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MGTA01H3 (583)
Chapter 4

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University of Toronto Scarborough
Management (MGT)
Chris Bovaird

 Accounting: a comprehensive system for collecting, analyzing, and communicating financial information --as such, it is a system for measuring business performance and translating those measures into information for management decisions  Bookkeeping: recording accounting transactions (it is just one phase of accounting)  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 --its job is to ensure there is consistent dependable financial information --the system includes all the people, reports, computers, procedures, and resources for compiling financial transactions o There are numerous users of accounting information: -business managers: use accounting information to set goals, develop plans, set budgets, and evaluate future prospects -employees and unions: use accounting information to get paid and to plan for and receive such benefits as health care, insurance, vacation time, and retirement pay -investors and creditors: use accounting information to estimate returns to stockholders, to determine a company's growth prospects, and to decide if the company is a good credit risk before investing or lending -taxing authorities: use accounting information to plan for tax inflows, to determine the tax liabilities of individual and businesses, and to ensure that correct amounts are paid in a timely fashion -government regulatory agencies: rely on accounting information to fulfil their duties; the provincial securities commissions, for example, require firms to file financial disclosures so that potential investors have valid information about a company's financial status o Two fields of accounting include financial and managerial accounting  Financial accounting system: the process whereby interested groups are kept informed about the financial condition of a firm --it is concerned with external users of information—consumer groups, unions, shareholders, and government agencies --it prepares income statements and balance sheets which focus on the activities of the company as a whole, rather than on individual departments or divisions --the information in the reports is mostly historical: that is, it summarizes financial transactions that have occurred during past accounting periods  Managerial (management) accounting: internal procedures that alert managers to problems and aid them in planning and decision making --serves internal users (managers at all levels, employees, etc) --reports to these users serve the company's individual units, whether departments, projects, plants, or divisions --the internal reports are forward-looking rather than historical in nature o Three professional accounting organizations have developed in Canada to certify accounting expertise:  1. Chartered accountants (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 (focus on external financial reporting)  2. Certified general accountant (CGA): an individual who has completed an education program and passed a national exam; works in private industry or a CGA firm (also focuses on external financial reporting)  3. Certified management accountant (CMA): an individual who has completed a university degree, passed a two-part national examination, and completed a strategic leadership program; works in industry and focuses on internal management accounting o CAs and CGAs usually perform several accounting services for their clients. The most common of these are auditing, tax services, and management services  1. Audit: an accountant's examination of a company's financial records to determine if it used proper procedures to prepare it financial reports --the audit will determine if the firm has controls to prevent errors or fraud from going undetected o Therefore, when audits are being conducted, sometimes forensic accountants: are used to track down hidden funds in business firms, usually as part of a criminal investigation o One of the auditor's responsibilities is to ensure that the clients accounting system adheres to generally accepted accounting principles (GAAP)—standard rules and methods used by accountants in preparing financial reports (the body of theory and procedure developed and monitored by the CICA ) o 2. Tax services include helping clients not only with preparing their tax return but also in their tax planning  3. Management consulting services: specialized accounting services to help mangers resolve a variety of problems in finance, production scheduling, and other areas (plant layout and design marketing studies, computer feasibility studies, and design and implementation of accounting systems) --range from personal financial planning to the planning of corporate mergers. o To ensure the fairness of their reports, CAs and CGAs must be independent of the many firms they audit. o But businesses also hire their own private accountants—an accountant hired as a salaried employee to deal with a company's day-to-day accounting needs o The two key concepts of accounting are: the accounting equation and double-entry bookkeeping o This equation is used to balance data pertaining to financial transactions Assets = liabilities + owners' equity  Asset: anything of economic value owned by a firm or individual  Liability: any debt owed by a firm or individual to others  Owners' equity: any positive differences between a firm's assets and its liabilities; what would remain for a firm's owners if the company were liquidated, all its assets were sold, and all its debts were paid Assets - liabilities = owners' equity -if a company's assets exceed its liabilities, owners' equity is positive; if the company goes out of business, the owners will receive some cash after selling assets and paying off liabilities. If liabilities outweigh assets, owners' equity is negative; asset are insufficient to pay off all debts. If the company goes out of business, the owner will get no cash and some creditors won't be paid --owners' equity consists of two sources of capital: 1. The amount that the owners originally invested [share capital] 2. Profits earned by and reinvested in the company [retained earnings]  Double-entry accounting system: a bookkeeping system that requires every transaction to be entered in two ways—how it affects assets and how it affects liabilities and owners' equity—so that the accounting equation is always in balance --to record the dual effects of transactions (every transaction affects at least two accounts) o Among the most important reports are financial statements—any of several types of broad reports regarding a company's financial status; most often used in reference to (three broad categories) balance sheets, income statements, and/or statements of cash flows  Balance sheet (statement of financial position): a type of financial statement that summarizes a firm's financial position at a particular point in time in terms of its assets, liabilities, and owners' equity o Most companies have three types of assets: current, fixed, and intangible  1. Current assets: cash and other assets that be
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