Download Chapter Twelve - Dr.Mahmood Asad

University of Bahrain
College of Business Administration
MGT 131: Introduction to Business
Administration
Chapter Twelve
Understanding Financial Information and
Accounting
Dr.Mahmood Ali
MGT131
1
Chapter Outline
•
•
•
•
•
•
•
Introduction to Accounting
The Importance of Financial Information
What is Accounting?
Areas of Accounting
Managerial and Financial Accounting
Auditing
The Six-Steps Accounting Cycle
Dr.Mahmood Ali
MGT131
2
Introduction to Accounting
• Learning about accounting is extremely important because as
a businessperson you will constantly be dealing in numbers.
Thus, some basic information on how businesspeople can use
accounting to better understand and control their businesses
will be discussed.
Dr.Mahmood Ali
MGT131
3
Dr.Mahmood Ali
MGT131
4
The Importance of Financial Information
• All individuals can benefit personally and professionally by
having a basic working knowledge of accounting.
• In addition, it is important to note that many people use
accounting information, not just managers (i.e. suppliers,
competitors and employees).
Dr.Mahmood Ali
MGT131
5
What is Accounting?
• Financial information is primarily based on information
generated from 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.
• Financial transactions can include such specifics as buying and
selling goods and services, acquiring insurance, paying
employees, and using supplies.
Dr.Mahmood Ali
MGT131
6
• Once business transactions have been recorded, they are
usually classified into groups that have common
characteristics.
• The method used to record and summarize accounting
data into reports is called and accounting system, which
illustrates the operating performance of the firm and from
which management can make informed decisions.
Dr.Mahmood Ali
MGT131
7
•
•
Another major purpose of accounting is to report financial
information to people outside the firm, such as owners,
suppliers, creditors, investors, and the government.
In sum, accounting is the measurement and reporting of
financial information to various users (inside and outside the
organization) regarding the economic activities of the firm.
Dr.Mahmood Ali
MGT131
8
Areas of Accounting
•
•
The accounting profession is divided into five key areas:
managerial and financial, auditing, tax, governmental, and
not-for-profit.
All five areas are important and create career opportunities
for students.
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.
Dr.Mahmood Ali
MGT131
9
•
Managerial accounting is concerned with 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 (i.e., information
and analysis for decision makers within the organization).
Dr.Mahmood Ali
MGT131
10
•
•
The information and analysis prepared by financial
accounting goes not only to the company owners, managers,
and employees, but also to creditors and lenders, employee
unions, customers, suppliers, government agencies, and the
general public.
Financial accountants have the important responsibility of
preparing annual reports which are yearly statements of the
financial condition, progress, and expectations of the
organization.
Dr.Mahmood Ali
MGT131
11
•
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.
• Public accountants can be hired to help businesses with
payroll, taxes and other projects but do not need to be
employees of the company.
Dr.Mahmood Ali
MGT131
12
• It is vital for the accounting profession to ensure users of
financial information that the information provided to
them is accurate.
• The independent Financial Accounting Standards Board
defines the set of Generally accepted accounting principles
that accountants must follow.
• Financial Accounting Standards Board (FASB): the group
that oversees accounting practice.
• Generally accepted accounting principles (GAAP): a set of
principles followed by accountants in preparing reports.
Dr.Mahmood Ali
MGT131
13
Auditing
•
•
•
Auditing: the job of reviewing and evaluating the records used
to prepare a company’s financial statements.
Accountants within the organization often perform internal
audits to ensure that proper accenting procedures and
financial reporting are being followed.
Public accountants also conduct independent audits of
accounting and related records.
Dr.Mahmood Ali
MGT131
14
•
•
Independent audit: an evaluation and an unbiased opinion
about the accuracy of a company’s financial statements.
An accountant who meets educational requirements can be
considered for a professional accreditation. The individual
receiving this accreditation or certification is called a certified
internal auditor (CIA).
Dr.Mahmood Ali
MGT131
15
The Six-Step Accounting Cycle
• The accounting cycle is a six-step procedure that results in
the preparation and analysis of the major financial
statements.
• The accounting cycle generally involves the work of both
the bookkeeper and the accountant.
• The first three steps are:
– Analyzing and categorizing documents
– Putting information into journals and
– Posting that information into ledgers
Dr.Mahmood Ali
MGT131
16
Journal: record book in accounting
Dr.Mahmood Ali
MGT131
17
Ledger: specialized accounting book in which information from
accounting journals is recorded into specific categories.
Dr.Mahmood Ali
MGT131
18
• The fourth step involves preparing a trial balance.
• Trial balance: a summary of all the financial data in the
account ledgers to check whether the figures are correct and
balanced.
• If the information in the accountant ledgers is not accurate, it
must be corrected before the firms financial statements are
prepared and analyzed in the final two steps:
Dr.Mahmood Ali
MGT131
19
Dr.Mahmood Ali
MGT131
20
• Preparing the financial statements, including a balance
sheet, income statement, and statement of cash flows
• Analyzing the financial statements and evaluating the
overall financial condition of the firm.
• Computers and accounting software have simplified this
process considerably.
Dr.Mahmood Ali
MGT131
21
Balance sheet: financial statement that reports a firm’s
financial condition at a specific time.
Dr.Mahmood Ali
MGT131
22
Income statement: summarizes all of the resources (revenue)
that come into the firm, the money resources that were used
up, the expenses incurred in doing business, and resources
left after all costs and expenses were paid out.
Dr.Mahmood Ali
MGT131
23
Statement of cash flows: reports cash receipts and expenses
related to operations, investments, and financing activities.
Dr.Mahmood Ali
MGT131
24
Figure 12.1: The Steps in the Accounting Cycle
Dr.Mahmood Ali
MGT131
25