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Chapter 4

Chapter 4- Understanding Accounting Issues.docx

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University of Toronto Scarborough
Management (MGT)

Chapter 4: Understanding Accounting Issues WHAT IS ACCOUNTING AND WHO USES IT? -accounting: a comprehensive system for collecting, analyzing, and communicating financial information -measures business performance; measures are converted into information for management decisions -bookkeeping: recording accounting transactions -uses performance measures to prepare performance reports for owners, the public, and regulatory agencies -keep records of taxes paid, income received, and expenses -they analyze the effects of these transactions on business activities -analyzing and sorting transactions can help determine how well a business is being managed and how financially strong it is -accounting system can provide distorted results which can cause problems for owners and managers -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 -includes all the people, reports, computers, procedures, and resources for obeying financial transactions -The below users use accounting for various reasons: (1) Business managers: to set goals, develop plans, set budgets, and evaluate future prospects (2) Employees and unions: to get paid, to plan for and receive such benefits such as health care (3) Investors and creditors: to estimate returns to stockholders, to determine a companys growth prospects, to decide if a company is a good credit risk before investing or lending (4) Taxing authorities: to plan for tax inflows, determine tax liabilities of individuals and businesses, to ensure correct amounts are paid on time (5) Government regulatory: to fulfil their duties, requires firms to file financial disclosures so potential investors will have information about a companys financial status WHO ARE ACCOUNTANTS AND WHAT DO THEY DO? -the head of the AIS is the controller -controller: individual who manages at the firms accounting activities -ensures that the AS provides the reports and statements needed for planning -the two main fields of accounting are financial and managerial Financial and Managerial Accounting -two fields of accounting: financial and managerial -can be distinguished by the different users they serve -users of accounting information can be classified as users outside the company and users inside the company -this allows us to categorize accounting systems as either financial or managerial Financial Accounting -financial accounting system: the process whereby interested groups are kept informed about the financial condition of a firm -concerned with external users of information---consumer groups, unions, shareholders, government agencies -prepares and publishes income statements and balance sheets -these documents focus on the activities as a whole rather than on individual departments -must conform to standard reporting formats imposed by government agencies and accounting professions -information in such reports is mostly historical -reports summarize financial transactions that have occurring during past accounting periods Managerial Accounting -managerial accounting: internal procedures that alert managers to problems and aid them in planning and decision making -managers need information to make decisions for the departments, to monitor current projects and to plan for future projects -this information can be these to negotiate material costs with suppliers - reports to these users serve the companys individual units (departments, projects, divisions) -internal reports are designed in any form, which helps internal users in planning, decision making, and controlling -internal reports are very important part of the management accounting system -they are forward looking rather than historical looking Professional Accountants -have a high level of expertise and credibility -three professional accounting organizations have developed in Canada to certify accounting expertise Chartered 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-a person must earn a university degree -then, completed an educational program and passed a national exam -half of all CAs work in CA firms that offer accounting services to the public -the other of CAs work in government or industry -provide audit, tax, and management services -focus on external financial reports -certifying for interested parties such as shareholders, lenders, revenue agency that the financial records of a company matches the actual financial condition of the firm Certified General Accountants -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 -a person must complete an education program and pass a national exam -to be eligible, a person must have an accounting job with a company -nowadays CGAs can audit corporate financial statements in most provinces -work in private companies, but there are a few CGA firms -also work i
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