CHAPTER 17 – UNDERSTANDING ACCOUNTING
AND FINANCIAL INFORMATION
LEARNING GOALS
After you have read and studied this chapter, you should be able to:
1. Demonstrate the role of financial information and accounting plays for a business and for its stakeholders.
2. Identify the different disciplines within the accounting profession.
3. List the steps in the accounting cycle, distinguish between accounting and bookkeeping. and explain how computers are used in accounting.
4. Explain how the major financial statements differ.
5. Demonstrate the application of ratio analysis in reporting financial information.
LEARNING THE LANGUAGE
Listed below are important terms found in the chapter. Choose the correct term for the definition and write it in the space provided.
Accounting / Depreciation / LiquidityAccounting cycle / Double-entry bookkeeping / Managerial accounting
Accounts payable / Financial accounting / Net income or net loss
Annual report / Financial statement / Notes payable
Assets / Fixed assets / Operating expenses
Auditing / Fundamental accounting equation / Owner’s equity
Balance sheet / Government and not-for-profit accounting / Private accountant
Bonds payable / Gross profit (gross margin) / Public accountant
Bookkeeping / Income statement / Ratio analysis
Cash flow / Independent audit / Retained earnings
Certified internal auditor (CIA) / Intangible assets / Revenue
Certified management accountant (CMA) / Journal / Statement of cash flows
Certified public accountant (CPA) / Ledger / Tax accountant
Cost of goods sold (cost of goods manufactured) / Liabilities / Trial balance
Current assets
1. A yearly statement called the ______states the financial condition, progress, and expectations of an organization.
2. A company’s ______is the difference between cash coming in and cash going out of a business.
3. Items known as ______can or will be converted into cash within one year.
4. An accounting system called ______is used for organizations whose purpose is not generating a profit but serving ratepayers, taxpayers, and others according to a duly approved budget.
5. Assets that are relatively permanent, or ______include items such as land, buildings and equipment.
6. A______is the record book or computer programwhere accounting data are first entered.
7. Long term liabilities that represent money lent to the firm that must be paid back are ______.
8. The amount of the business that belongs to the owners minus any liabilities owed by the business is the formula for ______.
9. A ______is a summary of all the data in the account ledgers to show whether the figures are correct and balanced.
10. An accountant known as a(n) ______is trained in tax law and is responsible for preparing tax returns or developing tax strategies.
11. The ease with which an asset can be converted into cash is its ______.
12. A(n) ______is an evaluation and unbiased opinion about the accuracy of a company ‘s financial statements.
13. Accounting used to provide information and analyses to managers inside the organization to assist them in decision-making is called ______.
14. A concept called ______is a system of writing every business transaction in two places.
15. An accountant called a ______passes a series of examinations established by the American Institute of Certified Public Accountants
16. The economic resources, or things of value, owned by the firm are called ______.
17. ______are current liabilities or bills the company owes to others for merchandise or services purchased on credit but not yet paid for.
18. A firm’s ______is how much the firm earned by buying, or making, and selling merchandise.
19. Accounting information and analyses prepared for people outside the organization is ______.
20. ______is revenue left over after all costs and expenses, including taxes, are paid.
21. The financial statement called a ______reports the financial condition of a firm at a specific time and is composed of three major accounts: assets, liabilities and owner’s equity.
22. An accountant who works for a single firm, government agency, or nonprofit organization is called a(n) ______,
23. The recording, classifying, summarizing and interpreting of financial events and transactions, called ______provides management and other interested parties the information they need to make good decisions.
24. A company’s ______is the value of what is received from goods sold, services rendered and other financial sources.
25. The job of reviewing and evaluating the records used to prepare the company's financial statements is called ______.
26. A ______is the summary of all transactions that have occurred over a particular period.
27. The six-step procedure called the ______results in the preparation and analysis of the major financial statements.
28. A type of expense called the ______is a measure of the cost of merchandise sold or cost of raw materials and supplies used for producing items for resale.
29. A ______is one who provides accounting services to individuals or businesses on a fee basis.
30. Accounts known as ______indicate what the business owes to others (debts).
31. A specialized accounting book known as a______is one in which information from accounting journals is accumulated into specific categories and posted so managers can find all the information about one account in the same place.
32. A ______is a professional accountant who has met certain educational and experience requirements, passed a qualifying exam in the field, and been certified by the Institute of Certified Management Accountants.
33. The recording of business transactions is called ______
34. The ______shows a firm’s profit after costs, expenses and taxes; it summarizes all of the resources that have come into the firm, all the resources that have left the firm and the resulting net income.
35. ______is the systematic write-off of the cost of a tangible asset over its estimated useful life.
36. Long-term assets that are relatively permanent are known as ______and include patents, and copyrights that have no real physical form but do have value.
37. The financial statement called a ______reports cash receipts and disbursements related to a firm’s three major activities: operations, investment, and financing.
38. A ______is an accountant who has a bachelor's degree 2 years of internal auditing experience, and has passed an exam administered by the Institute of Internal Auditors.
39. Assets equal liabilities plus owner's equity is the ______and is the basis for the balance sheet.
40. Costs involved in operating a business, such as rent, utilities, and salaries are called ______.
41. The assessment of a firm’s financial condition and performance, or ______is done through calculations and interpretations of financial ratios developed from the firm’s financial statements.
42. The accumulated earnings from a firm’s profitable operations that were kept in the business and not paid out to stockholders in dividends are ______.
43. Short-term or long-term liabilities, or ______, are those that a business promises to repay by a certain date.
ASSESSMENT CHECK
Learning Goal 1
The Role of Accounting Information
1. Why is it important to know something about accounting?
2. Financial transactions include:
a. ______
b. ______
c. ______
d. ______
3. What are two purposes of accounting?
a. ______
b. ______
4. Who are the users of accounting information?
a. ______
b. ______
c. ______
d. ______
Learning Goal 2
Accounting Disciplines
5. List the five key working areas of accounting.
a. ______
b. ______
c. ______
d. ______
e. ______
6. Identify the areas with which managerial accounting is concerned.
a. ______
b. ______
c. ______
d. ______
7. How does financial accounting differ from managerial accounting?
8. Answers to financial questions such as profitability, and about debt and liabilities are answered in the company’s ______
9. What are some accounting services public accountants may provide for their clients ?
a. ______
b. ______
c. ______
10. What does it indicate when financial reports are prepared in accordance with GAAP?
11. Describe the Sarbanes-Oxley Act.
12. Internal audits are conducted to guarantee______
______
13. A Tax accountant is responsible for:
a. ______
b. ______
14. Who are the primary users of government and not-for-profit accounting information? What do the users of this information want to ensure?
Learning Goal 3
The Accounting Cycle
15. How do accountants differ from bookkeepers?
16. List the six steps in the accounting cycle
a. ______
b. ______
c. ______
d. ______
e. ______
f. ______
17. What is the benefit of double-entry bookkeeping?
18. What is the difference between a journal and a ledger?
19. How have computers helped in the accounting process?
a. ______
b. ______
c. ______
d. ______
e. ______
Learning Goal 4
Understanding Key Financial Statements
20. Describe the three key financial statements
a. ______
b. ______
c. ______
21. The difference between the financial statements can be summarized this way:
22. The fundamental accounting equation is:
______= ______+ ______
23. How do you calculate your net worth, or equity?
24. Assets include ______
______
25. Describe “goodwill” as an asset.
26. In what order are assets listed on a balance sheet?
27. Describe the three categories of assets on a balance sheet.
a. ______
b. ______
c. ______
28. What is the difference between current liabilities and long-term liabilities?
29. Describe:
a. Accounts payable:
b. Notes payable
c. Bonds payable
30. How is “equity” calculated? What is shareholder’s equity?
31. What is a capital account?
32. An income statement
a. summarizes: ______
______
b. reports the firm’s operations over ______
______
33. What is the formula for developing an income statement, according to GAAP?
34. What is the difference between:
a. revenue and sales?
b. between gross sales and net sales?
35. Costs that make up cost of goods sold include:
36. How does gross margin differ between a service firm and a manufacturing firm?
37. Describe the two categories of operating expenses.
38. What is the “bottom line”?
39. Describe the three major activities for which cash receipts and disbursements are reported on a statement of cash flows.
a. ______
b. ______
c. ______
40. What questions may be answered by a statement of cash flows?
a. ______
b. ______
c. ______
d. ______
41. How would you describe a poor, or negative, cash flow?
42. How do cash flow problems start?
Learning Goal 5
Analyzing Financial Performance using Ratios
43. Financial ratios provide key insights into how a firm compares to other firms in the same industry in what key areas?
a. ______b. ______
b. ______c. ______
44. What do liquidity ratios measure?
45. Two key liquidity ratios are:
a. ______
b. ______
46. The formula for the current ratio is as follows:
47. The current ratio is compared to:
a. ______
b. ______
48. The formula for the acid test ratio is:
49. To what kinds of firms is the acid test ratio important?
50. What do leverage ratios measure?
51. What is the formula for the debt to equity ratio, and what does it measure?
52. What does it mean if a firm has a debt to equity ratio above 100%?
53. What do profitability ratios measure?
54. What are three profitability ratios?
a. ______
b. ______
c. ______
55. What is the difference between Basic EPS and diluted EPS?
56. What is the formula for determining Basic Earnings Per Share?
57. What is the formula for return on sales and for what do firms use this ratio?
58. What is the formula for return on equity? What does it measure?
59. What do activity ratios measure?
60. What is the formula for inventory turnover? What does it measure?
61. What is meant by inventory turnover ratios that are:
a. lower than average?
b. higher than average?
CRITICAL THINKING EXERCISES
Learning Goals 1,2
1. Match the following terms with the descriptions below. Some of these terms are describing general areas of accounting, others are similar but more specific, so use your text to help you to differentiate the terms!
Annual report Tax accountant
Auditing Independent audit
Certified internal auditor Managerial accounting
Certified management accountant (CMA) Private accountant
Certified public accountant (CPA) Public accountant
Financial accounting
a. ______Markus Larsen works for a mid-sized, publicly held company. He is responsible for the preparation and analysis of financial information for people and organizations outside the firm.
b. ______Jim Hopson has his own small accounting firm. He provides business assistance to his clients in a number of ways. Most recently he helped a small business by designing an accounting system for the firm, and helped them select the correct software to use to get them started.
c. ______Bob Glenn is majoring in accounting, but plans to specialize in this area, as he enjoys preparing budgets and checking to determine if costs for departments are within the budget. Bob also feels that with growing emphasis on global competition, outsourcing , and organizational cost cutting the job market for this area of accounting may be very strong.
d. ______Harry Winston prepares tax returns for his company, and develops strategies to minimize the company’s tax burden.
e. ______Nancy Hoffman works for Monsanto on a full time basis to help the company keep accurate financial information.
f. ______Hector Perez‘s job is to guarantee that proper accounting procedures and financial reporting are being carried on within the company. For this job Hector not only examines the financial health of a company but looks into organizational efficiencies and effectiveness.
g. ______Kimberly Chung recently passed a series of examinations to meet the state’s requirement for education and experience, and she can now work as a private or public accountant in this type of position in accounting.
h. ______Irena Manovich is involved with this type of accounting, which is concerned with measuring and reporting costs of production, marketing and other functions, preparing budgets, checking to see that units are staying within budgets and designing strategies to minimize taxes.
i. ______In his job as a public accountant for a major accounting firm, Ryan Deiker performs this job, which is to determine if a firm has prepared its financial statements according to accepted accounting principles.
j. ______As a stockholder in Microsoft, Gary Ford receives this document each year. Gary has noticed that more information is going into this yearly report, as pressure builds from stakeholders.