Chapter 17.

Understanding Accounting and Financial Information

CHAPTER 17
UNDERSTANDING ACCOUNTING AND FINANCIAL INFORMATION
1.1. PowerPoint Slide notes
Learning objectives Key terms
1. Demonstrate the role that accounting and financial accounting
information play for a business and its stakeholders.
2. Identify the different disciplines within the accounting accounting cycle
profession. bookkeeping
journal
double-entry bookkeeping
ledger
trial balance
3. List the steps in the accounting cycle, distinguish between financial statement fundamental
accounting and bookkeeping, and explain how computers are accounting equation
used in accounting. balance sheet
assets
liquidity
current assets
fixed assets
intangible assets
liabilities
accounts payable
notes payable
bonds payable
owners’ equity
retained earnings
income statement
net income or net loss
cost of goods sold (or cost of goods
manufactured)
gross profit (or gross margin)
operating expenses
depreciation
statement of cash flows
cash flow
4. Explain how the major financial statements differ. ratio analysis

5. Demonstrate the application of ratio analysis in reporting financial accounting

financial information. annual report
private accountant
public accountant
certified public accountant (CPA)
managerial accounting
auditing
independent audit
tax accountant
government and not-for-profit
accounting

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Chapter 17. Understanding Accounting and Financial Information
1.2. EXERCISES
1.2.1. Knowing and understanding key terms
Match the key terms in column A with the suitable definitions in column B.
A. Key terms B. Definitions
LO1 and LO2: A. A specialized accounting book or program where all information
is in one place.
Accounting -B
B. Recording, classifying, summarizing and interpreting of financial
accounting cycle -D
events and transactions in an organization to provide interested
bookkeeping -F
parties needed financial information.
journal -G
C. A summary of all the information in the account ledgers.
double-entry bookkeeping - E
D. A six-step procedure that results in the preparation and analysis of
ledger - A
the major financial statements.
trial balance - C
E. Bookkeepers record all transactions in two places so they can
check one list of transactions against the other for accuracy.
F. The recording of business transactions.
G. The record book or computer program where accounting data are
first entered.
LO3: A. The financial statement that reports a firm’s financial condition at
a specific time.
financial statement -H
B. Ease with which assets can be converted into cash.
fundamental accounting equation
C. Economic resources owned by a firm. Items can be tangible or
-G
intangible.
balance sheet-A
D. Long-term assets that are relatively permanent such as land,
assets-C
buildings, or equipment.
liquidity-B
E. Items that can or will be converted to cash within one year.
current assets-E
F. Long-term assets that have no physical form but do have value
fixed assets-D
such as patents, trademarks, and goodwill.
intangible assets -F
G. The basis for the balance sheet. Assets = Liabilities + Owners
Equity
H. A summary of all the financial transactions that have occurred
over a particular period.

accounts payable - C
notes payable -B
bonds payable - A
owners’ equity -E
A. Long-term liabilities that the firm must pay back.
B. Short or long-term liabilities a business promises to pay by a
certain date.
C. Current liabilities a firm owes for merchandise or services
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Chapter 17. Understanding Accounting and Financial Information
retained earnings-D
income statement- G
net income or net loss -F
cost of goods sold (or cost of
goods manufactured) - B
gross profit (or gross margin) -A
operating expenses - D
depreciation -C
statement of cash flows -F
cash flow - E
LO4 and LO5:
ratio analysis - B
financial accounting -A
annual report - C
private accountant -F
public accountant -E
certified public accountant (CPA)
-D
managerial accounting -E
purchased on credit.
D. Accumulated earnings from the firm’s profitable operations that
are reinvested in the business.
E. The amount of the business that belongs to the owners minus any
liabilities of the owners.
F. The revenue left over after costs and expenses.
G. The financial statement that shows a firm’s bottom line - that is,
its profit after costs, expenses, and taxes.
A. How much a firm earned by buying (or making) and selling
merchandise.
B. Measures the cost of merchandise the firm sells or the cost of raw
materials and supplies it used in producing items for resale.
C. The systematic write-off of the cost of a tangible asset over its
estimated useful life.
D. Cost involved in operating a business, such as rent, salaries and
supplies.
E. The difference between cash coming in and cash going out of a
business.
F. Financial statement that reports cash receipts and disbursements
related to a firm’s three major activities: operations, investments,
and financing.
A. Financial information and analyses are generated for people
primarily outside the organization.
B. The assessment of a firm’s financial condition using calculations
and interpretations of financial ratios developed from the firm’s
financial statements.
C. A yearly statement of the financial condition, progress, and
expectations of the firm.
D. 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.
E. Provide accounting services to individuals or businesses.
F. Work in a single firm, government agency, or nonprofit
organization.
A. An evaluation and unbiased opinion about the accuracy of a
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Chapter 17. Understanding Accounting and Financial Information
auditing - B
independent audit - A
tax accountant - C
government and
not-for-profit accounting - D
company’s financial statements.
B. Reviewing and evaluating the information used to prepare a
company’s financial statements.
C. Accountants trained in tax law and are responsible for
preparing tax returns or developing tax strategies.
D. Support for organizations whose purpose is not generating a
profit, but serving others according to a duly approved budget.
E. Provides information and analysis to managers inside the
organization to assist them in decision making.

True / False questions. Read the following statements and decide whether they are true or false.

1. Accounting provides information about the financial condition and operating performance of
a firm.  True/ False
2. There are five key working areas in accounting: financial accounting, managerial accounting,
auditing, tax accounting, and government and not-for-profit accounting.  True/ False
3. The accounting profession is divided into two main fields: bookkeeping and auditing.  True/
False
4. Activities of managerial accountants include measuring and reporting the costs of production,
marketing and other functions within the organization.  True/ False
5. Information contained in a firm's annual report largely represents work done by managerial
accountants.  True/ False
6. A major part of a bookkeeper's job is to interpret financial data and suggest strategies for
improving the firm.  True/ False
7. Double-entry bookkeeping can help identify a recording error made by a bookkeeper. True/
False
8. The income statement reports the difference between a firm's assets and its liabilities as of a
certain date.  True/ False
9. A balance sheet is composed of assets, liabilities, and revenues.  True/ False
10. Net income before taxes is found by deducting total operating expenses from gross profit. 
True/ False

Multiple choice questions. Choose the correct answer (A, B, C or D)

1. Although accounting has several specific uses, the overall purpose of accounting can be
summarized as: 
A. to provide financial information that is useful to decision makers.
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Chapter 17. Understanding Accounting and Financial Information
B. to meet the legal requirements of the Financial Accounting Standards Board (FASB).
C. to allow the government to track business activity levels.
D. to compute the profit or loss and declared dividend of a business firm.
2. The area of accounting that provides managers inside the organization with information they
need to make decisions is called: 
A. tax accounting.
B. managerial accounting.
C. informational accounting.
D. financial accounting.
3. A(n) ___________ is an evaluation and unbiased opinion of the accuracy of a firm's financial
statements. 
A. internal audit
B. annual report
C. independent audit
D. certified audit
4. A bookkeeper's first task is to: 
A. separate all of the firm's transactions into meaningful categories.
B. prepare the firm's financial statements.
C. summarize the firm's financial data.
D. interpret and report data to the firm's management.
5. A _________ summarizes all the data from the account ledgers to verify that they are correct
and balanced. 
A. ledger statement
B. balance sheet
C. trial balance
D. statement of cash flows
6. The Balance Sheet, the Statement of Cash Flows, and the ______________ are three key
financial statements prepared by accountants. 
A. Income Statement
B. Statement of Retained Earnings
C. Statement of Changes in Financial Position
D. Trial Balance
7. Patents and copyrights are classified as ___________ on the Balance Sheet. 
A. fixed assets
B. intangible assets

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Chapter 17. Understanding Accounting and Financial Information
C. current assets
D. owners' equity
8. The value of resources the firm owns, minus the amount of money the firm owes to others =
____________. 
A. liabilities.
B. liquidity.
C. leverage.
D. owners’ equity.
9. Revenue, minus cost of goods sold =____________. 
A. retained earnings.
B. fundamental accounting equation.
C. gross profit.
D. net income.
10. Net profit refers to: 
A. the result of deducting liabilities from the assets of the firm.
B. the result of subtracting cost of good sold from revenues.
C. the result of deducting depreciation expense from revenues.
D. the net earnings after the deduction of all expenses, including tax expense.

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Chapter 17. Understanding Accounting and Financial Information
1.2.2. Questions and Answers
Helping terms With the assistance of the terms in the left column, fill in the blanks to
answer the following questions. Please note that in some cases, you must
use your own words.
1. What’s the key difference between managerial and financial
accounting?
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 oversees
the organization.

2. How’s the job of a private accountant different from that of a

public accountant?
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, selecting of software to run the accounting system and analyzing an
organization’s financial performance.

3. What’s the job of an auditor? What’s an independent audit?

Auditors are responsible for examining the financial health of the organization
as well as looking into the operational effectiveness and efficiencies of the
organization. An independent audit is an audit conducted by public accounts
who provide an evaluation and unbiased opinion about the accuracy of a
company’s financial statements

4. How is the job of the bookkeeper different from an accountant?

A bookkeeper classify and sumarize the firm’s financial data; while
accountants interpret the data, provide financial statements, and report the
information to management.

5. What’s the purpose of accounting journals and a ledger?

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.

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Chapter 17. Understanding Accounting and Financial Information
1.2.3. Classroom activities

1.2.4. Case study discussion