Understanding Accounting and Financi Al Information

Chapter 17
Understanding Accounting and Financi

al Information
Shelly Sun, CEO
of BrightStar Care
GETTING TO KNOW
Chapter Str
ucture 17.1. The role of Accounting Information
17.2. The Accounting Cycle
17.3. Understanding Key Financial Statements
17.4. Analyzing Financial Performance Using Ratios
17.5. Accounting Disciplines
17.1. The role of Accounting Information
What is accounting
The recording, classifying, summarizing, and

interpreting of financial events and transactions
to provide management and other interested
parties the information they need to make good
decisions
17.1. The role of Accounting Information
The accounting System
accounting cycle
A six-step procedure that results in the preparation
Key terms
and analysis of the major financial statements.
bookkeeping
The recording of business transactions.
Journal
A record book or computer program that bookkeepers
Double-entry bookkeeping record financial data from the original transaction
The practice of writing every documents
business transaction in two places. Ledger
A specialized accounting book or computer program in
which information from accounting journals is
Trial balance
accumulated into specific categories and posted so
A summary of all the financial data in
that managers can find all the information about one
the account ledgers that ensures the
account in the same place.
figures are correct and balanced
USERS OF ACCOUNTING INFORMATION AND THE
REQUIRED REPORTS
Key terms
Steps in the accounting cycle
Using Technology in Accounting
What is financial
statement? A summary of all the transactions that
have occurred over a particular period
balance
sheet
Income
statement
Statement of
cash flows
The fundamental accounting equation
The Balance Sheet
A balance sheet is the

financial statement
that reports a firm’s
financial condition at
a specific
time
Classifying Assets
1. Current assets are items that can

or will be converted into cash within
one year. They include cash, account
Assets are economic resources (things of value) receivable, and inventory.
owned by a firm. Assets include productive, tangible 2. Fixed assets are long-term assets
items such as equipment, buildings, land, furniture, that are relatively permanent such as
and motor vehicles that help generate income, as land, buildings, and equipment. (On
well as intangible items with value like patents, the balance sheet we can also refer
trademarks, copyrights, and goodwill to these as property, plant, and
equipment.)
3. Intangible assets are long-term
assets that have no physical form but
do have value.10 Patents,
trademarks, copyrights, and goodwill
are intangible assets.
Liabilities and Owner’s Equity Accounts
 Liabilities are what the business owes to others—its debts. Current liabilities are
debts due in one year or less. Long-term liabilities are debts not due for one year
or more.
 Accounts payable are current liabilities or bills the company owes others for
merchandise or services it purchased on credit but has not yet paid for.
 Notes payable can be short-term or long-term liabilities (like loans from banks) that a
business promises to repay by a certain date.
 Bonds payable are long-term liabilities; money lent to the firm by bondholders that it
must pay back.
 Owners’ equity: The amount of the business that belongs to the owners minus any
liabilities owned by the business
 Retained earnings are accumulated earnings from the firm’s profitable operations that
are reinvested in the business and not paid out to stockholders in distributions of
company profits.
Revenue
Revenue is the monetary value of what a firm received for goods sold, services
rendered, and other payments (such as rents received, money paid to the firm for
use of its patents, interest earned, etc.)
The Income Statement
 income statement: The financial statement that shows a firm’s profit after
costs, expenses, and taxes; it summarizes all of the resources that have come
into the firm (revenue), all the resources that have left the firm, expenses, and
the resulting net income or net loss
 net income or net loss: Revenue left over after all costs and expenses,
including taxes, are paid.
Cost of Goods Sold
 The cost of goods sold (or cost of goods manufactured) measures the cost
of merchandise the firm sells or the cost of raw materials and supplies it used
in producing items for resale.
The cost of goods sold includes the purchase price plus any freight charges paid
to transport goods, plus any costs associated with storing the goods.
 Gross profit (or gross margin) is how much a business earned by buying
(or making) and selling merchandise.

Operating Expenses
 operating expenses are costs involved in operating a business, such as rent,

utilities, and salaries.
 Depreciation: The systematic write-off of the cost of a tangible asset over its
estimated useful life.
Net Profit or Loss
After deducting all expenses, we can determine the firm’s net income before taxes,
also referred to as net earnings or net profit.
*Look back on Figure 17.6
The statement of Cash Flows
Statement of cash flows: Financial statement that reports cash receipts and
disbursements related to a firm’s three major activities: operations, investments,
and financing
The statement of Cash Flows
The assessment of a firm’s financial condition using calculations and interpretations

of financial ratios developed from the firm’s financial statements.
Ratios Use Formula
Current ratio of a firm’s current assets to its current
Current ratio of a firm’s current assets to its current
ratio liabilities
ratio liabilities
Acid-test ratio measures the cash, marketable securities (such

Acid-test ratio measures the cash,
as stocks and marketable
bonds), securities
and receivables of a(such
firm,
as stocks and bonds), and receivables
compared to its current liabilities of a firm,
compared to its current liabilities
debt to owners’ measures the degree to which the company is
debt
equitytoratio
owners’ measures
financed bythe degree to
borrowed which
funds the
that company
it must pay. is
equity ratio financed by borrowed funds that it must pay.
Basic earnings determine the amount of profit a company
per share ratio earned for each share of outstanding common
(Basic EPS)
Basic earnings stock
determine the amount of profit a company
per share
Return on ratio
sales earned for each the
tells us whether share
firmofisoutstanding
doing as wellcommon
as its
(Basic EPS) stock
competitors in generating income from sales.
Return on sales
equity tells us whether
indirectly measuresthe risk
firm by
is doing
tellingas
uswell
howas its
much
competitors
a firm earnedinfor
generating income
each dollar fromby
invested sales.
its
owners
Return on equity indirectly measures risk by telling us how much
Inventory measures the for
a firm earned speed
eachwith which
dollar inventory
invested moves
by its
turnover ratio through the firm and gets converted into sales
Accounts in the balance sheet and income statement
Financial Accounting
 financial accounting: Accounting information and analyses prepared for

people outside the organization.
annual report: A yearly statement of the financial condition, progress, and
expectations of an organization.
private accountant: An accountant who works for a single firm, government
agency, or nonprofit organization.
 public accountant: An accountant who provides accounting services to
individuals or businesses on a fee basis.
 certified public accountant (CPA): An accountant who passes a series of
examinations stablished by the American Institute of Certified Public
Accountants (AICPA).
Managerial Accounting
 Managerial accounting provides information and analysis to managers inside

the organization to assist them in decision making.
 Managerial accounting is concerned with:

• measuring and reporting costs of production, marketing, and other functions;
preparing budgets (planning);
• checking whether or not units are staying within their budgets (controlling);
• and designing strategies to minimize taxes.

Auditing
 Auditing: The job of 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.
Tax Accounting and Government and not-for-profit accounting
 Tax accountant: An accountant trained in tax law and responsible for preparing
tax returns or developing tax strategies
 Government and not-for-profit accounting: Accounting system for

organizations whose purpose is not generating a profit but serving ratepayers,
taxpayers, and others according to a duly approved budget.
Thank you
Lecturer
Nguyen Thi Lien Huong
Email:
Faculty of Business Management

Buiding A1, Room 1008, NEU

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Chapter 17

Understanding Accounting and Financi

The recording, classifying, summarizing, and

A balance sheet is the

1. Current assets are items that can

 operating expenses are costs involved in operating a business, such as rent,

The assessment of a firm’s financial condition using calculations and interpretations

Acid-test ratio measures the cash, marketable securities (such

 financial accounting: Accounting information and analyses prepared for

 Managerial accounting provides information and analysis to managers inside

 Managerial accounting is concerned with:

 Government and not-for-profit accounting: Accounting system for

Faculty of Business Management

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