Chapter 14: 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 hae valid information about a company's financial status
Who are Accountants and What Do They Do
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 companys day-to-day accounting needs (to ensure
fairness CAs and CGAs must be independent of the firms they audit)
CPA vision project: established (US) to assess the future of accounting (explains how six classes of global forces are driving the
professions reorientation)
Vision Project changes:
Accounting should adopt a broader focus beyond numbers that includes strategic thinking
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