Chapter 10.pdf

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Dave Swanston

Textbook Notes Chapter 8- Understanding Accounting and Financial Information The Importance of Accounting and Financial Information • Financial information is the heartbeat of competitive businesses and accounting information keeps the heartbeat stable • Impossible to run a business without being able to read, understand, and analyze accounting reports and financial statements What isAccounting? • Accounting- The recording, classifying, summarizing, and interpreting of financial events to provide managements and other interested parties the information they need to make good decisions • The accounting system: The inputs to an accounting system include sales documents and other records; the data are recoded, classified, and summarized; they’re then put into summary financial statements such as the income statement and balance sheet: • Purposes of accounting:  Help managers evaluate the financial condition and the operating performance of the firm so that they can make well informed decisions  Report financial information to people outside the firm (owners, creditors, suppliers) Areas of Accounting • Accounting profession is divided into five key working areas, all of which are important and create career opportunities 1.ManagerialAccounting • Managerial Accounting- Accounting used to provide information and analyses to managers within the organization to assist them in decision making • Provides much forward looking data in the form of budgets • Management decision making is based on data collected • Results are:  Compared with plans to see if the results are achieving the targets set for the period  Compared with those of the particular industry to see that they are in line with, or better than, the results in competing firms  Trends of resents are examined to ensure that good trends are continued and unfavourable ones are reversed 2.FinancialAccounting • Financial Accounting- Accounting information and analyses prepared for people outside the organization • Annual Report-A yearly statement of the financial conditions, progress, and expectations of an organization; required by law for shareholders of all public corporations • Financial accounting reports provide information that allows readers to answer questions like:  Has company’s income been satisfactory?  Should we lend money to this company?  Are company’s costs getting out of control? • Accounting Designations  Chartered Accountant (CA)-An accountant who has met the examination, education, and experience requirements of the Canadian Institution of Chartered Accountants o Leading financial and accounting professionals in Canada  Certified Management Accountant (CMA)-An accountant who has met the examination, education, and experience requirements of Society of Management Accountants of Canada o With growing global competition, company rightsizing, outsourcing, and organization cost cutting, managerial accounting may be one of the most important areas to study  Certified General Accountant (CGA)-An accountant who has met the examination, education, and experience requirements of the Certified General Accountants Association of Canada o Expertise in taxation, finance, information technology, and strategic business management • Private and Public Accountants  Private Accountant-An accountant who works for a single firm, government agency, or non-profit organization (help keep accurate financial information)  Public Accountant-An accountant who provides his/her accounting services to individuals/businesses on a fee basis  Accountants must follow a set of generally accepted accounting principles (GAAP)  Scrutiny of the accounting industry intensified and culminated with the passage of the Sarbanes-Oxley Act by the U.S. Congress for publicly traded companies  Forensic Accounting-A relatively new area of accounting that focuses its attention on fraudulent activity o Gathers evidence for presentation in a court of law which comes from a review of financial and other records 3. Compliance • Compliance- The job of reviewing and evaluating the records used to prepare a company’s financial statements • Private accountants within organization perform internal audits to ensure proper accounting procedures and financial reporting are being carried out within the company while public accountants conduct independent audits of accounting and related records • Most important function and income generator for public accounting firms is performing independent audits (examinations) of the books and financial statements of companies • Independent Audit- An evaluation and unbiased opinion about the accuracy of a company’s financial statements; required by law for all public corporations in Canada 4.TaxAccounting • Federal and provincial governments require submission of tax returns that must be filed at specific times and in a precise format • Tax accountant is trained in tax law and is responsible for preparing tax returns or developing tax strategies 5.Governmental and Not-for-ProfitAccounting • Governmental Accounting:  Different levels of government require an accounting system that satisfies the needs of their information users  Primary users are citizens, special interest groups, legislative bodies, and creditors who want to ensure that government is fulfilling its obligations and making proper use of taxpayers’ money • Not-for Profit Accounting  Have a growing need for trained accountants since contributions to non-profits want to see exactly how and where the funds they contribute are being spent TheAccounting Cycle • Accounting Cycle- A six step procedure that results in the preparation and analysis of the two major financial statements: the balance sheet and the income statement • Accounting cycle requires work of both bookkeeper and accountant • Bookkeeping- The recording of business transactions 1. Divide all firm’s transactions into meaningful categories 2. Record financial data from the original transaction documents into a journal  Journal- The record book or computer program where accounting data are first entered • Accountants classify and summarize financial data provided by bookkeepers and then interpret the data and report the information to management and suggest strategies for improving financial condition and progress of the firm The FundamentalAccounting Equation • Double Entry Bookkeeping- Concept of every business transaction affecting at least 2 accounts • Accounts- Different types of assets, liabilities, and owner’s equity • Fundamental Accounting Equation-Assets = Liabilities + his is the bases for the balance sheet • Debits and credits on their own are neither good/bad, simply a mechanism for maintain the balance of the accounting equation 3. Ledger- A specialized accounting book in which information from accounting journals is accumulated into accounts and posted so that managers can find all of the information about a specific account in one place 4. Trial BalanceA - summary of all the data in the account ledgers to show whether the figures are correct and balanced 5. Prepare the financial statements according to generally accepted accounting principles 6. From the financial statements, analyze and evaluate financial condition of the firm Using Computers inAccounting • Since computers can rapidly handle large amounts of financial information, accountants are freed up to do more important tasks such as financial analysis • Computerized accounting programs have been helpful to small business owners who lack the strong accounting support within their companies that larger firms enjoy • A specific accounting system can be developed using the accounting software chosen • Computers help ease the monotony of bookkeeping and accounting work but it can’t make good financial decisions by itself Understanding Key Financial Statements • Financial Statement- A summary of all the transaction that have occurred over a particular period; indicate firm’s financial health and stability and key factor in decision making • The differences among the financial statements:  Balance sheet details what company owns and owes on a certain day; income statement shows what firm sells products for and what its selling costs are over specific period; and cash flow statement highlights difference between cash coming in and cash going out over specific period • Three financial statements of a business: 1.The Balance Sheet • Balance Sheet- Financial statement that reports a firm’s financial condition at a specific time • Balance between two figures: assets and liabilities + owner’s equity • Three major groups of accounts:  Assets o Assets- Economic resources (things of value) owned by a firm o Include productive, tangible items, (buildings, equipment, etc) that help generate income, as well as intangibles with value (patents, trademarks, etc) o Liquidity- How fast an asset can be converted into cash o Assets are divided into three categories:  Current Assets- Items that can or will be converted into cash within one year (cash, accounts receivable, and inventory)  Capital Assets-Assets that are relatively permanent (land, buildings, and equipment) acquired to produce products for a business; aimed to generate revenue  Intangible Assets- Long term assets patents, trademarks, copyrights) that have no real physical form but do have value  Liabilities o Liabilities- What the business owes to others (debts) o Current Liabilities are debts due in one year or less; long term liabilities are debts not due for one year or longer o Common liability accounts r
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