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Canada (158,198)
MGTA02H3 (361)
Chapter 4

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University of Toronto Scarborough
Management (MGT)
Chris Bovaird

Chapter 4: Understanding Accounting Issues What is accounting and who uses it? Terms:  Accounting: a comprehensive system for collecting, analysing and communicating financial information.  Bookkeeping: recording accounting transactions.  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. Types of 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 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? Terms:  Controller: the individual who manages all the firm’s accounting activities. Financial and Managerial Accounting Financial Accounting:  Financial accounting system: the process whereby interested groups such as consumer groups, unions, shareholders and government agencies are kept informed about the financial condition of a firm.  It prepares and publishes income statements and balance sheets at regular intervals.  All of these documents focus on the activities of the company as a whole, rather than on individual departments or divisions.  In reporting data, financial accountants must conform to standard reporting formats and procedures imposed by both the accounting profession and government regulatory agencies.  This requirement helps ensure that users can clearly compare information, whether from many different companies or from the same company at different times.  The information in such reports is mostly historical: That is, it summarizes financial transactions that have occurred during past accounting periods. Managerial Accounting:  Managerial accounting system: internal procedures that alert managers to problems and aid them in planning and decision making.  Managers at all levels need information to make decisions for their departments, to monitor current projects and to plan for future activities.  Reports to these users serve the company’s individual units, whether they are departments, projects, plants or divisions.  Internal reports may be designed in any form that will assist internal users in planning, decision making and controlling.  As projections and forecasts of both financial data and business activities, internal reports reveal current and future business prospects. Professional Accountants Terms:  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. About half of all CA work in CA firms that offer accounting services to the public, while the other half work in government or industry. CA firms typically provide audit, tax and management services. CAs focus on external financial reporting for various interested parties (shareholders, lenders, Canada Customs, and Revenue Agency, etc) that financial records of a company accurately reflect the true financial condition of the firm.  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. To be eligible a person must have an accounting job with a company. CGA were formerly not allowed to audit financial statements belong to publicly held companies, but due to changing times and policies, they are now allowed do so. Most CGAs work in private companies, but there are a few CGA firms.  Certified management accountant (CMA): An individual, who has completed a university degree, passed a national examination and completed a strategic leadership; works in industry and focuses on internal management accounting. CMAs works in all kinds and sizes of organization, and focus on applying best management practices in all operations of a business. CMAs bring a strong market focus to strategic management and resource deployment, synthesizing and analyzing financial and non-financial information to help organizations maintain a competitive advantage. CMA’s emphasize the role of accountants in the planning and overall strategy of the firm in which they work. Accounting Services Terms:  Audit: an accountant’s examination of a company’s financial records to determine if it used proper procedures to prepare its financial reports. Companies must normally provide audited financial reports when applying for loans or when selling stock. They will determine if the firm has controls to prevent errors or fraud from going undetected, and will also examine receipts and inventories.  Forensic accountants: an accountant who tracks down hidden funds in business firms, usually as part of a criminal investigation.  Generally accepted accounting principles (GAAP): standard rules and methods used by accountants in preparing financial reports.  Tax services: include helping clients not only with preparing their tax returns but also in their tax planning. A CA’s advice can help a business structure or restructure its operations and investments and save millions of dollars in taxes.  Management consulting services: specialized accounting services to help managers resolve a variety of problems in finance, production scheduling and other areas. These services include personal financial planning, planning of corporate mergers, plant layout and design, marketing studies, production scheduling, computer feasibility studies and design and implementation of accounting systems.  Private accountants: an accountant hired as a salaried employee to deal with a company’s day-to-day accounting needs. Tools of the Accounting Trade Terms:  Assets = Liabilities + Owner’s Equity  Asset: anything of economic value owned by a firm or individual.  Liability: any debt owed by a firm or individual to others.  Owner’s equity: any positive difference between a firm’s assets and its liabilities; what would remain for a firm’s owners if the company if the company was liquidated, all its assets were sold, and all its debts are paid. It consists of two sources of capital: the amount that the owners originally invested and the profits earned by and reinvested in the company.  Owner’s Equity = Assets – Liabilities  Double-entry accounting: 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 owner’s equity – so that the accounting equation is always in balance. Characteristics:  When a company operates profitably, its assets increase faster than its liabilities.  Owner’s equity will increase if profits are retained in the business instead of paid out as dividends to stockholders.  Owner’s equity also increases if owner invest more of their own money to increase assets. Financial Statements Terms:  Financial statements: 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 sheet: a type of financial statement that summarizes a firm’s financial position on a particular date in terms of its assets, liabilities and owner’s equity.  Current assets: cash and other assets that can be converted into cash within a year.  Liquidity: the ease and speed with which an asset can be converted to cash; cash is said to be perfectly liquid.  Accounts receivable: amounts due to the firm from customers who have purchased goods and services on credit; a form of current asset.  Merchandise inventory: the cost of merchandise that has been acquired for sale to customers but that is still on hand.  Prepaid expenses: includes supplies on hand and rent paid for the period to come.  Fixed assets: assets that have long-term use or value to the firm such as land,
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