Chapter 9:

Chapter
Understanding
Financial Information
and Accounting
The Accounting System

2
 The Influence of
Accounting Information
• Managers-
– Financial reports pinpoint
problems/opportunities
• Investors, Suppliers, & Creditors-
– Provides a means to analyze business
• Government-
– Assists with tax collection

3
 Top Business
Uses of Accountants
Valuation, Merger,
Acquistion

Personal Financial
Planning

Market Strategy &

Planning

Cash Mgmt. &

Forecasting

Tax/Auditing

0% 20% 40% 60% 80% 100% 120%

4
 Types of Accountants

• Public • Private
– Auditing – Management
– Tax Consulting Accounting
& Compliance – Government
– Management Accounting
Consulting – Academia

5
 “Cooking the Books”
• Early Recognition of Revenue
• Late Recognition of Expense
• Inadequate Reserves for Bad Debts,
Returns, & Liabilities
• Changing Inventory Valuation Methods - 1
Time Boost to Income
• Phony Transactions With Partnerships
Courtesy of B. Lilly- De Anza College

6
 Steps to Control
Accounting Practices
45%
40%

35%
30%
25%

20%
15%
10%
5%
0%
Review Change Create/Expand Hire Independent Restructure
Current Internal Audits Firm for Executive
Procedures Consulting Compensation
Plans
Source: USA Today, “Snapshots”, Section B, pg. 1, March 26, 2003

7
 Steps In The
Accounting Cycle

Record
Analyze Source Transactions Post Journal
Documents in Journals Entries to Ledger

Prepare Analyze
Take a
Financial Financial
Trial Balance
Statements Statements

8
 Financial Statements
• Balance Sheet-
– Statement of Financial Position
• Income Statement-
– Statement of Revenues & Expenses
• Statement of Cash Flows –
– Statement of Cash Receipts & Disbursements

9
 Accounting Equation

Assets = Liabilities + Owner’s Equity

Owned = Owed + Owner’s Claims

10
 Sarbanes-Oxley Timeline

Effective Requirements
Prohibit personal loans to officers/directors.
July 30, 2002 CEOs/CFOs return incentive-based compensation
after erroneous financial report.
CEOs/CFOs must certify annual/quarterly reports.
August 29, 2002 Officers must make certifications regarding
company’s internal controls.
Responsibilities for attorneys/audit firms increased.
January 26, 2003 Disclosure requirements for off-balance sheets
transactions tightened.
Audit committees must: be independent directors, be
April 26, 2003 responsible for compensation & oversight of
certifying accountants.

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