Chapter 16 Accounting Textbook Notes

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University of Waterloo
Accounting & Financial Management
AFM 131
Robert Sproule

Chapter16-Accounting Role of Accounting Information  Impossible to manage a business without being able to read, understand and analyze accounting reports and financial statements (which reflect a business's health)  Accounting is the recording, classifying, summarizing and interpreting of financial events which help evaluate financial condition and the operating performance  Managers and other stakeholders of a business use this information in order to make informed decisions Accounting Disciplines Managerial Accounting  Used to provide information and analyses to managers inside the organization to assist them in decision making o Lots of forwarding looking data o Compares actual financial performance to:  Budgets  Competitors  Past performance as a benchmarking activity for both planning and control o Sustainability reporting, annual report of green initiatives Financial Accounting  Accounting information and analyses prepared for people outside the organization  Reports historical results with comparatives  Must be provided by all public companies  Included in a company's annual report Compliance  Job of reviewing and evaluating the records used to prepare a company’s financial statements both internally and externally  Required of all public corporations  Forensic accounting focuses on identifying a company’s fraudulent activities Tax Accounting  Tax returns (both federal and provincial) are required of all businesses o Used to determine/confirm income tax and consumption tax – HST o Based on an ever changing set of tax laws  Tax accountants are trained in tax law and responsible for preparing tax returns or developing tax strategies Governmental and Not-for-Profit Accounting  Checking the accounting records to ensure the business is fulfilling its obligations and making proper use of the funds they have been provided Private and Public Accountants  Private accountants: works for a single firm  Public accountants: provides services to individuals or businesses on a fee basis, self-employed o Both for the design of an accounting system and the preparation of accounting records Recent Scandals  Purposeful incorrect reporting of accounting information  Led to government rules and regulations regarding many aspects of accounting o Sarbanes-Oxley Act: SEC o Bill 198: OSC  Protection of whist blowers  Requirement of CEO and CFO to certify all financial reports  Prohibits corporate loans to executives  Established oversight board Accounting Cycle  Six step procedure that results in the preparation and analysis of major financial statements  Bookkeepers records on the journal of all transactions and posts them to the ledger, also makes the reports  Accountants interprets the data in the financial statements and reports the results to management  The basis for the recording of financial events is the fundamental accounting equation of offsetting debits and credits  Each of journals, ledgers and a trail balance are part of the cycle  A set of rules (GAAP) govern how financial data is recorded  Computers and accounting software have greatly simplified the preparation of accounting records, including the financial reports Understanding Key Financial Statements Balance Sheet  Reports a firm’s financial condition at a specific point in time, usually at the end of a period o Assets – current, capital and in
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