Marco Romero CHAPTER 17 UNDERSTANDING ACCOUNTING AND FINANCIAL INFORMATION 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 o Financial transactions include buying and selling goods services acquiring insurance paying employees and using supplies Accounting system the method we use to record and summarize accounting data into reports Purpose of accounting is to help managers make well informed decisions o Another purpose is to report financial info about the firm to interested stakeholders such as employees owners creditors suppliers unions community activists investors and the government Accounting is divided into five key working areas o Managerial accounting financial accounting auditing tax accounting and government and not for profit account 1 Managerial accounting accounting used to prove information and analyses to managers inside the organization to assist them in decision making o Concerned with measuring and reporting costs of production marketing and other functions preparing budgets planning checking whether or not units are staying within their budgets controlling and designing strategies to minimize taxes 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 2 Financial accounting accounting information and analyses prepared for people outside the organization o 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 o External users ask questions like Is the organization profitable Is it able to pay its bills How much debt does it owe o These questions are answered in a company s annual report Annual report a yearly statement of the financial condition progress and expectations Private accountant an accountant who works for a single firm government agency or Public accountant an accountant who provides accounting services to individuals or of an organization nonprofit organization businesses on a fee basis Certified public accountant CPA an accountant who passes a series of examinations established by the American Institute of Certified Public Accountants AICPA The independent Financial Accounting Standards Board FASB defines the generally accepted accounting principles GAAP that accountant must follow 3 Auditing the job of reviewing and evaluating the information used to prepare a company s financial statements Independent audit an evaluation and unbiased opinion about the accuracy of a company s financial statements Marco Romero Certified Internal Auditor CIA an accountant who has a bachelor s degree and two years of experience in internal auditing and who has passed an exam administered by the Institute of Internal Auditors 4 Tax accountant an accountant trained in tax law and responsible for preparing tax returns or developing tax strategies 5 Government and Not for Profit Accounting accounting system for organizations whose purpose is not generating a profit but serving ratepayers tax payers and others according to a duly approved budget o Government accounting standards are set by an organization called the Governmental Accounting Standards Board GASB Accounting cycle a six step procedure that results in the preparation and analysis of the major financial statements o Relies on the work of both a bookkeeper and an accountant 1 Analyzing documents 2 Recording information into journals 3 Posting that info into ledgers 4 Developing a trial balance 5 Preparing financial statements 6 Analyzing financial statements Bookkeeping the recording of business transactions o First task is to divide all the firm s transactions into meaningful categories such as sales documents purchasing receipts and shipping documents o Then they record financial data from the original transaction documents sales slips and so forth into a record book or computer program called a journal Journal the record book or computer program where accounting data are first entered a day s transaction Double entry bookkeeping the practice of writing every business transaction in two 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 Trial balance a summary of all the financial data in the account ledgers that ensures the Financial statement a summary of all the transactions that have occurred over a figures are correct and balanced particular period o Indicates a firm s financial health and stability and are key factors in management decision making The key financial statements of a business are 1 The balance sheet which reports the firm s financial condition on a specific date 2 The income statement which 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 3 The statement of cash flows which provides a summary of money coming into and going out of the firm that tracks a company s cash receipts and cash payments The balance sheet details what the company owns and owes on a certain day Marco Romero The income statement shows the revenues a firm earned selling its products compared to its selling costs profit or loss over a specific period of time The statement of cash flow highlights the difference between cash coming in and cash Liabilities debts assets cash and so forth equity what you own Fundamental accounting equation Assets Liabilities Owners equity this is the going out of a business basis for the balance sheet Balance sheet financial statement that reports a firm s financial condition at a specific time and is composed of three major accounts assets liabilities and owners equity Assets economic resources things of value owned by a firm o Tangible items such as equipment buildings land furniture and motor vehicles that help generate income and intangible such as patents trademarks copyrights and goodwill o Goodwill represents the value attached to factors such as a firm s reputation location and superior products o Not all companies list intangible assets on
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