional accounting assures users of finan-
cial information that financial reports of organiza-
tions are accurate.
a. The independent financial accounting stand-
ards board (FASB) defines what are GEN-
ERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) that accountants
must follow.
b. If financial reports are prepared “in accord-
ance with GAAP,” users know the infor-
mation is reported professionally.
5. In the early 2000s, several SCANDALS rocked
the accounting industry.
a. After scandals involving companies including
WorldCom, Enron, and Tyco, the public has
lost faith in corporate integrity.
b. Arthur Andersen was convicted of obstruc-
tion of justice for its actions in the Enron
case.
6. Scrutiny of the accounting industry is becoming
more intense.
7. In response, Congress passed the SARBANES-
OXLEY ACT that created:
a. New government reporting standards for