CH (7)

UNDERSTANDING
FINACIAL
INFORMATION
AND ACCOUNTING

LEARNING objectives

1. Describe the importance of financial information and accounting.

2. Define and explain different area of accounting .
3. List the steps in the accounting cycle.
4. Explain how the major financial statements differ.
5. Explain the importance of ratio analysis in reporting financial
information.

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 Section (1): THE IMPORTANCE OF FINANCIAL INFORMATION

Section Outline:-
What is Accounting.

Accounting :- Recording, classifying ,summarizing and interpreting

financial events and transactions to provide management and other
interested parties the information they need to make good decisions.

Section (2): THE FIVE AREAS OF ACCOUNTING

Section Outline:-
A. Managerial and Financial Accounting.
B. Auditing.
C. Tax Accounting.
D. Government and Not-for Profit Accounting.
E. Accounting Tools .
F. Sarbanes Oxley Act.

A. Managerial and Financial Accounting :-

Managerial Accounting: - Provides information and analysis to managers

within the organization to assist them in decision making.

Financial Accounting: - Generates information for use outside the

organization .

Annual report: - Yearly statement of the financial condition, progress, and

expectations of an organization.

Certified management accountant ( CMA) :- A professional accountant who

has met certain educational and experience requirement , passed a qualifying
exam in the field , and been certified by the Institute of Certified
Management Accountants .

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Certified public accountant ( CPA) :- An accountant who who passes a series
of examinations establish by the American Institute of Certified Public
Accountants (AICPA) . and does accounting for no one particular firm .

Private accountant: - Accountant who works for a single firm , government

agency , or nonprofit organization , on the payroll of the company or
organization.

Public Accountant: - Accountant who does not work for a specific company.

Financial Accounting Standers Board (FASB) :- The group that oversees

accounting practices.

Generally accepted accounting principles (GAAP) :- A set of principles

followed by accountants in preparing reports.

B. Auditing.

Auditing: - The job of reviewing and evaluating the records used to prepare a
company's financial statements.

Independent audit :- An evaluation and unbiased opinion about the accuracy

of a company's financial statements .

Certified international auditor (CIA) :- An accountant who meet educational

requirements can be considered for a professional accreditation As
independent audit.

D. Government and Not-for Profit Accounting:-

Governmental Accounting Standards Board (GASB):- This group sets

standards government agencies accounting practices .

Bookkeeping :- The recording of business transactions .

It is important to note that accounting is different from bookkeeping As

Bookkeeping is simply The recording of business transactions .BUT accounting goes
much further .Accountants rather than simply recording transactions, classify and
summarizing financial data according to formal standers and principles .
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E. Accounting Tools :-

Journal :- Recording book in accounting (can also be a computer program)

Double-entry bookeeping :- The concept of writing (or typing ) every

transaction in two places. (To ensure the accuracy of the information )

Ledger :- A specialized accounting book or computer program in which

information from accounting journals is recorded into specific categories .
F. Sarbanes Oxley Act.
Sarbanes Oxley Act: - Signed into law in 2002 after many accounting scandals, the act requires higher
standers of accounting practices and auditing firms

Section (3 ): THE SIX- STEP ACCOUNTING CYCLE

1 2 3 4 5 6

Analyze Record Transfer Take Prepare Analyze

Source Transactions (post) A trial Financial Financial
Documents In journals Journal balance Statements statements
(sales slips, Entries
travel to
records , ledger
etc.)

1 Balance Sheet
2 Income Statement
3 Statement Of Cash flows

Keep in mind that the financial statements are result of the ongoing work
of bookkeepers and managerial accountants.

Trial balance (4):- A summary of all of all the financial data in the account
ledgers to check whether the figures are correct and balanced .

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 Section (4): Financial statement

Section Outline:-

A. The Accounting Equation

B. The Balance Sheet.
C. The Income Statement.
D. The Statement of Cash Flows .
E. A Word about Depreciation.

Financial statement: - A summary of all transactions that have occurred over

a particular period.

The following are the key financial statements of a business:-

i. Balance sheet
ii. Income statement (Profit and loss statement or P&L statement)
iii. The Statement of Cash Flows

A. The Accounting Equation

Assets = liabilities + Owner's equity

B. The Balance Sheet.

Balance sheet :- The financial statement that reports a firm's financial

condition at a specific time. (Photo)

It is comprised of three major accounts:-

i. Assets ii. Liquidity iii. Owner's equity

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Assets :- Economic resources (things or values) owned by a firm .
Assets are divided into three categories according to how quickly they can
be turned into cash:-
i. Current assets ii. Fixed assets iii. Intangible assets

Liquidity: - Refers to how fast an asset can be converted into cash .

Account receivable:- An amount of money owed to a firm that is expected to

be paid with one year.

Liabilities :-What the business owes to others ( debts) .

Owner's equity: - The amount of business that belongs to the owners minus
any liabilities owed by the business .

C. The Income Statement.

The income statement :- Summarizes all of the resources ( called revenue)

that have come into the firm from operating activities , the money resources
that were used up ,the expense incurred in doing business ,and what
resources were left after all costs and expenses, including taxes, were paid out

Revenue: - The value of what is received from goods sold, services from
rendered, and other financial sources

Gross sales :- Total of all sales the firm completed

Net sales :-Gross sales minus returns, discounts, and allowances

Cost of goods sold (cost of goods manufactured COGS):- A measure of the

cost of merchandise sold, or the cost of the raw materials and supplies used
for producing items for sale .

Gross profit (gross margin) :-How much a firm earned by buying (or making)
and selling merchandise, without expense.

Operating expenses: - The costs involved in operating a business.

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D. The Statement of Cash Flows .

The statement of cash flow:-Reports cash receipts and

disbursements related to the three major activities of a firm:-
i. Operations ii. Investments iii. Financing

Depreciation :-The systematic write-off of the cost of a tangible asset over its
estimated useful life .

Section (5): Analyzing financial statements:

Ratio analysis

Ratio analysis: - The assessment of a firm's financial condition and

performance through calculations and interpretations of financial ratios
developed from the firm's financial statement.

Current Ratios To be risk free 2

Liquidity
Ratios
Acid-test ratio

( safe in case bet. 0.5 and 1 )

Leverage Debt to owners' equity ratio =

(Debt) Ratios

Activity Ratios Inventory Turnover =