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Introduction to Business

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Chapter 14 USING FINANCIAL INFORMATION AND TECHNOLOGY

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Learning Outcomes

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

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Exhibit 14.3 The Accounting System

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Exhibit 14.4 Reports Provided by the Accounting System

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US GAAP versus IFRS

  1. Since consolidating or at least reconciling U.S. GAAP and the global IFRS accounting standard seems to be unlikely, what specifically are the effects of this?
  2. Does this difference really matter to most small businesses in the USA or around the world?
  3. Even if it probably would be simpler for the entire global business community to utilize only one accounting “language”, are the costs of conversion to IFRS from GAAP worth it, for example, to U.S. companies that only do business domestically? 

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Exhibit 14.5 The Accounting Cycle

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3. What are the six steps in the accounting cycle?�

  • CONCEPT CHECK
  • Explain the accounting equation.
  • Describe the six-step accounting cycle.
  • What role do computers and other technology play in accounting?

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Data Analysis

  • In the MANAGING CHANGE box of Section 14.3, the value of data analytic tools to today’s accountants is discussed.  In fact, the text goes as far as to call this movement toward data analytics a “seismic shift”.   Perhaps the authors of the text were referring to the idea that modern accountants must not only help business leaders accurately report financial information, but also assist them to forecast future performance. 
  • View the video in which the presenter summarizes the current importance of data analysis to the accounting profession, and moreover offers 5 free tools tools that accountants would find useful.

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Linking the 3 Financial Statements in Excel

  • Review Sections 14.4, 14.5 and 14.6 to understand the criteria, purpose, and contribution to financial knowledge of each of the three key financial documents: Balance Sheet, Income Statement and Statement of Cash Flows.
  • View the comprehensive video which explains step-by-step how Excel can be used to connect these three important sources of information together to yield one integrated picture of the financial health of an organization. 

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Tools for Financial Statement Analysis

  • As explained in Section 14.7, because companies come in so many different sizes, the most accurate way to compare financial results is by using financial ratios. A financial ratio expresses the relationship between financial data on a percentage basis rather than using dollars (or any other currency).  This way, comparisons between small, medium and large company performance are still valid since the correlation of results is by ratio and not absolute monetary earnings or expenses, for example. 
  • As you learned in this Section, ratios are classified by what they measure. Thus, they are typically grouped by liquidity, profitability, activity, and debt. The text provided a sample using Delicious Desserts’ 2018 balance sheet and income statement (Table 14.1 and Table 14.2).  As explained afterwards, it’s then possible to calculate and interpret the key ratios in each group. You can view the summary of these ratios for Delicious Desserts in Table 14.4. 
  •   After reviewing the material in Section 14.7, watch the video from Larry Walther.