Chapter 17 Understanding Accounting and Financial Information The Role of Accounting Information Accounting reports financial statements reveal the business s health Accounting the recording classifying summarizing and interpreting of financial events and transactions to provide management and other interested parties the information they need to make good decisions Financial transactions buying selling goods services getting insurance paying employees using supplies Accounting system the method we use to record and summarize accounting data into reports Purpose of accounting help managers make well informed decisions and to report financial information to interested stakeholders Accounting Disciplines Aka language of business Managerial accounting accounting used to provide information and analyses to managers inside the organization to assist them in decision making o Measuring reporting costs of production marketing preparing budgets checking whether or not units are staying within their budgets designing strategies to minimize taxes o Certified management accountant CMA a professional accountant who has met certain educational and experience requirements passed a qualifying exam and been certified by the Institute of Certified Management Accountants Financial accounting accounting information and analyses prepared for people outside the organization o For company owners managers employees AND ALSO creditors lenders employee unions customers suppliers government agencies general public o Annual reports a yearly statement of the financial condition progress and expectations of an organization o Private accountant an accountant who works for a single firm government agency or nonprofit organization Not all companies need their own private accountant therefore there are public accountants provided by accounting firms o Public accountant an accountant who provides accounting services to individuals or businesses on a fee basis o Certified public accountant CPA an accountant who passes a series of examinations established by the American Institute of Certified Public Accountants AICPA o Accounting reports should be prepared according to the generally accepted accounting principles GAAP o Sarbanes Oxley Act created new government reporting standards for publicly traded companies to try to avoid scandal Auditing the job of reviewing and evaluating the information used to prepare a company s financial statements o Independent audit an evaluation and unbiased opinion about the accuracy of a company s financial statements o Certified internal auditor an accountant who has a bachelor s degree and 2 years of experience in internal auditing and has passed an exam administered by the Institute of Internal Auditors Tax accounting an accountant trained in tax law and responsible for preparing tax returns or developing tax strategies Government and not for profit accounting accounting system for organizations whose purpose is not generating a profit but serving ratepayers taxpayers and others according to a duly approved budget o These ppl make sure the government is fulfilling its obligations and making proper use of its tax money The Accounting Cycle Accounting cycle a 6 step procedure that results in the preparation and analysis of the major financial statements o Relies on the work on the bookkeeper and an accountant o Bookkeeping the recording of business transactions First task divide the firm s transactions into meaningful categories like sales documents purchasing receipts Then record financial data form the original transaction documents into a record book computer program called a journal where accounting data is first entered Double entry bookkeeping the practice of writing every business transaction in 2 places 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 ex how much the company spent on office supplies Trial balance a summary of all the financial data in the account ledgers that ensures the figures are correct and balanced if correct then prepare financial statements balance sheet income statement statement of cash flows o Accountants then classify summarize interpret report this data from the bookkeepers suggest strategies to improve the firm s financial conditions Understanding Key Financial Statements Financial statement a summary of all the transactions that have occurred over a particular period indicate a firm s financial health and stability key factors in management decision making o The balance sheet reports the firm s financial condition on a specific date o The income statement summarizes revenues cost of goods and expenses including taxes for a specific good and highlights the total profit or loss the firm experienced during that period o The 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 cash payments o Fundamental accounting equation assets liabilities owner s equity this is the basis for the balance sheet o Balance sheet financial statement that reports a firm s financial condition at a specific time and is composed of 3 major accounts assets liabilities owners equity Assets economic resources things of value owned by a firm Liquidity the ease with which an asset can be converted into cash more liquefiable is at the top of the balance sheet Current assets items that can converted to cash within Fixed assets items like land buildings that are relatively permanent Intangible assets items of value like patents copyrights that don t have a physical form Liabilities what the business owes to others debts Current liabilities payments that are due in 1 year or a year less o Accounts payable are current liabilities or bills that the company owes to others for merchandise or services purchased on credit but not yet paid for Notes payable short term or long term liabilities that a business promises to repay by a certain date Long term liabilities payments not due for 1 year or longer o Bonds payable longer term liabilities that represent money lent to the firm that must be paid back Owners equity the amount of the business that belongs to the owners minus any liabilities owed by the business aka stockholder s equity or shareholders equity Owners equity depends on the type of business Sole proprietors
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