Chapter 17: Understanding Accounting and Financial Information

THE ROLE OF ACCOUNTING INFORMATION

What Is Accounting?
Figure 17.1 the accounting system

ACCOUNTING DISCIPLINES
Managerial Accounting
Managerial accounting is involved with:
 Costs of production
 Costs of marketing
 Preparation and control of budgets
 Minimizing tax liabilities
Figure 17.2 users of accounting information and the required reports

Financial Accounting
Annual Report
Private Accountants
Public Accountants
Certified Public Accountants (CPAs)

Auditing
Independent Audit
Certified Internal Auditors (CIAs)

Tax Accounting
Tax Accountants
Government and Not-for-Profit Accounting

THE ACCOUNTING CYCLE

Accounting Cycle
Bookkeeping
Journal
Figure 17.4 steps in the accounting cycle
Double-Entry Bookkeeping
Ledger
Trial Balance

UNDERSTANDING KEY FINANCIAL STATEMENTS

Financial Statement
Key financial statements of business are:

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  Balance sheet
 Income statement
 Statement of cash flows

Fundamental Accounting Equation

Assets = Liabilities + Owners’ Equity

The Balance Sheet

Classifying Assets
Assets
Liquidity
Current Assets
Fixed Assets
Intangible assets

Liabilities and Owners’ Equity Accounts

Liabilities
Accounts Payable
Notes payable
Bonds payable

Owners’ Equity
Retained Earnings

The Income Statement

Net Income/Net Loss
Revenue
Cost of Goods Sold
Gross profit (or gross margin)
Operating expenses
Depreciation

The Statement of Cash Flows

Cash Flow

ANALYZING FINANCIAL PERFORMANCE USING RATIOS

Ratio Analysis
Liquidity Ratios
Leverage (Debt) Ratios
Profitability (Performance) Ratios
Activity Ratios

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