Chapter 14 Learning Goals
• Why are financial reports and accounting information important, and who uses them?
• What are the differences between public and private accountants?
• What are the six steps in the accounting cycle?• In what terms does the balance sheet describe the
financial condition of an organization?
Chapter 14 Learning Goals (cont’d.)
• How does the income statement report a firm’s profitability?
• Why is the statement of cash flows an important source of information?
• How can ratio analysis be used to identify a firm’s financial strengths and weaknesses?
• What major trends are affecting the accounting industry today?
Learning Goal 1• Why are financial reports and accounting
information important, and who uses them?– Financial reports give information about a company’s past,
present and future performance to:• Managers
– Can use reports to make decisions about firm’s operations
• Employees• Investors and customers• Suppliers, creditors, and government agencies
AccountingAccounting::
The process of collecting, recording, classifying, summarizing, reporting, and analyzing financial activities; results in reports that describe the financial condition of an organization
Learning Goal 2• What are the differences between public and private
accountants?– Public accountants
• Work for independent firms that provide accounting services to other organizations on a fee basis
– Financial report preparation and auditing
– Tax return preparation
– Management consulting
– Private accountants• Employed to serve one particular organization
– Prepare financial statements
– Tax returns
– Management reports
Public accountantPublic accountant::
Independent accountant who serves organizations & individuals on a fee basis; offers a wide range of services including preparation of financial statements & tax returns, independent auditing, & management consulting
Private accountantPrivate accountant::
Accountant who is employed by one particular organization and works only for it
Learning Goal 3
• What are the six steps in the accounting cycle?– Accounting cycle:Accounting cycle: the process of generating financial
statements• AAnalyzing business transactions
• RRecording transactions in journals
• PPosting transactions to ledgers
• SSummarizing ledger totals in a trial balance
• PPreparing financial statements and reports
• AAnalyzing reports and making decisions
The Accounting Cycle1. Analyze business
transaction documents
2. Record business transactions in journal
3. Post entriesto ledgers
4. Prepare trial balance
5. Prepare financial statements &
management reports
6. Analyze reports
Learning Goal 4• In what terms does the balance sheet describe the financial
condition of an organization?– Balance sheet represents:
• The financial condition of a firm at one moment in time, in terms of assets, liabilities, and owner’s equity
– Assets• Current, fixed and intangible
– Liabilities• Current and long-term
– Owner’s equity• Amount of owners’ investment into the firm after all liabilities have been
paid
The Balance Sheet
• Summarizes a firm’s financial position at a specific point in time
1. AssetsAssets (resources)current, fixed, intangible, depreciation
2. LiabilitiesLiabilities (obligations)current, long-term
3. Assets minus obligations (equityequity)retained earnings
Learning Goal 5• How does the income statement report a firm’s
profitability?– Income statement:
• Summary of firm’s operations over some period
– Main parts of income statement• Revenues
– Gross and net sales
• Cost of goods sold• Operating expenses
– Selling and general and administrative expenses
• Taxes• Net profit or loss
The Income Statement
• Summarizes the firm’s revenues & expenses and shows total profit or loss over a period of time
1. RevenuesRevenuesgross sales, net sales
2. ExpensesExpensescost of goods sold, operating expenses
3. Net profitNet profit or lossloss
The Income Statement: Revenues
• Increased revenues don’t always lead to increased stock value:– US Office ProductsUS Office Products had very high revenue
growth in 1998, but it’s stock price decreaseddecreased 88%
Source: Fortune, Sept. 28, 1998, p. 232.
Learning Goal 6
• Why is the statement of cash flows an important source of information?– Statement of cash flows
• Summarizes the firm’s sources and uses of cash during financial reporting period
• Shows net change in firm’s cash and marketable securities
– Breaks firm’s cash flows into those from:• Operating activities
• Investment activities
• Financing activities
The Statement of Cash Flows
• Summarizes the money flowing into and out of a firm for a period of time
• Sources of cash flow:– operating activities– investment activities– financing activities
Learning Goal 7• How can ratio analysis be used to identify a firm’s financial
strengths and weaknesses?– Ratio analysis
• Using financial statements to gain insight into a firm’s– Operations– Profitability– Overall financial condition
• Comparing ratio’s can indicate trends and highlight financial strengths and weaknesses
– Four main types of ratios• Liquidity ratios• Profitability ratios• Activity ratios• Debt ratios
Analyzing Financial Statements
Ratio analysis:Ratio analysis: calculating & interpreting financial ratios taken from financial reports to assess a firm– liquidity ratios– profitability ratios– activity ratios
• inventory turnover ratio– debt ratios
• debt-to-equity ratio
Liquidity & Profitability Ratios
• Liquidity ratios– current ratio– acid-test (quick) ratio– net working capital
• Profitability ratios– net profit margin– return on equity– earnings per share
Learning Goal 8
• What major trends are affecting the accounting industry today?– Role of accountants has expanded
• Includes management consulting in areas such as:– Computer systems
– Human resources
– Electronic commerce
– Major issue: How to treat key intangible assets• FASB and SEC are raising concerns about quality of reported
earnings