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Chapter Seventeen

Chapter Seventeen

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Chapter Seventeen

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  1. Chapter Seventeen Using Accounting Information 17 | 1

  2. Learning Objectives • Explain why accurate accounting information and audited financial statements are important • Identify the people who use accounting information and possible careers in the accounting industry • Discuss the accounting process • Read and interpret a balance sheet • Read and interpret an income statement • Describe business activities that affect a firm’s cash flow • Summarize how managers evaluate the financial health of a business 17 | 2

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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 Liabilitiesand Fixed Liabilities? 17 | 7

  8. The Balance Sheet (cont’d) • Know how to define Owners’ (or Stockholders’) Equity • For different groups • Sole proprietorships • Partnerships • Corporations • DefineRetained Earnings 17 | 8

  9. The Income Statement • Define and explain the Income Statement • What areProfits andLosses? • Define • Revenues • Gross Sales • Net Sales • Cost of Goods Sold • Gross Profit • Operating Expenses • Net Income • Net Loss 17 | 9

  10. 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

  11. 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

  12. 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

  13. 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

  14. Profitability Ratios • Know how to calculate Profitability Ratios • Return on Sales • Return on Owners’ Equity • Earnings per Share 17 | 14

  15. Short-Term Financial Ratios • Know how to calculate Short-Term Financial Ratios • Working Capital • Current Ratio • Acid Test 17 | 15

  16. Activity Ratios • Know how to calculate Activity Ratios • Accounts Receivable Turnover • Inventory Turnover • Debt-to-Owners’ Equity Ratio 17 | 16