* * Chapter Seventeen Understanding Accounting and Financial Information Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

* * Accounting -- Recording, classifying, summarizing and interpreting of financial events and transactions in an organization to provide interested parties with needed financial information. Purpose of Accounting: -Help Managers make well-informed decisions about firm’s operations. -report firm’s financial information to interested stakeholders, i.e., employees, owners, creditors, suppliers, community activists, unions, investors and the government (for tax purpose). WHAT’S ACCOUNTING? What is Accounting? LG1 17-2

Managerial accounting Provides information to managers inside the organization to assist them in decision making. Involved with: -Costs of production, -Costs of marketing, -Preparation & control of budgets, -Minimizing tax liabilities. A certified management accountant (CMA) is a professional accountant who has met certain requirements, passed a qualifying exam, and has been certified by the Institute of Certified Management Accountants.

Financial Accounting Provides financial information and analyses for people primarily outside the organization, who are interested in these questions: -Is the organization profitable? -Is it able to pay its bills? -How much debt does it owe? Annual report: a yearly statement of the financial condition, progress, and expectations of a firm. Certified Public Accountant (CPA): A professional accountant who has met certain requirements, passed series of qualifying examinations established by the American Institute of Certified Public Accountants (AICPA).

* * Accounting Cycle -- A six-step procedure that results in the preparation and analysis of the major financial statements. The ACCOUNTING CYCLE The Accounting Cycle LG3 17-7

* * Financial Statement -- A summary of all the financial transactions that have occurred over a particular period. KEY FINANCIAL STATEMENTS Understanding Key Financial Statements LG3 Key financial statements of business are:  Balance sheet  Income statement  Statement of cash flows 17-8

* * Fundamental Accounting Equation -- The basis for the balance sheet. The equation must always be balanced and includes the formula: o Assets = Liabilities + Owners Equity Owned=Owed+ Owners’ Claim $826,000=$613,000+$213,000 The FUNDAMENTAL ACCOUNTING EQUATION The Fundamental Accounting Equation LG4 17-9

Classifying Assets Assets: Economic resources owned by firm. Items can be tangible or intangible. Liquidity: Ease with which assets can be converted into cash. Classification of assets: Current Assets: Items that can or will be converted to cash within one year. Fixed Assets: Long-term assets that are relatively permanent such as land, buildings, or equipment. Intangible assets: Long-term assets that have no physical form but do have value such as patents, trademarks, and goodwill.

Balance Sheet Classifying Liabilities: Liabilities: What the business owes to others- its debts. Accounts payable: Current liabilities a firm owes for merchandise or services purchased on credit.