1. Instructor Lecture PowerPoints
The Role of Accountants and Accounting Information
Business Essentials, 8th Edition Ebert/Griffin
Instructor Lecture PowerPoints
PowerPoint Presentation prepared by
Carol Vollmer Pope Alverno College
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 1

2. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
L E A R N I N G O B J E C T I V E S
After reading this chapter, you should be able to:
Explain the role of accountants and distinguish between the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
Explain how the accounting equation is used.
Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.
In this chapter we will study the role of the accountant and accounting information. We will explain the role of accountants and distinguish between the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
We will also explain how the accounting equation is used, and we will describe the three basic financial statements and show how they reflect the activity and financial condition of a business.
Teaching Tips:
Form a team with another student. In your teams, please select one of the learning objectives we just reviewed. Please prepare a brief introduction to the topic. We will share our answers with the class.
Answers will vary. You can wait to comment on the answers until you have covered the material later in the chapter.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-2

3. L E A R N I N G O B J E C T I V E S (cont.)
After reading this chapter, you should be able to:
Explain the key standards and principles for reporting financial statements.
5. Describe how computing financial ratios can help users get more information from financial statements to determine the financial strengths of a business.
6. Discuss the role of ethics in accounting.
We will also explain the key standards and principles for reporting financial statements and describe how computing financial ratios can help users get more information from financial statements to determine the financial strengths of a business. And, finally, we will discuss the role of ethics in accounting.
Teaching Tips:
In your student teams, please prepare a brief introduction to one of the learning objectives above. We will share our answers with the class.
Answers will vary. You can wait to comment on the answers until you have covered the material later in the chapter.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-3 3

4. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
What’s in It for Me?
By understanding this chapter’s discussion of accountants, their methods, and their responsibilities, you’ll benefit in three ways:
If you’re thinking about starting your own business, you’ll discover your obligations for reporting your firm’s financial status
As an employee or union member, you’ll see how to evaluate your company’s financial condition and its prospects for the future
As an interested citizen, you’ll learn about accounting ethics and regulatory requirements for maintaining public trust in the business system
What’s in it for you?
By understanding this chapter’s discussion of accountants, their methods, and their responsibilities, you’ll benefit in three ways:
First, if you’re thinking about starting your own business, you’ll discover your obligations for reporting your firm’s financial status.
Second, as an employee or union member, you’ll see how to evaluate your company’s financial condition and its prospects for the future.
Third, as an interested citizen, you’ll learn about accounting ethics and regulatory requirements for maintaining public trust in the business system.
Teaching Tips:
In your student teams, choose one of these three benefits we have just reviewed. Please discuss in your teams how you believe you will achieve the benefit.
Answers will vary. Your responses can wait until later in the class once the material has been covered.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-4

5. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
What Is Accounting?
Accounting Defined:
A comprehensive system for collecting, analyzing, and communicating financial information
Bookkeeping: the recording of transactions
Users of Accounting Information:
Business managers
Employees and unions
Investors and creditors
Tax authorities
Government regulatory agencies
Let’s define accounting and users of accounting information:
Accounting is a comprehensive system for collecting, analyzing, and communicating financial information.
Bookkeeping, on the other hand, is the recording of transactions.
Users of accounting information include:
Business managers
Employees and unions
Investors and creditors
Tax authorities
Government regulatory agencies
Teaching Tips:
In your student teams, please choose one of the five users of accounting information and discuss how they might specifically use accounting information. We will share our answers with the class.
Answers will vary but should relate to examples from the text.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-5

6. Who Are Accountants and What Do They Do?
Controller
Manages all of a firm’s accounting activities
Types of Accounting Systems
Financial Accounting
Concerned with external information users—the firm’s external stakeholders
Prepares income statements, balance sheets, and other financial reports for shareholders and the public
Managerial (Management) Accounting
Serves internal users (managers) by providing information to make departmental decisions, monitor projects, and plan future activities
Next we will talk about accountants and what they do. The controller is the financial officer, who is an accountant and who manages all of a firm’s accounting activities.
There are a number of types of accounting systems. Let’s look at them:
First let’s discuss financial accounting. Financial accounting:
Is concerned with external information users who are the firm’s external stakeholders.
Prepares income statements, balance sheets, and other financial reports published for shareholders and the public.
Second, let’s discuss managerial, or management, accounting.
Managerial accounting serves internal users or managers by providing information to make departmental decisions, monitor projects, and plan future activities.
Teaching Tips:
In your student teams, please choose one of the two types of accounting systems we have discussed and describe how the audience for which it is prepared might use the information. We will share our examples with the class.
Answers may vary but should focus on external stakeholders and internal managers, respectively.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-6

7. Who Are Accountants and What Do They Do? (cont.)
Certified Public Accountants (CPAs)
Licensed, offer services to the public
Auditing (GAAP)
Tax services
Management advisory services
Non-certified Public Accountants
Private Accountants
Work exclusively for a firm as accountants
Management Accountants
Certified management accountant (CMA)
Let’s look at some additional types of accountants:
Certified public accountants, or CPAs.
CPAs are licensed accountants who offer services to the public such as:
Auditing, which helps firms meet GAAP or generally accepted accounting principles.
Tax services, which helps the firms or individuals prepare tax returns.
Management advisory services, or consulting, regarding accounting matters for the firm.
Non-certified public accountants.
Private accountants, who work exclusively for a firm as an accountant.
Management accountants.
These accountants are certified management accountants or CMAs.
Teaching Tips:
In your student teams, please discuss the work of accountants and think about whether this is a field you might consider for your career. Be sure to explain why or why not. We will share our answers with the class.
Answers will vary by student.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-7

8. Who Are Accountants and What Do They Do? (cont.)
Forensic Accountants
Assist in the investigation of business and financial issues that may have application in a court of law
Investigative Accounting
Identifying and analyzing financial evidence
Presenting accounting conclusions and their legal implications
Litigation Support
Certified fraud examiner: A specialty area within forensic accounting
Finally let’s discuss forensic accountants and what they do for the firm.
They assist in the investigation of business and financial issues that may have application in a court of law.
They conduct investigative accounting.
They identify financial evidence that may be pertinent.
They analyze the financial evidence they find.
They present accounting conclusions and their legal implications.
They offer litigation support.
They could be a certified fraud examiner, which is a specialty area within forensic accounting.
Teaching Tips:
In your student teams, please discuss the types of projects you think a forensic accountant might undertake. We sill share our ideas with the class.
Answers will vary, but of course could focus on situations like Arthur Anderson, Enron, etc.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-8

9. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
The CPA Vision Project
Redefining the role of the accountant for today’s world economy
Identifying issues for the future
Global forces as drivers of change
Recommendations
A new direction
Core services
Core competencies
Let’s take a moment to talk about the CPA Vision Project.
This project is redefining the role of the accountant for today’s world economy. It is also identifying issues for the future in accounting.
It sees global forces as drivers of change, and it is making recommendations for change. It is also suggesting a new direction for the accounting profession, including:
Core services provided by accountants
Core competencies that accountants should have
Let’s look at those core competencies.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-9

10. TABLE 14.1 Core Competencies for Accounting
The CPA Vision Project is suggesting five core competencies for accountants. Let’s review these:
Strategic and critical thinking skills, through which the accountant can provide competent advice for strategic action by combining data, knowledge, and insight.
Communications and leadership skills, through which the accountant can exchange information meaningfully in a variety of business situations with effective delivery and interpersonal skills.
Focus on the customer, client, and market, through which the accountant can meet the changing needs of clients, customers, and employers better than the competition and can anticipate those needs better than competitors.
Skills in interpreting converging information, through which the accountant can interpret new meaning by combining financial and nonfinancial information into a broader understanding that adds more business value.
Technology skills, through which the accountant can use technology to add value to activities performed for employers, customers, and clients.
Teaching Tips:
In your student teams, please choose one of the five core competencies for accounting, and discuss more specifically how that core competency will benefit the accountant in his or her work. For example, what type of competent advice for strategic action can the first core competency provide?
Answers will vary.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-10

11. Federal Restrictions on CPA Services and Financial Reporting: Sarbox
Sarbanes-Oxley Act of 2002 (Sarbox)
Enacted to restore public trust in corporate accounting practices
Restricts non-audit services that CPAs can provide
Sarbox Compliance Requirements
CFOs and CEOs must pledge that the company’s finances are correct and face severe penalties for noncompliance
Whistleblowers must be protected
It is important to learn about the Sarbanes-Oxley Act of 2002, or Sarbox, as it is sometimes called by accountants. The Act imposes federal restrictions on CPA services and financial reporting.
The Sarbanes-Oxley Act was enacted to restore public trust in corporate accounting practices as a direct response to corporate financial abuses. The act restricts non-audit services that CPAs can provide.
To be in compliance with Sarbox, CFOs and CEOs must pledge that the company’s finances are correct and face severe penalties for noncompliance.
In addition, whistleblowers, or the people who report fraudulent accounting, must be protected.
Let’s take a closer look at the act.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-11

12. TABLE 14.2 Selected Provisions of the Sarbanes-Oxley Act
Table 14.2 provides selected provisions of the Sarbanes-Oxley Act.
Teaching Tips:
In your student teams, please select two provisions of the Sarbanes-Oxley Act. Then please discuss why your two provisions need to be included in the act. You may use historical information from our text or other sources, such as the Internet or news reports, in your discussion. We will share our results with the class.
Answers will vary and could include discussion of such historical cases as Enron, WorldCom, Arthur Anderson, etc.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-12

13. The Accounting Equation
Assets = Liabilities + Owners’ Equity
Assets – Liabilities = Owners’ Equity (or Net Worth)
Asset
Any economic resource that is expected to benefit a firm or an individual who owns it
Liability
A debt that the firm owes to an outside party
Owners’ Equity
Money that owners would receive if they sold all of a company’s assets and paid all of its liabilities
Let’s examine the accounting equation. This equation is something each of you, no matter what your major, should know. It represents the heart of understanding the finances of every organization.
The first equation is Assets = Liabilities + Owners’ Equity.
This means that the holdings of the company on the positive side of the books equals the amount the company owes to vendors and to owners.
Double-entry accounting requires that every entry in the books or accounting system of every company debit one account and credit an opposite account.
The second equation is Assets – Liabilities = Owners’ Equity, or their net worth.
Let’s define these terms:
An asset is any economic resource that is expected to benefit a firm or an individual who owns it.
A liability is a debt that the firm owes to an outside party.
Owners’ equity is money that owners would receive if they sold all of a company’s assets and paid all of its liabilities.
Teaching Tips:
In your student teams, make a list of two types of assets and two types of liabilities. We will share our responses with the class.
Assets could include: cash balances in banks, CDs, savings, stocks, accounts receivable from customers and equipment such as a building, vehicles, or computers, office furniture, etc. Liabilities could include payables, bank loans, loans to shareholders, etc.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-13

14. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
Financial Statements
Balance Sheets
Supply detailed information about:
Assets
Current assets: Cash/assets that can be converted into cash within a year
Fixed assets: Capital that has long-term use or value
Intangible assets: Patents, trademarks, copyrights, etc.
Liabilities
Current liabilities: Debts that must be paid within one year, including accounts payable
Long-term liabilities: Debts not due for at least a year
Owners’ Equity
Paid-in (invested) capital
Retained earnings (net profits)
Now we will discuss financial statements. A balance sheet supplies detailed information about:
Assets: Current assets such as cash, or assets that could be converted into cash within a year.
Fixed assets: Capital that has long-term use or value such as a vehicle, land, building, computers, etc.
Intangible assets: Includes patents, trademarks, copyrights, goodwill, etc.
Liabilities: Current liabilities, which are debts that must be paid within one year including accounts payable.
Long-term liabilities: Debts not due for at least one year.
Owners’ equity: Includes paid-in or invested capital as well as retained earnings, which are also called net profits.
Let’s look at an example of a balance sheet.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-14

15. FIGURE 14.1 Google’s Balance Sheet
Figure 14.1 shows an example of a balance sheet for Google, Inc. You will see on the left side are all the assets, and on the right side are all the liabilities and shareholders’ equity.
Teaching Tips:
In your student teams, please analyze this balance sheet. What can you tell us about Google, Inc., from its balance sheet? We will share our answers with the class.
First this balance sheet shows clearly that the firm’s total assets are equal to its total liabilities and owners’ equity, thus proving the equation we discussed earlier.
Second, students could analyze the elements that make up the assets. It is interesting to note that there are no accounts receivable for Google, Inc., and that they hold a lot of money in current assets versus fixed and intangible assets.
Third, they may question what makes up the “other” liabilities. They may also note that Google, Inc., has no long-term debt.
Fourth, students could note that Google, Inc., had retained earnings, or a net profit of more than $9 million.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-15

16. Financial Statements (cont.)
Income Statement (Profit and Loss Statement)
Its description of revenues and expenses results in a figure showing the firm’s annual profit or loss
Revenues: The funds that flow into a business from the sale of goods or services
Cost of revenues: Shows the costs of obtaining the revenues from other companies during the year
Cost of goods sold: Costs of obtaining materials to make products sold during the year
Gross profit: Considers revenues and cost of revenues from the income statement
Operating expenses: Resources that must flow out of a company if it is to earn revenues
Another important financial statement is the income statement, which is sometimes called the profit and loss statement. The income statement provides a description of revenues and expenses and results in a figure showing the firm’s annual profit or loss.
It can include the following items:
Revenues, or the funds that flow into a business from the sale of goods or services.
Cost of revenue, which shows the costs of obtaining revenues from other companies during the year.
Cost of goods sold, which is the costs of obtaining materials to make products sold during the year.
Gross profit, which considers revenues and cost of revenues from the income statement.
Operating expenses, which are resources that must flow out of a company if it is to earn revenues.
Teaching Tips:
In your student teams, please give two examples of the types of income or expenses that make up each of the five elements of an income statement. We will share our examples with the class.
Revenue examples include sales or refunds.
Cost of revenues includes costs of obtaining the revenues, which could include things like promotion expenses.
Cost of goods sold includes the cost of the components.
Gross profit is revenues less costs of revenues and goods sold.
Operating expense are all types of costs such as salaries, wages, rent, electricity, etc.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-16

17. FIGURE 14.2 Google’s Income Statement
Let’s look at a sample, condensed income statement from Google, Inc., for 2007.
Teaching Tips:
In your student teams, please analyze this income statement. We will share our analyses with the class.
The income statement shows:
Revenues of $16.5 billion
Cost of revenues of $6.6 billion
Gross profit of $9.94 billion
Operating expenses of sales and marketing and administrative and general of $4.8 billion
Operating incomes before taxes of $5.1 billion
Income taxes of $880 million
Net income or net profit of $4.2 billion
Google has high sales and high gross profit.
Expenses are less than 30% of their revenue.
Net income or profit is about 25% of revenue.
They are in a very good financial condition.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-17

18. Financial Statements (cont.)
Statements of Cash Flows
Describes yearly cash receipts and cash payments
Cash Flows from Operations: Concerns main operating activities: cash transactions involved in buying and selling goods and services
Cash Flows from Investing: Net cash used in or provided by investing
Cash Flows from Financing: Net cash from all financing activities
The Budget
A detailed report on estimated receipts and expenditures for a future period of time
Another form of financial statement is cash flow. Cash flow describes yearly cash receipts and cash payments. These include:
Cash flows from operations, which concerns main operating activities such as cash transactions involved in buying and selling goods and services.
Cash flows from investing, which is net cash used in or provided by investments.
Cash flows from financing, or net cash from all financing activities.
The budget is also a very important financial statement. The budget is a detailed report on estimated receipts and expenditures for a future period of time.
Teaching Tips:
Why is it important to monitor cash flow? Please discuss this in your teams and we will share our responses with the class.
Cash flow lets us see how much cash is coming in and out of the business over a specific period of time. It tells us what our corporate cash situation will look like over a period of time. For example, if we have seasonal sales, the cash flow statement will tell us this information, and we can plan to keep enough cash on hand to fund our expenses during seasonal shortfalls.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-18

19. FIGURE 14.3 Google’s Statements of Cash Flows
Here is the year-end summary cash flow statement of Google, Inc., for 2007.
Teaching Tips:
What does this cash flow statement tell us about Google’s cash position at the end of 2007?
It tells us that at the beginning of 2007 the company had a little more than $2.5 billion in cash. During they gained $5.7 billion from operating activities, and that they used $3.7 billion for payment of purchase of property, equipment, and securities.
It also shows they received $443 million from financing activities.
It then takes the beginning cash position in January 2007 and adds the cash gained during 2007 to show cash at the end of the year at just over $6 billion.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-19

20. FIGURE 14.4 Perfect Posters’ Sales Budget
Figure 14.4 shows us an example of a sales budget for a company called Perfect Posters, Inc., located in Chicago. This budget is for the first quarter of the year, January through March.
The numbers are summed to project first quarter sales and selling price per unit, giving them budgeted sales revenue for the first quarter.
It also shows expected cash receipts by month.
Teaching Tips:
In your student teams, please examine the cash position of the company by month in terms of total cash receipts. What information does this provide for the company? We will share our answers with the class.
The budget shows that sales and receipts from December and January are strong, but drop by almost half in February and March. This could mean that Perfect Posters has seasonal business.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-20

21. Financial Statements Review
Balance Sheet Assets – Liabilities = Owners’ Equity
Income Statement Revenues – Expenses = Profit (or Loss)
Statement of Cash Flows Cash In and Cash Out
Here we see a review of some of the key elements of a financial statement.
Balance sheet: Assets – Liabilities = Owners’ equity
Income statement: Revenues – Expense = Profit or loss
Statement of cash flows: Examines cash coming in and going out
Budget: Budget estimate – Actual revenues or costs = A budget variance
Teaching Tips:
In your student teams, please choose one of the four financial elements we just discussed. Please develop an example of your chosen financial element. You may make up numbers, but be sure to explain what the numbers you included mean.
Answers will vary by group. Numbers should be explained using the equations and statements above.
Budget Estimate – Actual = Variance
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-21

22. Reporting Standards and Practices
Generally Accepted Accounting Principles (GAAP)
Revenue recognition: Formal recording and reporting of revenues at the appropriate time
Full disclosure
Financial statements should not include just numbers but should also furnish management’s interpretations and explanations of those numbers so that users can better understand information in the statements
Earlier we mentioned GAAP, or generally accepted accounting principles. How are GAAP standards used?
First they are used for revenue recognition. They provide a formal recording and reporting of revenues at the appropriate time.
Second they offer full disclosure of the company’s finances. Financial statements should not include just numbers but should also furnish management’s interpretations and explanations of those numbers so that users can better understand information in the statements.
Teaching Tips:
In your student teams, please discuss why GAAP principles are important. We will share our answers with the class.
Students should reply with some variation of what was just discussed.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-22

23. Short-Term Analyzing Financial Statements Solvency Ratios
Current Ratio:
Current Assets
Current Liabilities
Many of you may have heard of financial analysis using key ratios. Let’s examine them, starting with solvency rations, which are short term in nature. One of the most important of the solvency ratios is the current ratio.
The Current ratio = Current assets/current liabilities.
The leverage this ratio provides is the ability to finance an investment through borrowed funds.
Leverage: The ability to finance an investment through borrowed funds
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-23

24. Debt to Owners’ Equity Ratio:
Analyzing Financial Statements (cont.)
Solvency Ratios
Long-Term
Debt
Owners’ Equity
Debt to Owners’ Equity Ratio:
Another key solvency ratio, which is long term in nature, is the debt to owners’ equity ratio.
The Debt to owners’ equity ratio = Debt/owner’s equity.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-24

25. # of Shares Outstanding
Analyzing Financial Statements Profitability and Activity Ratios
Net Income
Total Owners' Equity
Return on Equity:
Net Income
# of Shares Outstanding
Earnings Per Share:
Another set of ratios are profitability and activity ratios. These include the following:
Return on equity = Net income/Total owners’ equity
Earning per share = Net income/Number of shares outstanding
Inventory turnover ratio = Cost of goods sold/Average inventory value
Teaching Tips:
In your student teams, please choose one of the five ratios we have reviewed today. Please use the sample Google, Inc., balance sheet and income statement and calculate the ratio your team has chosen. We will share these results with the class. Be prepared to describe what the ratio means to Google, Inc.
Student will use Google’s data to calculate the ratio. If the numbers are not present, tell them to make up a number that seems reasonable. Review the ratios and what students think they mean.
Cost of Goods Sold
Average Inventory
Inventory Turnover Ratio:
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-25

26. Bringing Ethics into the Accounting Equation
Why Accounting Ethics?
To maintain public confidence in business institutions, financial markets, and the products and services of the accounting profession
AICPA’s Code of Professional Conduct
Maintained and enforced by the AICPA
The AICPA identifies six ethics-related areas with which accountants must comply to maintain certification
As we have discussed today, ethics is important in the field of accounting. Why?
Accounting ethics are used to maintain public confidence in business institutions, financial markets, and the products and services of the accounting profession.
The AICPA, or the American Institute of Certified Professional Accountants, has a code of professional conduct which they maintain and enforce.
The AICPA identifies six ethics-related areas with which accountants must comply to maintain certification. Let’s look at these areas.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-26

27. TABLE 14.3 Overview of the Code of Ethics for CPAs
Table 14.3 provides an overview of each of the six ethics-related areas with which accountants must comply to maintain certification. Membership in the American Institute of Certified Public Accountants is voluntary.
By accepting membership, a certified public accountant assumes an obligation of self-discipline above and beyond the requirements of laws and regulations.
The six ethics-related areas include:
Responsibilities
The public interest
Integrity
Objectivity and independence
Due care
Scope and nature of services
Teaching Tips:
In your student teams, please look at what each of these means. Review the description on the slide, and then, in your own words, give an example of why this area is important to a CPA.
Answers will vary but should relate to the definitions above.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-27

28. TABLE 14.4 Examples of Unethical and Illegal Accounting Actions
Table 14.4 provides examples of actual unethical and illegal accounting actions by corporations. The corporations and their violations include:
AOL Time Warner: American Online (AOL) inflated revenues to keep stock prices high before and after merging with Time Warner.
Cendant: Inflated income in financial statements by $500 million through fraud and errors.
HCA, Columbia/HCA: Defrauded Medicare, Medicaid, and TRICARE through false cost claims and unlawful billings, for which they had to pay $1.7 billion in civil penalties, damages, criminal fines, and penalties.
Tyco: CEO Dennis Kozlowski illegally used company funds to buy expensive art for personal possession. For this he received an 8- to 25-year prison sentence.
Waste Management: Overstated income in financial statements through false and misleading reports by improperly calculating depreciation and salvage value for equipment.
WorldCom: Hid $3.8 billion in expenses to show an inflated and false profit instead of a loss in an annual income statement.
Teaching Tips:
In your student teams, please choose one of these six corporate examples of unethical and illegal accounting actions. Please discuss in your teams why you believe these were unethical and/or illegal. Please state what the company should have done to avoid penalties, prison, and fines. We will share our discussions with the class.
Answers will vary.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-28

29. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
Key Terms
accounting
accounting equation
accounting information system (AIS)
accounts payable (payables)
activity ratio
asset
audit
balance sheet
bookkeeping
budget
Certified Fraud Examiner (CFE)
certified management accountant (CMA)
certified public accountant (CPA)
code of professional conduct
controller
core competencies for accounting
cost of goods sold
cost of revenues
current asset
current liability
current ratio
There are many key terms that we learned in this chapter.
Teaching Tips:
Please form teams of two students. Each team will be assigned a number of terms. Your team should write an appropriate sentence using the key terms assigned to your group, which we will share with the class.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-29

30. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
Key Terms (cont.)
debt
depreciation
earnings per share
financial accounting
financial statement
fixed asset
forensic accounting
full disclosure
generally accepted accounting principles (GAAP)
goodwill
gross profit
income statement (profit-and- loss statement)
intangible asset
leverage
liability
liquidity
long-term liability
management accountant
management advisory services
managerial (management) accounting
There are many key terms that we learned in this chapter.
Teaching Tips:
Please form teams of two students. Each team will be assigned a number of terms. Your team should write an appropriate sentence using the key terms assigned to your group, which we will share with the class.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-30

31. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
Key Terms (cont.)
revenue recognition
revenues
Sarbanes-Oxley Act of (Sarbox)
short-term solvency ratio
solvency ratio
statement of cash flows
tax services
net income (net profit, net earnings)
operating expenses
operating income
owners’ equity
paid-in capital
private accountant
profitability ratio
retained earnings
There are many key terms that we learned in this chapter.
Teaching Tips:
Please form teams of two students. Each team will be assigned a number of terms. Your team should write an appropriate sentence using the key terms assigned to your group, which we will share with the class.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-31

32. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
14-32 32 32