Chapter 17 – Understanding Accounting and Financial Information
17-61
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.
This slide helps highlight the difference in public and pri-
vate 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 exec-
utives.
• Help them learn how to analyze and forecast fi-
nancial goals through utilization of historical da-
ta, competitor information and financial da-
ta/information.
• Make an impression at a multibillion-dollar cor-
poration.
• See the company increase its financial vitality by
being a part of the financial planning and report-
ing process.
(Source: Retailology.com.)
Chapter 17 – Understanding Accounting and Financial Information
17-62
PPT 17-14
Ways to Improve Accounting Practices
WAYS to IMPROVE
ACCOUNTING PRACTICES
17-14
Source: www.soxlaw.com, accessed November 2014.
LO 17-2
1. This slide charts how to improve accounting practices.
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 informed
decisions.
3. The federal government has reacted with the passage
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 pro-
vided of all deficiencies in the internal controls
and information on any fraud that involves
employees who are involved with internal ac-
tivities; and any significant changes in internal
controls or related factors that could have a
negative impact on the internal controls are re-
ported.
• Section 401: Financial statements published by
issuers are required to be accurate and present-
ed in a manner that does not contain incorrect
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.)
Chapter 17 – Understanding Accounting and Financial Information
17-63
PPT 17-15
Dodd-Frank Act
DODD-FRANK ACT
17-15
PhotoCredit:NancyPelosi
LO 17-2
• 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.
PPT 17-16
Auditing Checks Accuracy
AUDITING CHECKS ACCURACY
17-16
LO 17-2
• 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.
PPT 17-17
Elementary, Mr. Auditor, Elementary
ELEMENTARY,
MR. AUDITOR, ELEMENTARY
17-17
• Fraud damages businesses, no matter the size.
• The SEC has committed itself to fighting fraud but not
all auditors and CPAs are trained in finding fraud.
• Colleges are offering advanced degrees in forensic
accounting to meet the upcoming demand for these
accountants.
Chapter 17 – Understanding Accounting and Financial Information
17-64
PPT 17-18
Specialized Accountants
• Tax Accountants — Accountants trained in tax law
and are responsible for preparing tax returns or
developing tax strategies.
SPECIALIZED ACCOUNTANTS
17-18
LO 17-2
• 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.
PPT 17-19
Test Prep
TEST PREP
17-19
• 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?
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
measuring and reporting cost of production,
marketing, and other functions such as preparing
budgets; making sure business units stay within
their budgets and designing strategies to minimize
taxes. Financial accounting differs from
managerial accounting in that financial accounting
generates information for people primarily outside
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 individuals
or businesses that include designing an accounting
system, selection of software to run the accounting
system. and analyzing an organization’s financial
performance.
3. Auditors are responsible for examining the finan-
cial health of the organization as well as looking
into the operational effectiveness and efficiencies
of the organization. An independent audit is an au-
dit conducted by public accounts who provide an
evaluation and unbiased opinion about the accuracy
of a company’s financial statements.
Chapter 17 – Understanding Accounting and Financial Information
17-65
PPT 17-20
The Accounting Cycle
The ACCOUNTING CYCLE
17-20
LO 17-3
• Accounting Cycle –– A six-step procedure that
results in the preparation and analysis of the major
financial statements.
With this slide, students are provided with the step-by-step
progression of the accounting cycle. Place particular em-
phasis on the accounting cycle to give the student an over-
view of reporting requirements. To start a discussion with
students ask the following questions before showing the
next few slides:
• Can you explain the differences between account-
ing and bookkeeping?
• What’s the difference between an accounting jour-
nal and a ledger?
• Why does a bookkeeper prepare a trial balance?
PPT 17-21
Bookkeeper’s Role
BOOKKEEPER’S ROLE
17-21
LO 17-3
• 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.
PPT 17-22
Bookkeeper’s Tools
BOOKKEEPER’S TOOLS
17-22
LO 17-3
• 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.
Chapter 17 – Understanding Accounting and Financial Information
17-66
PPT 17-23
Technology and Accounting
TECHNOLOGY and ACCOUNTING
17-23
LO 17-3
• Computerized
accounting programs
post information
instantly and from
remote locations.
• Intuit’s QuickBooks
address the specific
needs of small
businesses.
PPT 17-24
Test Prep
TEST PREP
17-24
• 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?
1. A bookkeeper classifies and summarizes the firm’s
financial data; while accountants interpret the data,
prepare financial statements, and report the
information to management.
2. The purpose of accounting journal is to divide the
firm’s transactions into meaningful categories to
keep information organized and manageable. A
ledger transfers information from an accounting
journal so managers can find information 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 journals
instantaneously even from remote locations so fi-
nancial information is readily available whenever
the organization needs it.
PPT 17-25
Financial Statements
• Financial Statement — A summary of all the
financial transactions that have occurred over a
particular period.
FINANCIAL STATEMENTS
17-25
LO 17-3
• Key financial statements of
business are:
– Balance sheet
– Income statement
– Statement of cash flows
Students often do not understand that financial statements
are more than a balance sheet but also incorporate the in-
come statement and statement of cash flows.
Chapter 17 – Understanding Accounting and Financial Information
17-67
PPT 17-26
The Fundamental Accounting Equation
The FUNDAMENTAL
ACCOUNTING EQUATION
17-26
LO 17-4
• Fundamental Accounting Equation — The basis
for the balance sheet.
• The equation must always be balanced and
includes the formula:
Ø Assets = Liabilities + Owners Equity
PPT 17-27
The Balance Sheet
The BALANCE SHEET
17-27
LO 17-4
• Balance Sheet —
The financial
statement that
reports a firm
’
s
financial condition
at a specific time.
See Figure 17.5 in the text for a sample balance sheet for
Very Vegetarian.
PPT 17-28
Assets
ASSETS
17-28
LO 17-4
• Assets — Economic resources owned by a firm.
Items can be tangible or intangible.
• Liquidity — Ease with which assets can be
converted into cash.
Chapter 17 – Understanding Accounting and Financial Information
17-68
PPT 17-29
Classifying Assets
CLASSIFYING ASSETS
17-29
LO 17-4
• 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.
Assets are divided into three categories according to how
fast they can be converted into cash.
PPT 17-30
Classifying Liabilities
CLASSIFYING LIABILITIES
17-30
LO 17-4
• 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.
PPT 17-31
Owners’ Equity Accounts
OWNERS’ EQUITY ACCOUNTS
17-31
LO 17-4
• 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.
Chapter 17 – Understanding Accounting and Financial Information
17-69
PPT 17-32
Test Prep
TEST PREP
17-32
• 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 is the difference between long-term and
short-term liabilities on the balance sheet?
• What is owners’ equity and how is it determined?
1. The formula for the balance sheet is referred to as
the fundamental accounting equation. This
equation includes the following three accounts:
assets, liabilities and owners equity.
2. Assets on the balance sheet are listed according to
how quickly they can be converted to cash.
Therefore, as you move down the balance sheet it
becomes more difficult to convert the assets into
“liquid” cash.
3. Liabilities are what the business owes to others.
The liability account is divided into current and
long-term liabilities. Common liability accounts
include: accounts payable, notes payable and
bonds payable.
4. Owners’ equity is the amount of the business that
belongs to the owners, minus any liabilities the
business owes. The formula for owners’ equity is
assets minus liabilities.
PPT 17-33
The Income Statement
The INCOME STATEMENT
17-33
LO 17-4
• 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.
PPT 17-34
The Income Statement
The INCOME STATEMENT
17-34
LO 17-4
• 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
See Figure 17.7 in the text for a sample income statement
for Very Vegetarian.
Chapter 17 – Understanding Accounting and Financial Information
17-70
PPT 17-34
Accounts of the Income Statement
ACCOUNTS of the INCOME
STATEMENT
17-35
LO 17-4
• 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.
PPT 17-35
The In’s and Out’s of Valuing Inventory
THE IN’S and OUTS of
VALUING INVENTORY
17-36
• 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.
PPT 17-36
Accounts of the Income Statement
ACCOUNTS of the INCOME
STATEMENT
17-37
LO 17-4
• 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.
While depreciation is an expense, it is a noncash expense
for the company.
Chapter 17 – Understanding Accounting and Financial Information
17-71
PPT 17-38
The Statement of Cash Flows
The STATEMENT of CASH FLOWS
17-38
LO 17-4
• 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
See Figure 17.8 in the text for a sample statement of cash
flows for Very Vegetarian.
PPT 17-39
Understanding Cash Flow
• Cash Flow — The difference between cash coming
in and cash going out of a business.
UNDERSTANDING CASH FLOW
17-39
LO 17-4
• Managing cash flow is
a key consideration of a
business and can be
particularly challenging
for small and seasonal
businesses.
PPT 17-40
Would You Cook the Books?
WOULD YOU COOK the BOOKS?
17-40
• You are 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?
Chapter 17 – Understanding Accounting and Financial Information
17-72
PPT 17-41
Progress Assessment
TEST PREP
17-41
• 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?
1. The key steps in preparing an income statement
are:
Revenue
−Cost of goods sold
= Gross profit (gross margin)
−Operating expenses
= Net income before taxes
−Taxes
= Net income or loss
2. Revenue is the monetary value of what a firm
receives for goods sold, services rendered, and
other payments such as rent. Income refers to the
bottom line which is the net income (or perhaps net
loss) the firm incurs from revenue minus sales
returns, costs, expenses, and taxes over a period of
time.
3. The statement of cash flows is important because it
answers such questions as: How much cash came
into the business from current operations? Did the
firm use cash to buy stocks, bonds, or other in-
vestments? Did it sell some investments that
brought in cash?
PPT 17-42
Using Financial Ratios
• Ratio Analysis — The assessment of a firm
’
s
financial condition using calculations and financial
ratios developed from the firm
’
s financial statements.
USING FINANCIAL RATIOS
17-42
LO 17-5
• Key ratios include:
– Liquidity ratios
– Leverage ratios
– Performance ratios
– Activity ratios
Ratio analysis provides an assessment of the firm’s finan-
cial condition. It can be extremely useful when results of a
ratio analysis are compared to industry peers.
Chapter 17 – Understanding Accounting and Financial Information
17-73
PPT 17-43
Commonly Used Liquidity Ratios
COMMONLY USED
LIQUIDITY RATIOS
17-43
LO 17-5
• 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.
The acid-test ratio is sometimes referred to as the quick
ratio.
PPT 17-44
Leverage Ratios
LEVERAGE RATIOS
17-44
LO 17-5
• 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.
PPT 17-45
Profitability Ratios
PROFITABILITY RATIOS
17-45
LO 17-5
• 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.
Chapter 17 – Understanding Accounting and Financial Information
17-74
PPT 17-46
Activity Ratios
ACTIVITY RATIOS
• This information is
found on the firm’s
balance sheet and
income statement.
17-46
LO 17-5
• Activity ratios measure how effectively
management is turning over inventory.
• Key ratios include:
– Inventory turnover ratio
PPT 17-47
Speaking a Universal Accounting Lan-
guage
SPEAKING a UNIVERSAL
ACCOUNTING LANGUAGE
17-47
• 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.
Chapter 17 – Understanding Accounting and Financial Information
17-75
PPT 17-48
Timeline for the Move to IFRS
TIMELINE for the MOVE to IFRS
17-48
Source: IFRS.org, accessed November 2014.
LO 17-5
• 2008: SEC offered proposed timeline
• 2009: 110 large companies had the option of using
IFRS
• 2012: SEC assessed progress of IFRS
• 2013: Final decision on the move to IFRS
• 2015: 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)
1. This slide profiles the timeline for the move to In-
ternational Financial Reporting Standards.
2. International Financial Reporting Standards (IFRS)
are a set of accounting standards developed by the
International Accounting Standards Board (IASB)
that is becoming the global standard for the prepa-
ration of public company financial statements.
3. Ask students: What are some of the benefits of in-
ternational accounting standards?
4. If time permits have students explore the IFRS
website (www.ifrs.com) and review some of the
accounting case studies that the website presents.
PPT 17-49
Test Prep
TEST PREP
17-49
• What’s the primary purpose of performing ratio
analysis using the firm’s financial statements?
• What are the four main categories of financial
ratios?
1. Ratio analysis is the assessment of a firm’s finan-
cial condition, using calculations and financial rati-
os. Financial ratios are especially useful in com-
paring the company’s performance to its financial
objectives and to the performance of others in the
industry.
2. The four main categories of financial ratios are: li-
quidity, leverage, profitability and activity.