chapter 14 notes

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21 Mar 2011
What Is Accounting?
1. Accounting: a comprehensive system for collecting, analyzing, and communicating
financial information.
oData is transformed into information for decision making.
2. Bookkeeping: recording accounting transactions.
3. Accountants can determine how well a business is being managed and how
financially strong it is.
4. 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.
oBusiness Managers: use accounting info to set goals, develop plans, set
budgets, and evaluate future prospects.
oEmployees and Unions: use accounting info to get paid and receive benefits
and insurance.
oInvestors and Creditors: use accounting info to estimate returns and decide if
a company is worth investing in.
oTax Authorities: use accounting info to plan for tax flows and to ensure
correct amounts are paid on time.
oGovernment Regulatory Agencies: rely in accounting info to fulfill their duties
Ex. Require firms to disclose their financial information to potential
What Are Accountants and What Do They Do?
5. Controller: the individual who manages all the firm's accounting activities.
6. Financial Accounting System: the process whereby interested groups are kept
informed about the financial condition of a firm.
oInterested groups include consumer groups, unions, shareholders, and gov't
oFocus on company as a whole, rather than individual departments or
7. Managerial (Management) Accounting: internal procedures that alert managers
to problems and aid them in planning and decision making.
oServes internal users.
oUsed to set and monitor projects, departments, and activities.
8. 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.
oFocus on external financial reporting.
oMake sure the financial records are legit and it truly reflect the financial
condition of the company.
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9. Certified General Accountant (CGA): an individual who has completed an
education program and passed a national exam; works in private industry or a CGA
oMust have accounting job with company.
oMost work in private companies.
oAudit corporate financial statements
10. Certified Management Accountant (CMA): an individual who has completed a
university degree, passed a national exam, and completed a strategic leadership
program; works in industry and focuses on internal management accounting.
oStrong 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
11. Audit: an accountants examination of a company's financial records to determine
whether it is sued proper procedures to prepare its financial reports.
oDetermines whether the firm has controls to prevent errors or fraud from
going undetected.
oSometimes may physically check inventories, equipments or other assets.
12. Forensic Accountant: an accountant who tracks down hidden funds in business
firms, usually as part of a criminal investigation.
13. Generally Accepted Accounting Principles (GAAP): standard rules and
methods used by accountants in preparing financial reports.
14. Management Consulting Services: specializing accounting services to help
managers resolve a variety of problems in finance, production scheduling, and other
15. Private Accountant: an accountant hired as a salaried employee to deal with a
company's day to day accounting needs.
The Accounting Equation
16. Accounting Equation: the most basic tool of accounting, used to balance the data
pertaining to financial transactions:
oAssets=liabilities + owner's equity
The equation must be in balance.
17. Asset: any economic resource that is expected to benefit a firm or an individual who
owns it.
oLand, buildings, equipment, inventory, and payments due the company.
18. Liability: a debt that the firm owes to an outside party.
19. Owner's Equity: the amount of money that owners would receive if they sold all of
a company's assets and paid of its liabilities.
(Assets ) - (liabilities)= Owner's Equity
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20. Asset > Liabilities, then owner's equity is positive.
oIf company went out of business, owner can sell assets and pay of liabilities
and still have some cash.
21. Liabilities > Assets: owner's equity is negative, assets are insufficient to pay off all
oIf company goes bankrupt, owner cannot pay off creditors.
22. Owner's equity consists of two sources of capital
oThe amount that the owners originally invested
oProfits earned by and reinvested in the company.
23. Owners equity increases when
oProfits are retained
oMore investment
24. Owner's equity decreases when
oCompany operates at a loss
oOwners withdraw assets
Financial Statements
25. Double Entry Accounting System: a bookkeeping system, developed in the
fifteenth century and still in use, that requires every transaction to be entered in two
ways - how it affects assets and how it affects liabilities, and owner's equity - so that the
accounting equation is always in balance.
oEx. Purchase inventory on cash
Decrease your cash
Increase your inventory
oEx. Purchase supplies on credit
1. Increase your supplies
2. Increase your accounts payable
oEx. Invest more money in your business
1. Increase the company's cash
2. Increase your owner's equity
oEvery transaction affects two accounts
Financial Statements: any of several types of broad reports
regarding a company's financial status; most often used in reference
to balance sheets, income statements, and/or statements of cash
flows. (3 broad categories)
oSupply detailed information about the accounting
equation factors: assets, liabilities, and owner's equity.
oSometimes called statements of financial positions
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