Business Communication

1. *
*
Chapter
Seventeen
Understanding
Accounting
and Financial
Information
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

2. • What is Accounting or Financial
Information?

3. *
*
• Accounting -- Recording, classifying, summarizing
and interpretation of financial events and transactions
in an organization to provide interested parties with
needed financial information.
• Outside parties - like employees, owners,
creditors, unions, investors and the government -
make use of a firm’s accounting information.
WHAT’S ACCOUNTING?
What is
Accounting?
LG1
17-3

4. • Why we need or what are the
benefits of Accounting or
Financial Information?

5. Benefits of Accounting or Financial
Information
• Helps stakeholders make better business
decisions by providing them with financial
information.
• Helps to analyze the financial information
• Allow companies to purchase economic
resources, goods or services
• Companies develop operating budgets for
their operations

6. Learning Outcomes
After you have read and studies this chapter, you should
be able to-----
• Demonstrate the role that accounting and financial
information play for a business and for its
stakeholders
• Identify the different disciplines within the
accounting profession
• List the steps in the accounting cycle, distinguish
between accounting and bookkeeping
• Explain how the major financial statements differ

7. Accounting Disciplines
The accounting profession is divided into five key
working areas:
• Managerial accounting
• Financial accounting
• Auditing
• Tax accounting
• Governmental and not-for-profit accounting

8. Managerial accounting
• Provides information to managers inside the
organization to assist them in decision making.
• Measuring and reporting costs of production,
marketing, and other functions; preparing budgets
(planning); checking whether or not units are staying
within their budgets (controlling) and designing
strategies to minimize taxes.
• 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.

9. Example of Managerial Accounting

10. Financial Accounting
• Provides financial information and analyses for
people primarily outside the organization.
• The information goes not only to company owners,
managers, and employees but also to creditors and
lenders, customers, suppliers, government agencies
and the general public.
• Annual report, a yearly statement of the financial
condition, progress, and expectations of an
organization.
• A professional accountant who has met certain
requirements, passed qualifying examinations
established by the American Institute of Certified
Public Accountants (AICPA) is recognized as a
certified public accountant (CPA).

11. Example of Financial Accounting

12. Example of Financial Accounting

13. • The Institute of Chartered Accountants of
Bangladesh (ICAB) is the national professional
accountancy body in Bangladesh. It is the sole
organisation in Bangladesh with the right to
award the Chartered Accountant designation.
• Institute of Cost and Management
Accountants of Bangladesh .

14. Financial Accounting Managerial Accounting
Aggregation 1. Financial accounting reports on the results of
an entire business
Managerial accounting almost always reports at a
more detailed level, such as profits by product,
product line, customer, and geographic region.
Efficiency 2. Financial accounting reports on the
profitability (and therefore the efficiency) of a
business
2. managerial accounting reports on specifically
what is causing problems and how to fix them
Reporting focus 3. Financial accounting is oriented toward the
creation of financial statements, which are
distributed both within and outside of a company
3. Managerial accounting is more concerned with
operational reports, which are only distributed
within a company
Standards 4. Financial accounting must comply with various
accounting standards
4. managerial accounting does not have to
comply with any standards when information is
compiled for internal consumption
Systems 5. Financial accounting pays no attention to the
overall system that a company has for generating
a profit, only its outcome
5. managerial accounting is interested in the
location of bottleneck operations, and the
various ways to enhance profits by resolving
bottleneck issues
Time period 6. Financial accounting is concerned with the
financial results that a business has already
achieved, so it has a historical orientation
6. Managerial accounting may address budgets
and forecasts, and so can have a future
orientation.
Timing 7. Financial accounting requires that financial
statements be issued following the end of an
accounting period
7. Managerial accounting may issue reports much
more frequently, since the information it
provides is of most relevance if managers can see
it right away

15. *
*What is
Accounting?
LG1
17-15
Ethics and Finance – A video example
https://www.youtube.com/watch
?v=K23cV1Jvhqw

16. Job Description of an Accountant
Accountants and auditors ensure that companies or
organizations are efficiently operating. They do this by
accessing financial records of their clients. Duties include
analyzing data, finance reports, budgets, tax returns,
and accounting records.

17. *
*
• Private Accountants -- Work for a single firm,
agency, or organization
• Public Accountants -- Provide accounting
services to the general public, i.e. any individual or
business who pays for the service (i.e. an accountant
for hire)
PUBLIC vs. PRIVATE
ACCOUNTANTS
Financial
Accounting
LG2
17-17

18. *
*
• Auditing -- Reviewing and evaluating the
information used to prepare a company’s financial
statements (to make sure the financial statements
are accurate)
• Independent Audit – an audit done by a public
accountant (an external third-party) on a firm, i.e.
An evaluation and unbiased opinion about the accuracy
of a company’s financial statements.
• Certified Internal Auditors (CIAs) -- Accountants who have a
bachelor’s degree and two years of experience in internal auditing
and who pass an exam administered by the Institute of Internal
Auditors. (i.e. a professional auditor)
AUDITING
Auditing
LG2
17-18

19. *
*
• Tax Accountants -- Accountants who are
trained in tax law and specialize in
preparing tax returns or developing tax
strategies for individuals or businesses
• Government and Not-for-Profit
Accountants–
• Government accountants work for the federal
government, making sure that government
budget and funds are allocated and being used
properly
• Not-for-profit accountants work for charities and
NGO’s (who need accountants to make sure that
their donations and funds are being allocated
and managed properly)
Other Types of Accountants
Tax
Accounting
LG2
17-19

20. *
*
• Bookkeeping -- The recording of business
transactions. Bookkeepers divide a firm’s
transactions into meaningful categories and post
them into a record book or computer program called
a journal.
• Double-Entry Bookkeeping -- Bookkeepers
record all transactions in two places so they can
check one list of transactions against the other for
accuracy.
BOOKKEEPING’S ROLE
The
Accounting
Cycle
LG3
17-20

21. *
*
• Ledger -- A specialized
accounting book or program
which contains specific types of
transactions sorted under a
common heading. Ex- Factory
Workers Salaries. This makes
it easier to find and analyze
information
• Trial Balance -- A summary of
all the information in the account
ledgers (to ensure that they are
correct, done before making the
financial statements)
BOOKKEEPING
The
Accounting
Cycle
LG3
17-21

22. Book keeping vs accounting
• Bookkeeping is responsible for the recording of
financial transactions whereas accounting is
responsible for interpreting, classifying, analyzing,
reporting, and summarizing the financial data.
• Bookkeeping and accounting may appear to be the
same to an untrained eye and since all the record
keeping is done through software these day, the
difference became even blurrier.

23. *
*
• 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
17-23

24. *
*
• 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
17-24

25. *
*
• Financial Statement -- A summary of all the
financial transactions that have occurred over a
particular period.
FINANCIAL STATEMENTS
Understanding
Key Financial
Statements
LG3
• Key financial statements of
business are:
- Balance sheet
- Income statement
- Statement of cash flows
17-25

26. *
*
• Fundamental Accounting Equation -- The basis
for the balance sheet.
• The equation must always be balanced and
includes the formula:
o Assets = Liabilities + Owners Equity
The FUNDAMENTAL
ACCOUNTING EQUATION
The
Fundamental
Accounting
Equation
LG4
17-26

27. *
*
• Fundamental Accounting Equation -- is the
basis for the balance sheet.
• The equation must always be balanced
• The formula is:
o Assets = Liabilities + Owners Equity (A = L + OE)
o OR
o Assets = Capital + Liabilities (A = C + L)
Balance Sheet Terms: The
FUNDAMENTAL
ACCOUNTING EQUATION
The
Fundamental
Accounting
Equation
LG4
17-27

28. *
*
• Assets -- Economic resources owned by a firm (i.e.
anything of value that the firm owns). Can be tangible
or intangible.
• Liquidity -- Ease with which assets can be
converted into cash.
Balance Sheet Terms: ASSETS Classifying
Assets
LG4
17-28

29. *
*
• Current Assets – assets that can or will be
converted to cash within one year. Includes: Cash,
accounts receivable and inventory (stock)
• Fixed Assets -- Long-term assets that are relatively
permanent and cannot be quickly converted to cash.
Includes: land, buildings, equipment etc
• Intangible Assets -- Long-term assets that have no
physical form but still have value. Includes: Brand
name, Logo, trademark, goodwill (reputation) etc
Balance Sheet Terms: ASSET
CLASSIFICATION
Classifying
Assets
LG4
17-29

30. *
*
• Liabilities -- What the business owes to others - its debts. Current
liabilities are debts which have to be repaid within one year or less.
Long-term liabilities are debts which have to be repaid after one
year or more
• Accounts Payable – Bills and other payments which a firm has to
pay back for goods and services already purchased (on credit) [a
type of current liability]
• Notes Payable -- Short or long-term loans that a business has to
repay by a certain date. (ex- bank loans, overdraft etc) [can be a
current liability or a long-term liability depending on repayment
date]
• Bonds Payable -- Long-term liabilities (loans) that the firm must
pay back. (ex- mutual bonds, treasury bonds, etc)
Balance Sheet Terms: LIABILITY
CLASSIFICATION LG4
17-30

31. *
*
• Owners’ Equity -- The
amount of the business that
belongs to the owner minus
any liabilities (debts)
• Retained Earnings –
Profits left over after paying
off salaries and expenses
which are reinvested in the
business (leftover earnings)
Balance Sheet Terms: OWNERS’
EQUITY
Liabilities and
Owners’
Equity
Accounts
LG4
17-31

32. Sample Balance Sheet

33. *
*
• Revenue is the monetary value a firm received for goods
sold, services rendered or other sources of payments.
• Cost of Goods Sold (or Manufactured) -- Measures the
cost of merchandise the firms sells or the cost of raw
materials and supplies it used in producing items for sale (i.e.
how much it took to make (or buy) the products)
• Gross Profit : Revenue – Cost of Goods Sold = Gross
Profit i.e. How much a firm earned from selling its products
Income Statement Terms
The Income
Statement
LG4
17-33

34. *
*
• Operating Expenses – Expenses of
running the business and keeping
things going. Can be of two types:
• Selling expenses such as advertising,
salesman salaries and distribution
cost
• General Expenses such as rent,
administrative salaries, insurance
costs etc
• Depreciation – The reduction in the
value of a machine or fixed asset over
it’s lifetime
Income Statement Terms
The Income
Statement
LG4
17-34

35. *
*
• Net Income/Net Loss – if there
is a surplus profit after paying off
expenses, it is called Net Profit.
If expenses are greater than
revenue earned, then we call it a
Net Loss
INCOME STATEMENT TERMS
The Income
Statement
LG4
17-35

36. *
*
• The formula for the income statement:
o Revenue
o -Cost of Goods Sold
o =Gross Profit (Gross Margin)
o -Operating Expenses
o =Net Income before Taxes
o -Taxes
o =Net Income or Loss (+ or -)
INCOME STATEMENT FORMULA
The Income
Statement
LG4
17-36

37. Sample Income Statement

38. *
*
• Cash Flow -- The difference between cash coming
in and cash going out of a business.
UNDERSTANDING CASH FLOW
The Need for
Cash Flow
Analysis
LG4
• Even though a firm
may make profits, it
might not have cash at
hand (if all it’s sales
were in the form of
credit)
• So, it is vital for a firm
to manage it’s cash
flow 17-38

39. *
*
• Statement of Cash Flows – Records cash coming
in and going out of the firm related to three major
areas:
1. Operations- cash transactions associated with
running the business
2. Investments- Cash transactions associated with
buying or selling of machinery, land or other fixed
assets
3. Financing- Cash transactions associated with a
firm’s capital structure, i.e. loans, debts, owner’s
equity, borrowings, etc
The STATEMENT of CASH FLOWS
The
Statement of
Cash Flows
LG4
17-39