AEC 8333 Midterm

Primary objective of accounting

provide information that is useful in making good decisions and as a result of good decisions, societal prosperity and welfare is maximized

Accounting allows stakeholders to

compare one business with another

Accounting is sometimes called the

langauage of business

Types of accounting information

financial, tax, management

financial accounting information shows

where to place scare resources

tax accounting information shows

tax obligations

management accounting information helps with

managing daily operations

financial accounting information describes the

financial resources, obligations, and activities of an economic entity

financial accounting information assists __ users such as

external users such as investors and creditors in the decision-making process

financial accounting information is often called __ accounting information

general-purpose

management accounting information involves the

development and interpretation of accounting information for management

T or F: management accounting information can be specifically tailored to management’s needs to assist in the decision-making process.

T

Reports for management accounting information are only provided to

internal users

tax accounting information must conform with

income tax reporting requirements

T or F: Laws and regulations for financial and tax accounting information underlying preparation are the same.

F

Basic functions of an accounting system

• interpret and record business transaction

• classify similar transactions into useful reports

• summarize and communicate information to decision makers

Information users of accounting information

investors, creditors, managers, owners, customers, employees, regulators (SEC, IRS, FTC)

financial information provided by the accounting information system

profitability, financial position, cash flows

decisions supported by the accounting information system

performance evaluations, stock investments, tax strategies, labor relations, resource allocations, lending decisions, borrowing

The primary external users of financial information are

investors and creditors

What obligation do publicly owned companies have in terms of preparing financial statements?

they have to release annual and quarterlu information to their stockholders and to the public

The annual report that publicly owned companies have to prepare includes

comparative financial statements and other information relating to the company’s financial position, business operations, and future prospects

The financial statements contained in the annual report must be

audited by CPAs

All external users of accounting information

owners, creditors, potential investors, labor unions, governmental agencies, suppliers, customers, trade associations, general public

External users are interested in business financial reports that are prepared and reported in a consistent manner that allow them to

• describe a business financial condition

• analyse the financial health of the business

• determine the impact of activities

• forecast the prospects for a company’s future

• compare the performance of one company with another

3 primary financial statements

balance sheet, income statement, statement of cash flows

balance sheet

shows where the company stands in financial terms on a specific date (also called the statement of financial position)

Income statement

shows the details of a company’s profit-related activities over a period of time

statement of cash flows

shows the details of a company’s activities involving cash over a period of time

Financial statements provide a __ to view business

lens

Characteristics of financial accounting externally reported information

• usefulness enhanced by explanation

• broader than financial statements

• historical in nature

• based on general-purpose assumption

• reults from inexact approximate measures

The primary internal users of management information are

managers and employees

All users of internal accounting information

board of directors, chief executive officer, chief financial officer, vice presidents, business unit managers, plant managers, store managers, line supervisors

Objectives of management accounting information

to help achieve mission and goals, to help evaluate and reward decision makers

T or F: Many companies have a reward system linked to performance as measured by the management accounting system.

T

Characteristics of management accounting information

timeliness, identify decision maker, oriented toward future, measures of efficiency and effectiveness of resource usage

Integrity refers to the following qualities:

complete, unbroken, sound, honest, sincere

The integrity of accounting information is enhanced in three primary ways

1. institutional features

2. professional accounting organizations

3. personal competence, judgment, and ethical behavior

Institutional features

• GAAP

• FASB
  IASB

• SEC

• PCAOB

• Audits of Financial Statements

For the auditor to reach the conclusion that the financial statements are fair representations of a company’s financial position, results of operations, and cash flows, the statements must

comply in all importance ways with generally accepted accounting principles

__ is the cornerstone of the accounting profession.

Ethical behavior

CPA

Certified Public Accountant

CMA

Certified Management Accountant

CIA

Certified Internal Auditor

Difference between bookkeeping and accounting

• bookkeeping is the clerical side of accounting - the recording of routine transactions and day-to-day record keeping

• Professional accountants are involved more the interpretation and use of accounting information than with its actual preparation

Accounting cycle

the sequence of accounting procedures used to record, classify, and summarize accounting information in financial reports at regular intervals

Accounting records are used to:

prepare financial statements, complete income tax returns, create other reports

Steps of the Accounting Cycle

1. record transactions

2. post each journal entry to ledger accounts

3. prepare a trial balance

4. make end-of-period adjusting entries

5. prepare adjusted trial balance

6. prepare financial statements

7. journalize and post closing entries

8. prepare after-closing trial balance

a financial statement is simply a

declaration of what is believed to be true about an enterprise, communicated in terms of a monetary unit, such as the dollar

When accountants prepare financial statements, they are describing in financial terms …

certains attributes of the enterprise that they believe fairly represents its financial activities

the balance sheet reveals the company’s

financial health or net worth

the balance is a __ of the business in

snapshot of the business in financial or dollar terms that shows what the enterprise looks like at a specific date

The income statement is focused on

profitability

the income statement is an __ statement that shows the

activity statement that shows the revenues and expenses for a designated period of time

Revenues result in

positive cash flows

Expenses result in

negative cash flows

The cash flow statement is focused on

liquidity

the cash flow statement details the company’s

sources and uses of cash during an accounting period and explains the change in the cash balance shown on the balance sheet

Features of the balance sheet

heading, assets, liabilities, equity

Heading on the balance sheet contains

the names of the business, name of the financial statement, and the date

Assets on the balance sheet are generally listed in

order of expected liquidity beginning with cash

Liabilities on the balance sheet are listed

on the opposite side of assets and before equity

equity on the balance sheet is divided into the categories of

capital stock and retained earnings

Assets have 3 basic characteristics

economics resources, owned by the company, and expected to benefit future operations

The expected future benefit of assets may come

directly as the asset is converted into cash or indirectly as the asset is used in operating the business to create other assets that result in positive future cash flows

Liabilites represent

negative future cash flows and claims against the borrower’s assets

the person/organization to whom the debt is owed is called a

creditor

liabilities are listed on the balance sheet in the order in which

they are expected to be repaid

equity represents the

owners’ claims on the assets of the business

equity entitles owners to

residual assets once the creditors have been paid in full

Increases in owners’ equity

investment of cash or other assets by owners, earnings from profitable operation of the business

Decreases in owners’ equity

payments of cash or transfers of other assets to owners, losses from unprofitable operation of the business

Which transactions on the ledger impact the statement of cash flows?

Cash charges

Which transactions on the ledger impact the Income statement?

Retained earnings charges

Net income =

revenues - expenses

Revenues cause __ in the company’s assets from its profit-directed activities.

increases

Expenses cause __ in the company’s assets from its profit-directed activities.

decreases

examples of Expense accounts on the income statement

salaries, selling expenses, depreciation, rent, interest expense

T or F: Investments by and payments to the owners are included on the Income statement.

F

operating cash flows

the cash effects of revenue and expense transactions that are included on the income statement

investing activities

the cash effects of purchasing and selling assets, such as land and buildings

financing activities

the cash effects of the owners investing in the company and creditors loaning money to the company and the repayment of either or both.

What types of items are included on the Statement of Cash Flows?

cash

What kind of cash flow activities include the cash effects of revenue and expense transactions?

operating

What kind of cash flow activities include the cash effects of purchasing and selling assets?

investing

What kind of cash flow activities include the cash effects of transactions with the owners and creditors?

financing

Which financial statement(s) are recorded over time?

income statement and statement of cash flows

Which financial statement(s) are recorded at a point in time?

balance sheet

_ _ are just one source of financial accounting information.

financial statements

Examples of other types of financial information?

• nonfinancial disclosures

• manageemnt interpretation

• industry

• competitors

• national economy