week 4 notes

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16 Dec 2010
Chapter 4 Understanding Accounting Issues Notes
What is Accounting and Who Uses It?
x accounting—a comprehensive system for collecting, analyzing, and communicating financial information
x bookkeeping—recording accounting transactions
x accounting also uses performance measures to prepare performance reports for owners, the public, and regulatory agencies
x accounting information system (AIS)—an organized procedure for identifying, measuring, recording, and retaining financial
information so that it can be used in accounting statements and management reports
x there are numerous users of accounting information:
o business managers use accounting information to set goals, develop plans, set budgets, and evaluate future prospects
o employees and unions use accounting information to get paid and to plan for and receive such benefits as health care,
insurance, vacation time, and retirement pay
o investors and creditors use accounting information to estimate returns to stockholders, to determine a company’s growth
prospects, and to decide if the company is a good credit risk before investing or lending
o taxing authorities use accounting information to plan for tax inflows, to determine the tax liabilities of individuals and
businesses, and to ensure that correct amounts are paid in a timely fashion
o government regulatory agencies rely on accounting information to fulfil their duties
Who Are Accountants and What Do They Do?
x controller—the individual who manages all the firm’s accounting activities
x as chief accounting officer, controller ensures that accounting system provides the reports and statements needed for planning,
controlling, and decision-making activities
Financial and Managerial Accounting
Financial Accounting
x financial accounting system—the process whereby interested groups are kept informed about the financial condition of a firm
x concerned with external users—consumer groups, unions, shareholders, and government agencies
x it prepares and publishes income statements and balance sheets at regular intervals
Managerial Accounting
x managerial accounting—internal procedures that alert managers to problems and aid them in planning and decision making
x managers at all levels need information (as well as other employees) to make decisions for their departments, to monitor current
projects, and to plan for future activities
Professional Accountants
Chartered Accountants
x chartered accountant (CA)—an individual who has met certain experience and education requirements and has passed a licensing
examination; acts as an outside accountant for other firms
x CA firms typically provide audit, tax, and management services and focus on external financial reporting
Certified General Accountants
x certified general accountant (CGA)—an individual who has completed an education program and passed a national examination;
works in private industry or a CGA firm
x CGS focus on external financial reporting and emphasize the use of the computer as a management accounting tool
Certified Management Accountants
x certified management accountant (CMA)—an individual who has completed a university degree, passed a national examination,
and completed a strategic leadership program; works in industry and focuses on internal management accounting
x CMAs bring a strong market-focus to strategic management and resource deployment, synthesizing and analyzing financial and
non-financial information to help organizations maintain a competitive advantage
Accounting Services
x audit—accountant’s examination of company’s financial records to determine if it used proper procedures to prepare its reports
x forensic accountant—accountant who tracks down hidden funds in business firms, usually as part of criminal investigation
x generally accepted accounting principles (GAAP)—standard rules and methods used by accountants in preparing reports
Management Consulting Services
x management consulting services—specialized accounting services to help managers resolve a variety of problems in finance,
production scheduling, and other areas
x other services include plant layout and design, marketing studies, computer feasibility studies, design and implementation of
accounting systems, and even executive recruitment
Private Accountants
x private accountant—an accountant hired as a salaried employee to deal with a companys day-to-day accounting needs
Tools of the Accounting Trade
The Accounting Equation
Assets and Liabilities
x asset—anything of economic value owned by a firm or individual
x liability—any debt owed by a firm or individual to others
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