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Chapter 16

AFM131 Chapter Notes - Chapter 16: Bookkeeping, Forensic Accounting, Financial Statement


Department
Accounting & Financial Management
Course Code
AFM131
Professor
Robert Sproule
Chapter
16

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Chapter 16 Notes
1
Understanding Accounting and Financial Information
The Importance of Accounting and Financial Information:
Accounting System: the inputs to an accounting system include sales documents and other
records. The data are recorded, classified, and summarized. They’re then put into summary
financial statements such as the income statement and the balance sheet. (pg 249)
Areas of Accounting:
Managerial accounting is used to provide information and analyses to managers within the
organization to assist them in decision-making. They answer questions like how quickly is the firm
selling what it buys and which expenses change with changes in revenue?
Financial accounting is accounting information and analyses prepared for people outside the
organization. They answer questions like should we lend money to this company and will it be able
to pay it back?
Private accountants work for a single firm, government agency, or non-profit organization.
Public accountants provide their services to individuals or businesses on a fee basis. They
provide services like accounting, compliance, and offer professional advice.
Forensic accounting is a new area of accounting that focuses its attention on fraudulent
activity.
Compliance is the job of reviewing and evaluating the records used to prepare a company’s
financial statements. Private accountants within the organization often perform internal audits to
ensure proper accounting procedures and financial reporting are being carried out within the
company. Public accountants also do independent audits of accounting and related records.
An independent audit is an evaluation and unbiased opinion about the accuracy of a
company’s financial statements.
Tax accountants are trained in tax law and are responsible for preparing tax returns or
developing tax strategies.
The primary users of government accounting information are citizens, special interest groups,
legislative bodies, and creditors.
The Accounting Cycle:
Bookkeeping involves the recording of business transactions and is an important part of
financial reporting.
In contrast, accountants classify and summarize financial data provided by bookkeepers and
then interpret the data and report the information to management. They also suggest strategies
for improving the financial condition and progress of the firm.
Goodwill is the value that can be attributed to factors such as reputation, location, and
superior products. It is included on the balance sheet when a firm acquiring another firm pays more
than the value of that firm’s tangible assets.
Ratios:
Liquidity ratios include the current ratio and acid-test ratio.
Leverage (debt) ratios include the debt to owner’s equity ratio.
Profitability (performance) ratios include the earnings per share ratio, return on sales ratio,
and the return on equity ratio.
Activity ratios include the inventory turnover ratio.
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