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MGTA02H3 (361)
Chapter 4

Chapter 4 Understanding Accounting Issues.docx

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University of Toronto Scarborough
Management (MGT)
Chris Bovaird

Chapter 4 Understanding Accounting Issues Accounting: comprehensive system for collecting, analyzing, and communicating financial information - measure business performance, sales, expenses, profits, or loses - translate this info so managers (and others) can make decisions 2 Types of Accounting - financial accounting: tells external users about financial condition of firm (looks at business as a whole), collected on an annual basis - managerial accounting: tells internal users about performance and problems. For planning, decision making and control purposes (looks at individual products, plants, or divisions) Bookkeeping: recording accounting transactions Accounting Information System: organized procedure for identifying, measuring, recording, and retaining financial information so that it can be used in accounting statements and management reports Users - business managers: set goals, develop plans, set budgets - employees and unions: get paid and to plan for and receive benefits - investors and creditors: estimate returns to stockholders, determine company’s growth prospects - taxing authorities: plan tax inflows, determine tax liabilities of individuals and businesses - government regulatory agencies: rely on accounting info to fulfill their duties, provincial securities commissions Controller: individual who manages all the firm’s accounting activities Financial Accounting System: process whereby interested groups are kept informed about the financial condition of a firm Managerial (management) Accounting: internal procedures that alert managers to problems and aid them in planning and decision-making Chartered Accountant: individual who has met certain experience and education requirements and has passed a licensing examination; acts as outside accountant for other firms Certified General Accountant: individual who has completed education program and passed national exam; works in private industry or CGA firm Certified Management Accountant: individual who has completed university degree, passed national examination, complete strategic leadership program; works in industry and focuses on internal management accounting Audit: accountant’s examination of a company’s financial records to determine if it used proper procedures to prepare its financial reports Forensic Accountant: accountant who tracks down hidden funds in business firms, usually part of criminal investigation Generally Accepted Accounting Principles (GAAP): standard rules and methods used by accountant in preparing financial reports - all businesses must use same rules and methods - most common set of rules - set by Canadian Institute of Chartered Accountants Management Consulting Services: specialized resolve a variety of problems in finance, production scheduling, and other areas Private Accountant: accountant hired as a salaried employee to deal with a company’s day- to-day accounting needs Accounting Equation: Assets = Liabilities + Owner’s Equity Asset: anything of economic value owned by a firm or individual - possessions available to a business - things that can be sold or given away - a store of value - potential source of cash Liability: any debt owed by a firm or individual to others - money borrowed or owed - one of two ways of acquiring an asset Owner’s Equity: positive difference between firm’s assets and its liabilities - contains amount that owners original invested - profits earned by and reinvested in the company Double-Entry Accounting System: bookkeeping system, developed in fifteenth century and still in use, requires every transaction be entered in two ways (how it affects assets and how it affects liabilities and owner’s equity) Financial Statement: several types of broad reports regarding company’s financial status; often used in reference to balance sheets, income statements, and or statements of cash flows Balance Sheet: type of financial statement that summarized firm’s financial position on
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