© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter Seventeen Using Accounting Information 17 | 1

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objectives 1. Explain why accurate accounting information and audited financial statements are important 2. Identify the people who use accounting information and possible careers in the accounting industry 3. Discuss the accounting process 4. Read and interpret a balance sheet 5. Read and interpret an income statement 6. Describe business activities that affect a firm’s cash flow 7. Summarize how managers evaluate the financial health of a business 17 | 2

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Why Accounting Information Is Important  Familiarize yourself with Recent Accounting Scandals and how they have affected the accounting industry Why did these scandals occur?  Explain what an Audit is and what it shows What does an audit not show?  Why are audited financial statements important?  Be prepared to discuss the Sarbanes-Oxley Act What prompted it What it does Why it is important 17 | 3

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Accounting Information  Know who uses accounting information Primary users Other users What is the value of accounting information to these groups?  What is Proprietary Information?  Know the difference between Managerial Accounting and Financial Accounting  What are the qualities a person should have to be successful in accounting? 17 | 4

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Careers in Accounting  Define Private Accountant Public Accountant Certified Public Accountant (CPA) Certified Management Accountant (CMA)  What is the difference between private and public accountants, and CPAs and CMAs? 17 | 5

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Accounting Process  Know the Accounting Equation  Define Assets Liabilities Owners’ Equity Double-Entry Bookkeeping System  What is the Accounting Cycle? Which activities are done on a regular basis? Which are done at the end of the period? 17 | 6

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Balance Sheet  Define and explain the Balance Sheet  What are Assets? How are they listed on the balance sheet? What is the difference between Current Assets, Fixed Assets, and Intangible Assets?  What are Liabilities? How are they listed on the balance sheet? What is the difference between Current Liabilities and Fixed Liabilities? 17 | 7

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Balance Sheet (cont’d)  Know how to define Owners’ (or Stockholders’) Equity For different groups -Sole proprietorships -Partnerships -Corporations  Define Retained Earnings 17 | 8

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Income Statement  Define and explain the Income Statement  What are Profits and Losses?  Define Revenues Gross Sales Net Sales Cost of Goods Sold Gross Profit Operating Expenses Net Income Net Loss 17 | 9

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Class Exercise  Review the class exercise from the lecture  For each of the following accounts, indicate whether it belongs on a balance sheet or an income statement. Rent Cash Patent Mortgage payment Net income Salaries payable Purchase Delivery equipment Sales Cost of goods sold Common stock 17| 10

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Statement of Cash Flows  Define Statement of Cash Flows  Be able to distinguish between the following Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities 17 | 11

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Evaluating Financial Statements  What does Evaluating Financial Statements involve? Use common sense to interpret the numbers Financial statements should be audited by an outside source and be current Look for use of new strategies to reduce costs Determine the firm’s ability to pay its debts and borrow money in the future Look at how the numbers relate to each other Understand the financial ratios  When, why and how do firms Compare Financial Data (with other years and with other firms)? 17 | 12

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financial Ratios  What are Financial Ratios?  Be familiar with how ratios can assist with comparisons between The firm’s own past ratios Ratios of competitors Industry averages  Know the different kinds of ratios listed in the book and how to calculate them 17 | 13

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Profitability Ratios  Know how to calculate Profitability Ratios Return on Sales Return on Owners’ Equity Earnings per Share 17 | 14

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Short-Term Financial Ratios  Know how to calculate Short-Term Financial Ratios Working Capital Current Ratio Acid Test 17 | 15

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Activity Ratios  Know how to calculate Activity Ratios Accounts Receivable Turnover Inventory Turnover Debt-to-Owners’ Equity Ratio 17 | 16