Accounting The process of measuring interpreting and communicating financial information to enable people inside and outside the firm to make informed decisions o In the US more than 1 2 million people work as accountants Allowing employees to view financial information helps them better understand how their work contributes to the company s success which in turn benefits them Open Book Management Accounting Professionals Three roles of accounting Public management government and not for profit accountants 1 Financing activities provide necessary funds to start a business and expand it after it begins operating Investing activities provide valuable assets required to run a business 2 3 Operating activities focus on selling goods and services but they also consider expenses as important elements of sound financial management Public Accountant Provides accounting services to individuals or business firms for a fee Provide three basic services to clients o Auditing or examining financial records o Tax preparation planning and related services o Management consulting Four largest public accounting firms collect more than 100 billion o Deloitte Touche o Ernst Young o KPMG o Pricewaterhouse Coopers Forensic Accountant fraud in a variety of organizations Certified Public Accountant These professionals and the firms that employ them focus on uncovering potential Demonstrate their accounting knowledge by meeting state requirements for education and experience and successfully completing a number of rigorous tests in accounting theory and practice auditing law and taxes Management Accountants An accountant employed by a business other than a public accounting firm o Such a person collects and records financial transactions and prepares financial statements used by the firm s managers in decision making Government and Not for Profit Accountants Concern themselves primarily with determining how efficiently the organizations accomplish their objectives The Foundation of the Accounting System Generally accepted accounting principles GAAP o Principles that encompass the conventions rules and procedures for determining acceptable accounting practices at a particular time o Based on four basic principles Consistency All data should be collected and presented in the same manner across all periods Any change in the way in which specific data are collected or presented must be noted and explained All information being reported should be appropriate and assist users in evaluating that information Implies that the accounting data presented in financial statements is reliable and can be verified by an independent party such as an outside auditor Relevance Reliability Comparability Ensures that one firm s financial statements can be compared with those of similar businesses Financial Accounting Standards Board Primarily responsible for evaluating setting or modifying GAAP Carefully monitors changing business conditions enacting new rules and modifying existing rules when necessary o Also considers input and requests from all segments of its diverse constituency including corporations and the SEC Now requires firms that give employees stock options to calculate the cost of the options and treat the cost as an expense similar to salaries Board includes 70 people Created the Public Accounting Oversight Board o 5 member board that has the power to set audit standards and to investigate and sanction accounting firms that certify the books of publicly traded firms Sarbanes Oxley Act Sarbanes Maryland Oxley Ohio o Helped improve the quality of financial reporting The Accounting Cycle Set of activities involved in converting information and individual transactions into financial statements o Recording o Classifying o Summarizing Financial statements o Balance sheet o Income statement o Statement of owners equity o Statement of cash flows The Accounting Equation Asset o Anything of value owned or leased by a business Land buildings supplies cash accounts receivable and marketable Liability securities o Claims against assets by creditors When a firm borrows money to purchase inventory land or machinery the claims of creditors are shown as accounts payable notes payable or long term debt Wages and salaries owed to employees also represent liabilities Owners Equity of cash dividends o Funds contributed by owners plus profits not distributed to owners in the form A strong owners equity position often is used as evidence of a firm s Accounting Equation financial strength and stability o Relationship that states that assets must always equal the sum of liabilities and owners equity Double entry Bookkeeping Assets liabilities owners equity business s financial structure o Process by which accounting transactions are entered each individual transaction always has an offsetting transaction o If a company increases an asset either another asset must decrease a liability must increase or owners equity must increase If a company uses cash to purchase inventory one asset is increased while another cash is decreased by the same amount o A decrease in an asset must be offset by either an increase in another asset a decrease in a liability or a decrease in owners equity If a company uses cash to repay a bank loan both an asset cash and a liability bank loans decrease and by the same amount Balance Sheet Statement of a firm s financial position what it owns and claims against its assets at a particular point in time balance sheet equation below Income Statement financial record of a company s revenues and expenses and profits over a period of time Assets liabilities net worth Statement of owners or shareholders equity record of the change in owners equity from the end of one fiscal year to the next Statement of cash flows statement showing the sources and uses of cash during a period of time Accrual accounting accounting method that records revenues and expenses when they occur not necessarily when cash actually changes hands Liquidity ratios A firm s ability to meet its short term obligations when they must be paid is measure by liquidity ratio Budget Organization s plan for how it will raise and spend money during a given period Leverage ratios measure the extent to which a firm relies on debt financing Cash budget tracks the firm s cash inflows and outflows Sarbanes Oxley Act responded to cases of accounting fraud o Created the Public Accounting Oversight Board which sets audit standards and investigates and sanctions
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