Textbook Notes (363,135)
Canada (158,215)
MGTA02H3 (361)
Chapter 4

Chapter 4

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University of Toronto Scarborough
Management (MGT)
Chris Bovaird

Chapter 4: Understanding Accounting Issues What is a Accounting and Who Uses It − accounting: a comprehensive system for collecting, analyzing, and communicating financial information − bookkeeping: recording accounting transactions (just one phase of accounting) − by sorting, analyzing, and recording thousands of transactions, accountants can determine how well a business is being managed and how financially strong it is (but accounting systems can produce distorted results that cause problems for owners and managers) − accounting information system: an organized procedure for identifying measuring, recording, and retaining financial information so that it can be used in accounting statements and management reports (dependable, consistent, mandatory system) − users of accounting information: − business managers: to set goals , develop plans, set budgets, and evaluate future prospects − employees and unions: to get paid and to plan for and receive such benefits as healthcare, insurance, vacation time and retirement pay − investors and creditors: to estimate returns to stockholders, to determine a company's growth prospects, and to decide if it is a good credit risk before investing or lending − taxing authorities: to plan for tax inflows, to determine the tax liabilities of individuals and businesses, and to ensure that correct amounts are paid in a timely fashion − government regulatory agencies: to fulfill 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 Who are Accountants and What Do They Do − controller : the individual who manages all the firm's accounting activities (head of AIS) < ensures that reports and statements needed for planning, controlling, and decision making activities are provided − financial accounting system: the process whereby interested groups are kept informed about the financial condition of a firm (concerned with external users of info such as consumer groups, unions, gov't) < prepares and publishes income statements and balance sheets at regular intervals < looks at company as a whole − managerial accounting: internal procedures that alert managers to problems and aid them in planning and decision making (serves internal users, such as different departments) < ex. managers to monitor current projects and plan for future activities < ex. engineers may look at costs of materials or production to make operations improvement < internal reports are forward looking in nature, not historical Professional Accountants − chartered accountant (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 (granted by The Canadian Institute of Chartered Accountants to people who have a university degree, competed an educational program and passed the national exam) < half CA are public, half are government or industry workers < CA focus on external financial reporting − certified general accountant (CGA): an individual who has completed an education program and passed a national exam; works in a private industry or a CGA firm (formerly not allowed to audit financial statements of publicly held companies, but this is changing in most provinces) < some work in private CGA firms, CA firms < focus on external financial reporting and use computer as management accounting tool − certified management accountant (CMA): an individual who has completed a university degree, passed a national examination, and completed a strategic leadership program; works in industry and focuses on internal management accounting (work in organizations of all sizes) < CMAs bring a strong market focus to strategic management and resource deployment Accounting Services − auditing: an accountants examination of a company's financial records to determine if it used proper procedures to prepare its financial reports (companies must provide audited financial reports for loans or when selling stock) < audit determines if the firm has control over fraud and errors from going undetected < examine receipts < may even physically check inventories, equipment, other assets − forensic accountants: an accountant who tracks down hidden funds in business firms, usually as part of criminal investigation ( used to examine Swiss bank accounts for assets deposited by victims of Nazi persecution during WWII) − generally accepted accounting principles: standard rules and methods used by accountants in preparing financial reports (auditor's responsibility to ensure that client's accounting system adheres to these principles − tax services: help clients with tax returns, tax planning (tax laws are complex so CA can help a business structure its operations and investments and save millions of dollars in taxes) < accountants must be aware of changing tax laws − management consulting services: specialized accounting services to help managers resolve a variety of problems in finance, production scheduling, and other areas (may assist in executive recruitment, plant layout and design, etc − private accountant: an accountant hired as a salaried employee to deal with a company’s day-to-day accounting needs (to ensure fairness CAs and CGAs must be independent of the firms they audit) Tools of the Accounting Trade The Accounting Equation - the accounting equation: 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 difference 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 (consists of two sources - the amount that the owners originally invested, profits earned by and reinvested in the company) assets – liabilities = owners’ equity Double-Entry Accounting - double-entry accounting system: a bookkeeping system, developed in the fifteenth century and still in use, 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 (every transaction affects two accounts) Financial Statements - financial statement: any of several types of broad reports regarding a company’s financial status; most often used in reference to balance sheets, income statements, and/or statements of cash flows - balance sheets: a type of financial statement that summarizes a firm’s financial position on a particular date in terms of its assets, liabilities and owners’ equity Assets - current assets: cash and other assets that can be converted into cash within a year o liquidity: the ease and speed with which an asset can be converted to cash; cash is said to be perfectly liquid (business debts are satisfied by cash) o marketable securities: include stocks or bonds of other companies, government securities, and money market certificates (a little less liquid)< 3 types of other important non-liquid assets held by companies: accounts receivable, merchandise inventory, and prepaid expenses - accounts receivable: amounts due to the fir
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