Management of the Enterprise
Chapter 16: Understanding Accounting and Financial Information
What is accounting?
- Accounting the recording, classifying, summarizing, and interpreting of financial
events to provide management and other interested parties the information they need to
make good decisions.
- Once the business’s transactions have been recorded, they are usually classified into
groups that have common characteristics.
- A major purpose of accounting is to help managers evaluation the financial condition and
the operating performance of the firm so that they can make well-informed decisions.
- Another major purpose is to report financial information to people outside the firm such
as owners, creditors, suppliers, employees, investors, and the government.
- In basic terms, accounting is the measurement and reporting of financial information to
various users (inside and outside the organization) regarding the economic activities of
The importance of accounting and financial information
- Financial information is the heartbeat of competitive business.
- It is almost impossible to run a business without being able to read, understand, any
analyze accounting reports and financial statements; They reveal as much about a
business’s health as pulse rate and blood pressure tell us about a person’s health.
- Managerial accounting accounting used to provide information and analyses to
amangers within the organization to assist them in decision making.
- Monitoring profit margins, unit sales, travel expenses, cash flow, inventory turnover and
other such data is critical to the success of a firm.
- Results are compared with plans to see if the results are achieving the target set for the
month, and when they do not, management must figure out how performance can be
- Trends that the results may reveal are carefully examined to ensure that good trends are
continued and bad ones are reversed. Areas of Accounting
- Managerial accounting
- Financial accounting
- Compliance (auditing)
- Tax accounting
- Governmental and not-for-profit accounting
- Financial Accounting accounting information and analyses prepared for people
outside the organization.
- The information goes to owners and prospective owners, creditors and lenders,
employee unions, customers, suppliers, government agencies and general public.
- Annual report a yearly statement of the financial condition, progress, and
expectations of an organization.
- These reports are required by law for the shareholders of all public corporations .
- Chartered Accountant (CA) an accountant who has met the examination, education
and experience requirements of the Canadian Institute of Chartered Accountants.
Are widely recognized as the leading financial and accounting
professionals in Canada.
- Certified Management Accountant (CMA) An accountant who has met the
examination, education, and experience requirements of the Society of Management
Accountants of Canada.
- Certified General Accountant (CGA) an accountant who has met the examination,
education, and experience requirements of the Certified General Accountants
Association of Canada.
Offers expertise in taxation, finance, information technology, and strategic
Private and Public Accountants
- Private accountants an accountant who works for a single firm, government agency,
or non-profit organization.
- Public accountant an accountant who provides his or her accounting services to
individuals or business on a fee basis. - Professional services can include designing an accounting system for a firm, helping
select the correct computer and software to run the system, analyzing the financial
strength of an organization, and providing consulting service.
- Forensic accounting a relatively new area of accounting that focuses its attention on
Gathers evidence of presentation in a court of law.
- Compliance the job of reviewing and evaluating the records used to prepare a
company’s financial statements.
- Private accountants within the organization often perform internal audits to ensure that
proper accounting procedures and financial reporting are being carried out within the
- Public accountants also conduct independent audits of accounting and related records.
- Independent audit an evaluation and unbiased op0inion about the accuracy of a
company’s financial statements.
- All stakeholders, including the public, governments, financial institutions, and
shareholders (owners) are interested in the results of these audits.
- This audit is required by law for all public corporations in Canada.
- Federal and provincial governments require submission of tax returns that must be filed
at specific times and in a presise format.
- A tax accountant is trained in tax law and is responsible for preparing tax returns or
developing tax strategies.
Governmental and Not-For-Profit Accounting
- Governmental and not-for-profit accounting involves working for organizations whose
purpose is not generating a profit but serving ratepayers, taxpayers, and others
according to a duly approved budget.
- The primary users of government accounting information are citizens, special interest
groups, legislative bodies, and creditors.
- Not-for-profit organizations have a growing need for trained accountants since
contributors to non-profits want to see exactly how and where the funds they contributed
are being spent. The Fundamental Accounting Equation
- Double-entry bookkeeping the concept of every business transaction affecting at
least 2 accounts
- Fundamental accounting equation assets = liabilities + owners equity.
- With each business transaction there is a recording of at least 2 entries: a debit or a
- 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.
- Trial balance a summary of all the data in the account ledgers to show whether the
figures are correct and balanced.
If the information is not accurate, it must be corrected before the firm’s
financial statements are prepared.
The Accounting Cycle
- Accounting Cycle a 6-step procedure that results in the preparation and analysis of
the two major financial statements; the balance sheet and the income statement.
- Bookkeeping the recording of business transactions.
- A bookkeeper’s first task is to divide all of the firm’s transaction into meaningful
categories such as sales documents, purchasing receipts, and shipping documents.
- Journal the record book or computer program where accounting data are first
Using computers n Accounting
- Today, computerized accounting programs post information from journals
instantaneously so that financial information is readily available whenever the
organization needs it.
- Many accounting packages, such as Simply Accounting and Quicken, address the
specific needs of small businesses, which are often significantly different from the needs
of a major corporation. The Balance Sheet (1) Current assets: Items that can be converted to cash within one year.
(2) Capital assets: Items such as land, buildings, and equipment that are relatively permanent.
(3) Intangible assets: Items of value such as patents and copyrights that don't have a physical
(4) Current liabilities: Payments that are due in one year or less.
(5) Long-term liabilities: Payments not due for one year or longer.
(6) Shareholders' equity: The value of what shareholders own in a firm (also called owners'
- Balance Sheet the financial statement that reports a firm’s financial condition at a
- Composed of 3 major groups:
Understanding a Key Financial Statements
- Financial Statement a summary of all the transactions that have occurred over a
period of time.
- Indicates a firm’s financial health and stability and are a key factor in management
- The following are the key financial statements of a business:
Balance Sheet: reports the firm’s financial position at the end of a period.
Income statement: summarizes revenues, cost of goods, and expenses
for a specific period of time and highlights the total profit or loss the firm
experienced during a period.
Cash flow statement: provides a summary of money coming into and
going out of the firm during a period.
- Assets economic resources (things of value) owned by a firm.
- Include productive, tangible items (ex. Equipment, building, land, furniture, fixtures, and
motor vehicles) that help generate income, as well as intangibles with value (ex. Patents,
trademarks, copyrights, or goodwill).
- Liquidity how fast an asset can be converted into cash.
- Assets are divided into 3 categories according to how quickly they can be turned into
cash: Current Assets: Are items that can or will be converted into cash within
one year. Current assets include cash, accounts receivable, and
Capital Assets: are items that are relatively permanent goods, such as
land and buildings, acquired to produce products for a business. They are
not bought to be sold but to generate revenue.
Intangible assets: are long-term assets that have no real physical form
but do have value. Patents, trademarks, copyrights, and goodwill.
Liabilities and Owners’ Equity Accounts