14: Using Financial Information and Accounting

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Learning Objectives

After reading this chapter, you should be able to answer these questions:

Why are financial reports and accounting information important, and who uses them?
What are the differences between public and private accountants, and how has federal legislation affected their work?
What are the six steps in the accounting cycle?
In what terms does the balance sheet describe the financial condition of an organization?
How does the income statement report a firm’s profitability?
Why is the statement of cash flows an important source of information?
How can ratio analysis be used to identify a firm’s financial strengths and weaknesses?
What major trends affect the accounting industry today?

14.0: Introduction
This page highlights the importance of financial reports and accounting information for businesses, explaining their use by stakeholders and differentiating between public and private accountants. It discusses the accounting cycle and key financial statements, including balance sheets and income statements.
14.1: Accounting- More than Numbers
This page highlights the significance of financial reports and accounting information in evaluating a company's performance, as evidenced by past corporate scandals. It contrasts US GAAP, with its detailed approach, against the principle-based IFRS, noting challenges in global standardization.
14.2: The Accounting Profession
This page outlines the differences between public and private accountants, noting that public accountants serve multiple clients while private accountants focus on one organization. It highlights the Sarbanes-Oxley Act's role in reforming accounting practices post-scandals by enforcing stricter auditing standards and financial disclosures.
14.3: Basic Accounting Procedures
This page outlines the six steps of the accounting cycle: analyzing transactions, recording them in a journal, posting to ledgers, summarizing in a trial balance, preparing financial statements, and analyzing reports for decisions. It highlights the impact of technology on accounting efficiency through automation and emphasizes the importance of data analytics for improved forecasting, risk management, and auditing.
14.4: The Balance Sheet
This page explains the balance sheet as a financial statement summarizing an organization's financial position at a specific time. It details assets (current, fixed, intangible), liabilities (current, long-term), and owners’ equity, which includes common stock and retained earnings. These components reflect the organization's financial health and follow the accounting equation.
14.5: The Income Statement
This page explains the income statement, which outlines a company's revenues and expenses over a period, resulting in total profit or loss. Key components include gross sales, costs, and net profit, exemplified by Delicious Desserts' 2018 figures. The income statement differs from the balance sheet, which captures financial status at a moment. Additionally, it emphasizes that profit is not the same as cash flow.
14.6: The Statement of Cash Flows
This page highlights the importance of the statement of cash flows in assessing a company's financial health, as it reveals cash generation and usage beyond net profit. It categorizes cash flows into operating, investing, and financing activities, aiding in spotting cash flow issues and evaluating overall viability—a requirement for publicly traded companies.
14.7: Analyzing Financial Statements
This page discusses ratio analysis as a tool to evaluate a firm's financial strengths and weaknesses, using historical data for insights while noting it doesn't predict future performance. Key ratios covered include liquidity, profitability, and debt ratios. Specific examples from Delicious Desserts illustrate these concepts: an EPS of $3.22, inventory turnover of 6.8 times per year, and a debt-to-equity ratio of 89.1%, suggesting high leverage.
14.8: Trends in Accounting
This page discusses significant changes in the accounting industry driven by post-SOX regulations, which shift focus to core auditing over advisory services. Key trends include the adoption of cloud-based services for rapid client onboarding and enhanced financial insights, along with automation that simplifies auditing processes. Staffing challenges emerge as firms seek talent skilled in these technologies.

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