Chapter 16: Understanding Accounting and Financial
Information 2012-12-17 7:39 AM
• Could you define accounting to a friend so that he/she would clearly understand what’s
• Can you explain the difference betwe en managerial and financial accounting?
• Describe the 3 accounting designations.
• What’s the difference between a private accountant and a public accountant?
• Can you explain the difference between accounting and bookkeeping?
• What’s the difference between an accounting journal and a ledger?
• Why does a bookkeeper prepare a trial balance?
• What key advantages do computers provide businesses in maintaining and compiling
• What is the formula for the balance sheet? What do we call this formu la?
• What does it mean to list various assets by liquidity?
• What goes into the liabilities accounts?
• What is owners’ equity and how is it determined?
• What is the formula for the income statement?
• What is the difference between revenue and income on the inc ome statement?
• What is the connection between the income statement and the balance sheet?
• Why is the cash flow statement important in evaluating a firm’s operations?
• What is the difference between LIFO and FIFO inventory valuation? How could the use of
these methods change financial results?
• How do financial ratios benefit stakeholders?
• What are the 4 main categories of financial ratios?
Learning Objective #1: Describe the importance of accounting and financial information.
• Financial information is critical to the growth and development of an organization.
Accounting provides the information necessary to measure a firm’s financial condition.
• What is accounting?
o Accounting is the recording, classifying, summarizing, and interpreting of financial
events and transactions that affect an organization. The methods used to record
and summarize accounting data into reports are called an accounting system.
Learning Objective #2: Define and explain the different areas of the accounting profession.
• The accounting profession covers five major areas: managerial accounting, financial
accounting, compliance, tax accounting, and government and not -for-profit accounting.
• How does managerial accounting differ from financial accounting?
o Managerial accounting provid es information (often of segments of a business) for
planning and control purposes to managers within the firm to assist them in
decision making. Financial accounting provides information in the form of the 3
basic financial statements to managers and exte rnal users of data such as
creditors and lenders.
• What is the job of an auditor?
o Auditors review and evaluate the standards used to prepare a company’s financial
statements. An independent audit is conducted by a public accountant and is an
evaluation and unbiased opinion about the accuracy of a company’s financial
• What is the difference between a private accountant and a public accountant?
o A public accountant provides services for a fee to a variety of companies, whereas
a private accountant works for a single company. Private and public accountants
do essentially the same things, with the exception of independent audits. Private
accountants do perform internal audits, but only public accountants supply
independent audits. Learning Objective #3: List the steps in the accounting cycle, distinguish between accounting and
bookkeeping, and explain how computers are used in accounting.
• Many people confuse bookkeeping and accounting.
• What is the difference between bookkeeping and accounting?
o Bookkeeping is part of accounting and includes the mechanical part of recording
data. Accounting also includes classifying, summarizing, interpreting and reporting
data to management.