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Chapter 4

chapter four book/ class notes

Management (MGT)
Course Code
Chris Bovaird

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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
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
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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
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
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,
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
-current assets: cash and other assets that can be converted into cash within a year
oliquidity: 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)
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