Chapter 17 Understanding Accounting and Financial Information 1 What is Accounting a Accounting Recording classifying summarizing and interpreting financial events and transactions in an organization to provide management and other interested parties the financial information they need to make good decisions about its operation i Example Transactions Buying and selling goods and services acquiring insurance paying employees and using supplies 1 The methods we use to record and summarize accounting data into reports is an accounting system ii Major Purpose To help managers make well informed decisions report financial information about a firm to its stakeholders 2 Accounting Disciplines a Managerial Accounting Provides information and analysis to managers inside the organization to assist them in decision making i Measures and reports costs of production marketing and other functions prepares budgets preparing checks how well units stay within their budgets controlling and designing strategies to minimize taxes 1 Emphasis Global competition outsourcing and organizational cost cutting ii Certified Management Accountant CMA Professional accountant who has met certain educational and experience requirements passed a qualifying exam and has been certified by the Institute of Certified Management Accountants b Financial Accounting Provides information and analysis to people outside the organization Information not only goes to company owners managers and employees but also to creditors and lenders employee unions customers suppliers government agencies and the general public i Annual Report Yearly statement of the financial condition progress and expectations of an organization 1 Is the organization profitable Is it able to pay its bills How much debt ii Private Accountant One who works for a single firm government agency or does it owe nonprofit organization iii Public Accountant Provides accounting services to individuals or businesses that include designing an accounting system helping select the correct software to run the system and analyzing an organization s financial performance 1 Certified Public Accountant Find careers as private or public accountants and are often sought to fill other financial positions within organizations a Pass exams by the American Institute of Certified Public Accountants AICPA iv Generally Accepted Accounting Principles GAAP Principles that accountants must follow as according to the Financial Accounting Standards Board v Sarbanes Oxley Act After year 2000 scandals Act created new government reporting standards for publically traded companies and created the Public Company Accounting Oversight Board which oversees the AICPA c Auditing Reviewing and evaluating the information used to prepare a company s financial statements i Private accountants perform internal audits to guarantee that it is carrying out proper accounting procedures and financial reporting ii Independent Audit An evaluation and unbiased opinion about the accuracy of a company s financial statements iii Certified Internal Auditor CIA Accountants who have a bachelor s degree and two years of experience in internal auditing and who pass an exam administered by the Institute of Internal Auditors d Tax Accountant Trained in tax law and is responsible for preparing tax returns or developing tax strategies i Challenging job because government always changes tax policies according to specific needs or objectives of an organization e Government and Non Profit Accounting Supports organizations whose purpose is not generating a profit but serving ratepayers taxpayers and others according to a duly approved budget i Governmental Accounting Ensuring that the government is fulfilling its obligations and making proper use of taxpayer s money ii Non Profit Knowing exactly how and where funds they contribute are being spent 3 Accounting Cycle a Accounting cycle is a six step procedure that results in the preparation and analysis of the major financial statements i Classifying and summarizing financial data provided by bookkeepers and then interpreting the data and reporting the information to management They also suggest strategies for improving the firm s financial condition and prepare financial analyses and income tax returns ii Bookkeeping The recording of business transactions 1 Divide firm s transactions into meaningful categories such as sales documents purchasing receipts and shipping documents 2 Journalizing Bookkeepers record financial data from the day s original transaction documents such as sales documents purchasing receipts and shipping documents 3 Double Entry Bookkeeping Writing every transaction in two places to ensure that both add up to the same amount in order to check for mistakes a Two entries in the journal two in the ledger for every transaction 4 Ledger A specialized accounting book or computer program in which information from accounting journals is accumulated into specific categories and posted so that managers can find all the information about one account in the same place 5 Trial Balance A summary of all the financial data in the account ledgers that ensures the figures are correct and balanced 6 Prepare the firm s financial statements balance sheet income statement and statement of cash flows as according to GAAP 4 Key Financial Statements a Financial Statement Summary of all the financial transactions that have occurred over a particular period indicate a firm s financial health and stability and are key factors in decision making i Balance Sheet Reports the firm s financial condition ON A SPECIFIC DATE ii Income Statement Summarizes revenues cost of goods and expenses including taxes for a specific PERIOD and highlights the total profit or loss the firm experienced DURING THAT PERIOD iii Statement of Cash Flows Provides a summary of money coming into and going out of the firm that tracks a company s cash receipts and payments iv Key Differences Balance sheet details what the company owns and owes on a certain day the income statement shows the revenue a firm earned selling its products compared to its selling costs profit or loss over a specific period of time and the statement of cash flows highlights the difference between cash coming and cash going out of a business b Fundamental Accounting Equation Assets Liabilities Owner s Equity i Basis for balance sheet c Assets Economic resources things of value owned by a firm Include productive tangible items such as
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