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Accounting

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A system for recognizing, organizing, analyzing, and reporting information about financial transactions that affcet an organization

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Who are the 6 key users of accounting information?

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1. managers 2. stockholders 3. employees 4. creditors 5. suppliers 6. government agencies

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What other types of people may be using accounting information?

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The news media, competitors, and unions

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Name three roles accounts play

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1. public accountant 2. management accountants 3. government accountants

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What does a public account do?

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provide services such as tax preparation, external auditing, or management consulting to the clients

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What do management accounts do?

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Work within a company and provide analysis, prepare reports and financial statements, and assist managers in tehir own organization.

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what do internal auditors do

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They also work within their organization to detect internal problems such as waste, mismanagement, embezzlement, and employee theft

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What do government accountants do?

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perform a variety of functions for local, state, or federal gov't agencies. Some ensure that the gov'ts own tax revenues and expenditures are recorded and reported in accordance with regulations and requirements. Others work for the IRS to audit tax returns or for other government agencies, such as the SEC or FDIC, to help ensure that our nation's banks and other financial institutions comply with the rules and regulations governing their behavior.

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What has to happen in order to be recognized as a certified public accountant?

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a person must complete the equivalent of 150 semester hours, five years, of college education with a heavy emphasis in accounting and other business-related courses, must pass a rigorous two-day, four-part exam, and must complete at least one year of direct work experience in the field of accounting

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What do people have to do to become certified management accountants or certified fraud examiners?

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similar challenging requirements

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Define financial accounting

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the branch of accounting that prepares financial statements for use by owners, creditors, suppliers, and other external stakeholders

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What are stakeholders interested in?

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The financial performance of the firm as a whole. The major output of financial accounting is a set of financial statements designed to provide this broad type of information.

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Generally accepted account principles (GAAP)

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- a set of accounting standards that is used in the preparation of financial statements. - adopted to reduce confusion and frustration

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In the us who has the ultimate legal authority to set and enforce accounting standards?

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- the securities and exchange commission (SEC) - SEC has delegated the responsibility for developing these rules to FASB

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Financial accounting standards board (FASB)

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- The private board that establishes the generally accepted accounting principles used in the practice of financial accounting - 7 members appointed by the financial accounting foundation - serves a five year term but can be reappointed to serve one additional year - members are required to server all ties with any firms or institutions they served prior to joining the board

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Through GAAP, the FASB ensures that financial statements are what 4 things?

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relevant, reliable, consistent, and comparable

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What's been the most important focus by the FASB in recent years

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A move by the FASB and its international counterpart, the IASB, to find ways to make US accounting practices more consistent with other nations

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What is one of the major responsibilities of financial accounting?

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- Preparation of three basic financial statements: balance sheet, income statement, statement of cash flows. - together they provide external stakeholders with a broad picture of financial conditions and financial performance - most provide balance sheet, income statement, and cash flows to all stockholders. Must also file annual reports and financial statements with the SEC

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balance sheet

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a financial statement that reports the financial position of a firm by identifying and reporting the value of the firm's assets, liabilities, and owners' equity - organized to reflect the accounting equation

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accounting

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assets = liabilities + owners' equity

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Assets

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- resources owned by a firm - current assets: cash and other assets that the firm expects to use up or convert into cash within a year - accounts receivable; converted into cash when customers pay their bills - inventory: wholesale/retail company it's the stock of goods available for sale. Manufacturing firm: inventory of finished goods and materials and parts used in the product process as well as unfinished firms - property, plant, and equipment: value of company's land, buildings, etc.

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assets have a limited useful life

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- subtract accumulated depreciated from the original value of these assets to reflect the fact that these assets are being used up over time. - intangible assets: no physical existence i.e. patents

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Liabilities

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- what the firm owes to non-owners. - claims non-owners have against the firm's assets - current liabilities: debts that come due within a year of the date on the balance sheet. Ex. Accounts payable - long term liabilities: debts that don't come due until more than a year after the date on the balance sheet. IOU

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Define accounts payable

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what the firm owes suppliers when it buys supplies on credit

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Wages payable

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what the firm owes to workers for work they have already performed

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Owners', stockholders, equity

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- the claims the owners have against the firm's assets - owners equity section is called the stockholders equity

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What are the only two sources of funding for firms to finance the purchase of their assets

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Owners and non-owners

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Balance sheet must always be in balance

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the dollar value of the assets must equal the dollar value of the liabilities plus owners equity

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income statement

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- the financial statement that reports the revenues, expenses, and net income that resulted from a firm's operations over an accounting period - profit and loss statement - revenue - expenses = net income

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Revenue

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- increases in a firm's assets that result from the sale of goods, provision of services, or other activities intended to earn income

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Accounts use an accrual-basis accounting when recognizing revenues. Define

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- the method of accounting that recognizes revenue when it is earned and matches expenses to the revenues they helped produce. - not always when the firm receives cash from a sale - if a firm sells goods on credit, it reports revenue before it receives cash

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define accounts receivable

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converted into cash when customers pay their bills

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Expenses

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- resources that are used up as the result of business operations - under accrual-basis accounting, expenses aren't always recorded when cash is paid. They are matched to the revenue they help generate.

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Costs are deducted from revenue in several stages to show how net income is determined. Describe the steps.

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- first step is to deduct costs of goods sold, which are costs directly related to buying, manufacturing, or providing goods and services the company sells. - difference between firm's revenue and its cost of goods sold is its gross profit - second step is to deduct operating expenses from gross profit. - operating expenses are costs the firm incurs in the regular operation of its business.

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most income statements divide operating expenses into what?

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- selling expenses, such as salaries and commissions - general or administrative expenses, such as insurance, utilities, and office supplies.

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the difference between gross profit and operating expenses is what

answer

- operating income - interest expense and taxes are deducted from net operating income to determine the firm's net income

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net income

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- the difference bt the revenue a firm earns and the expenses it incurs in a given time period

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statement of cash flows

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the financial statement that identifies a firm's sources and uses of cash in a given accounting period

question

The statement of cash flows provides this information by identifying the amount of cash that flowed into and out of the firm from 3 types of activities

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1. cash flows from operating activities show the amount of cash that flowed into the company from the sale of goods or services, as well as cash from dividends and interest received from ownership of the financial securities of other firms. Also shows cash used to cover expenses 2. cash flows from investing activities show the amount of cash received from the sale of fixed assets and financial assets bought as long-term investments. 3. cash flows from financing activities - cash firm received from issuing shares or taking out long-term loans, etc.

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True or false: not all revenues and expenses on the income statement represent cash flows, so operating cash flows may differ substantially from the revenues and expenses shown on the income statement

answer

This is true under the accrual method

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In addition to the balance sheet, income statement, statement of cash flows, firms also prepare a statement of retained earnings or a stockholder's equity statement

answer

- statement of retained earnings: simple statement that shows how retained earning have changed from one accounting period to the next. The change is found by subtracting dividends paid to shareholders from net income - stockholders equity statement: shows how net income and dividends affect retained earrings and also changes in stockholders equity

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define dividends

answer

a sum of money paid regularly by a company to its shareholders

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define equity

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the value of the shares issued by a company

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What does a CPA firm do?

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- performs an annual external audit of their financial statements - verify company's financial statements - examine methods company used to obtain figures - looks for signs of fraud - conduct physical count of goods - must be independent from the firms they audit

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results of the audit are presented where

answer

- independent auditors report - included in annual report firm sends to its stockholders - no problems: unqualified or clean opinion - minor concerns: qualified opinion - major concerns: adverse opinion

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Sarbanes-Oxley Act 2002 (sox)

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- law banned business relationships that might create conflicts of interest between CPA firms and the companies they audit - established private-sector nonprofit corporation known as the PCAOB: protects interests of investors and furthers public interest, etc.

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Notes

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- annual reports include notes that disclose additional information about the firms operations, accounting practices, etc. - very revealing - notes to financial statements explain the specific accounting methods used to recognize revenue, value inventory, and depreciate fixed assets - provide details about the way the firm funds its pension plan, health insurance - disclose changes in accounting methods that could affect the comparability of the current financial statements to those of the previous year

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managements discussion and analysis

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- another source of info in addition to the annual report - top management provides its take on the financial condition of the company - SEC says that they have to disclose trends, risks, events that may have an sig. impact on the firm's financial condition in this section of the report

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comparative financial statements

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- required by the SEC - balance sheet, income statement, and cash flows must list two or more years of figures side by side so ppl can see how account values have changed - firms that aren't publicly traded don't have to present comparative statements - allow users to trace what has happened to key assets and liabilities over the past 2/3 years to see if its owners equity had increased - shows whether firms income increased/decreased and what happened to revenues and expenses over recent years

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horizontal analysis

answer

analysis of financial statements that compare account values reported on these statements over two or more years to identify changes and trends

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managerial (or management) accounting

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- the branch of accounting that provides reports and analysis to managers to help them make informed business decisions. - viewed as competitive advantage source and regard the specifics of these systems as highly valuable company secrets - crucial role in managerial decision making: measuring and assigning costs, and developing budgets - accounting system helps managers throughout an organization measure costs and assign them to products, activities, and even whole divisions

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cost

answer

the value of what is given up in exchange for something

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out of pocket costs

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- a cost that involves the payment of money or other resources - Ex. wages, payments for raw materials, rent - monetary payment

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implicit cost

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- the opportunity cost that arises when a firm uses owner-supplied resources - what is given up is the opportunity to use another asset - ex. by using a building you're forgoing the opportunity to earn income by renting the office space

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fixed costs

answer

- costs that remain the same when the level of production changes within some relevant range - rent on office space, property insurance - fixed for only "relevant range" of output

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variable costs

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- costs that vary directly with the level of production - payments for labor, supplies, etc.

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direct costs

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- costs that are incurred directly as the result of some specific cost object - wage payments made to workers involved in producing something - for labor and materials they're easy to assign

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indirect costs

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- costs that are the result of a firm's general operations and are not directly tied to any specific object - one way to assign indirect costs to different products is to allocate indirect costs in proportion to the number of direct labor hours involved in the production of each project - products that require the most labor hours to produce are assigned the most direct costs - above is misleading

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activity based costing (ABC)

answer

- a technique to assign product costs based on links between activities that drive costs and the production of specific products - more complex - identify specific activities that create indirect costs and determine the factors that drive the costs of these activities - tie these cost drivers to the production of specific goods

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budgeting

answer

a management tool that explicitly shows how a firm will acquire and use the resources needed to achieve its goals over a specific time period

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if done well budgeting...

answer

- helps managers clearly specify ow they intend to achieve the goals they set during the planning process - encourages comm. and coordination among managers and employees - serves as a motivational tool. good budgets identify goals and demonstrate a plan of action - helps managers evaluate progress and performance

question

2 broad approaches to budget preparation

answer

- top-down: top management prepares with no input from middle and supervisory management - bottom-up: participatory process, middle and managers participate in the creation. Will make them more motivated, but it's more time consuming and resource extensive, could create budgetary slack

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operating budget

answer

budgets that communicate an organization's sales and production goals and the resources needed to achieve these goals

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Preparation of the operating budget

answer

- development sales budget: quarterly estimates of the number of units of each product the firm expects to sell, selling price, and the total dollar value of expected sales - production budget - production budget info used to prepare budgets for direct labor costs, material costs, etc. - budgeted income statement: much like the income statement, but instead of describing the actual results of the firm's past operations, it combines the revenue projections from the sales budget and the cost projections from the operating budgets to present a forecast of expected net income.

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financial budgets

answer

- budgets that focus on the firm's financial goals and identify the resources needed to achieve these goals - cash budget: short-term fluctuations in cash flows - capital expenditure budget: firm's planned investments in major fixed assets and long-term projects

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budget balance sheet

answer

- information from cash budget and capital expenditure budget and the budgeted income statement are combined to construct the budget balance sheet. - shows how the firm's operations, investing, and financing activities are expected to affect all of the asset, liability, and owner's equity accounts

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master budget

answer

a presentation of an organization's operational and financial budgets that represents the firm's overall plan of action for a specified time period

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static budget

answer

- based on a single assumed level of sales - weak when used to measure process, evaluate performance, and identify problem areas that need correcting - real world sales vary considerably

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flexible budget

answer

- not based on a single assumed level of sales - developed over a range of possible sales levels - designed to show off the approbate budgeted level of costs for each different level of sales.

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