Module 1

An Integrative Framework
for Understanding
Accounting

Slide M1.1
 Module 1 Learning
Objectives
Define the key elements of the integrated
accounting and financial reporting model for
business entities.
Provide a comprehensive overview of the key
features of an accounting system.
Define the primary purpose of financial statement
analysis.
Compute the gross profit percentage and profit
margin percentage ratios.

Slide M1.2
 An Integrative Accounting and Financial
Reporting Model for a Business Entity

Information Needs of
Decision Makers

Provide Incentive to Develop Analytical

an Accounting Techniques
System

Informed and
Periodic
Financial Data Accounting
Financial
Decision Rational
System Makers Economic
Statements
Decisions

Slide M1.3
Accounting’s primary
role is to provide . . .

useful information to
economic decision makers
such as mutual fund
investors, bank loan
officers, and regulatory
agencies.

Slide M1.4
 Accounting information
qualifies as useful if it is . . .

Understandable
Relevant
Reliable

Slide M1.5
The reliance on decision makers,
such as investors and lenders,
motivate businesses to . . .

. . . develop an
accounting system to
capture and
communicate the
information
demanded by these
parties.

Slide M1.6
 An Expanded View of an
Accounting System

Accounting System:

Accounts
Data Regarding: Balance Sheet
Chart of Accounts Income Statement
Revenues
General Ledger Statement of Cash Flows
Expenses
General Journal Statement of
Bank loans
Other events and Other Journals & Stockholders’ Equity

transactions Ledgers Financial Statement

Accounting Cycle Footnotes

Operational Features of an
Accounting System:
*Bookkeeping rules
*Recurring accounting procedures in
accounting cycle
*Accounting rules and procedures for
specific accounts
*Control activities
Slide M1.7
 The building blocks used in
constructing an accounting
system are . . .
Entity concept
Going concern assumption
Historical cost principle
Full disclosure principle
Accounting period concept
Revenue and expense
recognition rules
And other important
accounting concepts and
guidelines

Slide M1.8
 Recall that the key input to an
accounting system are data
regarding . . .
Revenues from services
provided and merchandise
sold
Payments of employee salaries
Collections of accounts
receivable
Bank loans
Investments of owners
And other business events and
transactions

Slide M1.9
 Key Components of an
Accounting System

Accounts
Chart of accounts
General ledger
General journal
Other journals and
ledgers
Accounting cycle

Slide M1.10
 Operational Features of an
Accounting System

Bookkeeping rules
Accounting procedures included
in accounting cycle
Accounting rules & procedures
for specific accounts
Control activities

Slide M1.11
The primary output of an
accounting system are . . .

. . . a set of financial
statements and
accompanying footnotes.

Slide M1.12
 To make the most effective use
of financial statement data,
decision makers apply various
analytical techniques to that
data, including . . .

Trend analysis
Preparation of common-
sized financial
statements
Ratio analysis

Slide M1.13
 The most widely used approach to
analyzing financial statement data is
ratio analysis.
Common types of financial
ratios include . . .

Profitability ratios
Liquidity ratios
Activity ratios
Leverage ratios
Market strength ratios

Slide M1.14
Two common profitability
ratios are . . .

Gross profit percentage

Profit margin percentage

Slide M1.15
 Interpreting Financial Ratios
Significant changes in key financial
ratios from one period to the next
may provide important insight on
the future prospects of a firm.
These insights allow investors,
lenders, and other decision
makers to make informed and
rational economic decisions
regarding that firm.
Which, again, is the primary role of
the accounting function of
businesses.

Slide M1.16
 An Integrative Accounting and Financial
Reporting Model for a Business Entity

Information Needs of
Decision Makers

Provide Incentive to Develop Analytical

an Accounting Techniques
System

Informed and
Periodic
Financial Data Accounting
Financial
Decision Rational
System Makers Economic
Statements
Decisions

Slide M1.17
The following organizational scheme is
used to address each major financial
statement item discussed in the next
series of chapters:
Introduction: nature of the item,
relationship to other financial
statement items, key terms
Information needs of decision
makers
Key accounting procedures
Relevant control activities
Relevant financial ratios and
other analytical techniques

Slide M1.18