Chapter 7 - accounting
• Financial information is the heartbeat of competitive businesses. To run a business you must be able to read, understand, and
analyze accounting reports and financial statements. Because those things tell us the financial health of the company.
• Accounting is recording, classifying, summarizing and interpreting of financial events to provides management and other interested
parties with the information they need to make good decisions.
• Financial transactions can include such specifics as buying and selling goods and services, acquiring insurance, paying
employees, and using supplies.
• A major purpose of accounting is to help managers evaluate the financial condition and the operating performance of the firm so
that they can make well-informed decisions.
• Accounting work is divided into several major areas.
• Used to provide info and analyses to managers within the organization to assist them in decision making.
• The data they work with reflect segments that the managers are responsible for.
• Financial accounting is heavily focused on historical information, management accounting also provides much forward looking data
in the form of budgets.
• Analysis of accounts receivable will help in evaluating the credit policies of a company.
• Monitoring profit margins, unit sales, travel expenses, cash flow, inventory turnover, and other such data is critical to the success of
• Some questions that management should consider:
o What goods and services are selling the most and what promotional tools are working best?
o How quickly is the firm selling what it buys? Which are the most profitable products? Which expenses change with
changes in revenue?
o Will the firm have enough cash to pay its bills?
• Management must figure out how performance can be improved. Results are also compared with those of the particular industry to
see that they are in line with, or better than, the results in competing firms
• Differs from managerial accounting in that the information and analyses it generates are for people outside the organization
• The external users are interested in the organization's profits, it's ability to pay its bills, and other important financial information.
• Accounting staff will be required to discuss financial information with a potential lender when applying for a loan
• Annual report: a yearly statement of the financial condition, progress, and expectations of an organization.
• Questions that financial accounting reports refer to:
o Has company's income been satisfactory? Should we invest in this company?
o Should we lend money to this company? Will it be able to pay it back? o Should we sell to this company? Will it be able to pay its bills?
• Chartered accountants (CA): an accountant who has met the examination, education, and experience requirements of the
Canadian Institute of Chartered accountants.
• 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
• Chartered accountants are widely recognized as the leading financial and accounting professionals in Canada
• Accountants work in all areas of business
Private and public accounts:
• Private: an accountant who works for a single firm, gov't agency, or non-profit organization.
• Public: an accountant who provides his or her accounting services to individuals or businesses on a fee basis.
• Accountants must follow a set of generally accepted accounting principles (GAAP)
• A relatively new area of accounting that focuses its attention on fraudulent activity is forensic accounting. This field of accounting
gathers evidence for a presentation in a court of law. This evidence comes from a review of financial and other records.
• This is the job of reviewing and evaluating the records used to prepare a company's financial statements.
• Internal audits to ensure that proper accounting procedures and financial reporting are being carried out within the company
• Independent audit is an evaluation and unbiased opinion about the accuracy of a company's financial statements. This audit is
required by law for all public corporations in Canada.
• Taxes are the price we pay for roads, parks, schools, police protection, military and other things.
• A tax accountant is responsible for preparing tax returns or developing tax strategies.
Governmental and not-for-profit accounting
• 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 contribute are being spent.
• This is a six step procedure. Involves the work of bookkeepers and accountants.
• Bookkeeping involves recording of business transactions and is an important part of financial reporting. • Accountants classify and summarize financial data provided by bookkeepers and then interpret the data and report the information
• A bookkeeper's first task is to divide all of the firm's transactions into meaningful categories such as sales documents, purchasing
receipts, and shipping documents.
• Bookkeepers then record financial data in a journal. A journal is where the day's transactions are kept.
• Accounting steps
o Analyze source documents
o Record transactions in journals
o Post journals to ledger
o Trial balance
o Prepare financial statements: income statement, retained earnings, balance sheet, cash flow.
Fundamental accounting equation: A= L+OE
Ledger: information from accounting journals is recorded into specific accounts and posted so that managers can find all of the
information about a specific account in one place.
Computerized accounting: many systems, can really help small business owners. They should hire or consult with an accountant to
identify the needs of their firm. Then a specific accounting system can be developed.
The balance sheet reports the firm's financial position at the end of a period. The income statement highlights the total profit or loss.
The cash flow statement, provides a summary of money comi