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Chapter 14

RSM100- Chapter 14.docx

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Rotman Commerce
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John Oesch

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Understanding Accounting Issues [Chapter 14] What is accounting?  Accounting: a comprehensive system for collecting, analyzing, and communicating financial info  Bookkeeping: recording accounting transactions (one phase of accounting)  Accounting information system (AIS): an organized procedure for identifying, measuring, recording, and retaining financial information so that it can be used in accounting statements an management reports  Some users of accounting information include: business managers, employees and unions, investors and creditor, tax authorities, government regulatory agencies Who are accountants and what do they do?  Head of AIS is the controller: the individual who manages all of the firms accounting activities  Two main fields of accounting: financial and managerial Financial and managerial accounting  Financial accounting: the process whereby interested groups are kept informed about the financial condition of a firm o Prepares income statements, balance sheets, all of these documents focus on the activities of the company as a whole, rather than on individual departments  Managerial accounting: internal procedures that alert managers to problems and aid them in planning and decision making o Reports to these users serve the company’s individual units, whether departments, projects, plants or divisions 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  Certified general accountants (CGA): an individual who has completed an education program and passed a national exam; works in private industry or a CGA firm  Certified management accountants (CMA): an individual who has completed a university degree, passed a national exam, and completed a strategic leadership program; works in industry and focuses on internal management accounting Accounting services  CAs and CGAs usually perform several services and most common are auditing, tax services, management services o Auditing: an accountants examination of a company’s financial records to determine whether it used proper procedures to prepare its financial reports  Forensic accountant: an accountant who tracks down hidden frauds in business firms, usually as part of a criminal investigation  General accepted accounting principles (GAAP): standard rules and methods used by accountants in preparing financial reports (must make sure firms follow the GAAP while performing audit) o Tax services: helping with tax returns and tax planning o Management consulting services: specialized accounting services to help managers resolve a variety of problems in finance, production, scheduling, and other areas Private accountants  An accountant hired as a salaried employee to deal with a company’s day to day accounting needs  CAs and CGAs must be independent of the firms they audit in order to be fair The accounting equation  The most basic tool of accounting, used to balance the data pertaining to financial transactions: [assets= liabilities + owners equity]  After every transaction, the equation must be in balance Assets and liabilities  Asset: any economic resource that is expected to benefit a firm or an individual who owns it  Liability: a debt that the firm owes o an outside party Owners Equity  Owners equity: the amount of money that owners would receive if they sold all of a company’s assets and paid all of its liabilities  [assets-liabilities = owners equity]  If assets > liabilities, OE= positive (and vice versa) if sold off everything would still be left with cash  OE consists of 2 sources of capital: o The amount that the owners originally invested o Profits earned by and reinvested in the company Financial statements  Every transaction affects two accounts  Double entry accounting system: a bookkeeping system, that requires every transaction to be entered in 2 ways- how it affects assets and how it affects liabilities and owners equity- so that the equation is always in balance  Financial statement: any of several types of broad reports regarding a company’s financial status; most often used in reference to balance sheets, income statement, cash flows Balance sheets  Supply detailed info about the accounting equation factors; assets, liabilities, and OE  Assets: 3 types; current, fixed, intangible o Current assets: include cash and assets tat can be converted into cash within a year  normally listed in order of liquidity (the ease with which assets can be converted into cash) o Three types of important non-liquid assets: accounts receivable, merchandise inventory, prepaid expenses  Accounts receivable: amounts due form customers who have purchased goods on credit  Merchandise inventory: the cost of merchandise that has been acquired for sale to customers and is still on hand  Prepaid expenses: include supplies on hand and rent aid for the period to come o Fixed assets: assets that have long term use or value to the firm, such as land, buildings, and machinery  Depreciation: distributing the cost of a major asset over the years in which it produces revenues; calculated by each ear subtracting the asset’s original value divided by the number of years in its productive life o Intangible assets: nonphysical assets, such as patents, trademarks, copyrights, and franchise fees, that have economic value but the precise value of which is difficult to calculate  Goodwill: amount paid for an existing business beyond the value of its other assets  Liabilities: current liabi
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