CH 1: Accounting in Our Economic Environment Flashcards
Who needs accounting? (examples)
- Entrepreneurs
- Investors
- Bankers and other lenders
- Government
- Managers
- Donors
((Why do you need Accounting Information?))
((You need accounting information to make wise choices about your future – earnings, spending, investments, etc.))
((What is accounting?))
Accounting is a communication and decision-making tool - ((The language of business))
Provides insight on the
* result of operations for a period of time
* financial position of an entity at a particular point in time
What is a business, and what are the 3 types of businesses?
An entity organized to accomplish a goal
For-profit businesses, Nonprofit entities, Governmental Entities
((What is the goal of for-profit businesses?))
((Profits Maximization - to make money))
((What is the goal of nonprofit entities?))
((Accomplish a mission, fulfill a need or purpose))
((What is the goal of Governmental Entities))
(To serve and protect citizens and residents))
((How does accounting serve all departments?))
Accounting is a bridge to better decision making across ((all business departments)) – all have budgets/all need and expend resources.
Marketing Dept.
* Human Resources Dept.
* Production & Operations Dept.
* Finance Dept.
* Information Management Dept.
* Every Other Department
Business Organization Forms - ((What is a sole proprietor?))
((One [single] owner))
* All profits and losses go to owner; owner has unlimited liability
* Owner may be sued for both personal and business assets
Business Organization Forms - ((What is a partnership?))
((At least two owners))
* Access to more capital than sole proprietor
* Agreements can be adapted to profit sharing and liability
* Responsible for debts of partnership (still unlimited liability)
Business Organization Forms - ((What is a corporation?))
((One or more owners))
* Owners are called stockholders
* Loss up to investment only not personal assets (limited liability)
((Who is Luca Pacioli?))
Known as the ((Father of double entry accounting))
*wrote ((Summa de Arithmetica)) – it included a chapter on accounting and business practices - resulted in the “double entry” bookkeeping currently being used
((What is the double entry system?))
((Double-entry means that financial transactions impact at least two accounts by equal amounts
on corresponding sides.))
Every account has two sides: a debit [left] side and a credit [right] side
((What is the Accounting Equation?))
The Accounting Equation: ((Assets = Liabilities + Stockholders’ Equity))
If you increase Asset, then Liabilities and/or Equity increases by the same amount
History of Need for Accounting Standards
Post WWI: booming economy, lots of public investing and public confidence
Markey prices accelerated rapidly, quick return
((Stock Market Crash))
((BLACK THURSDAY)): October 24 1929 - stock market had signifiant price drops and the plummeting prices to the worst drop on October 29 1929
Great Depression followed in the 1930s
((Public Outcry))
We need transparency in reporting ((accounting standards)) and regulation over the capital markets ((buy/sell stock))
Results:
- government stepped in
- requirements for companies selling stock to public
-attempts to protect public ((financial)) interests
- SEC established
((What is the SEC?))
((Securities & Exchange Commission)) ((U.S.))
((What is the FASB?))
((Financial Accounting Standards Board)) ((U.S))
((What is the IASB?))
((International Accounting Standards Board)) ((Global))
((SEC))
- Formed to protect investors, governed by 5 commissioners (appointed by president)
- Established by the ((Securities Exchange Act of 1934))
((SEC PURPOSE))
- to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation
- Any company offering securities for [public] investment dollars must reveal ((the truth)) about the business
- brokers, dealers, and exchangers - engaged in the trade of securities, must treat investors fairly and honestly, ((putting investors interests first))
((SEC GOALS))
Promote/restore public confidence in [stock] market system
((US GAAP))
Generally Accepted Accounting Principles - standards issued by FASB
((FASB))
- established July 1973
-((private, nonprofit)), standard-setting body, with ((seven)) full time ((independent)) board members
((FASB PURPOSE))
- ((given authority by SEC)) to set accounting standards for public companies in the US
- ((issues standards)) that are relevant to public, private, nonprofit (based on certain criteria)
((US GAAP PURPOSES))
-governs the preparation of financial statements - how accounting data is reported
- applicable to ((public entities (registered with SEC))) in the US to issue securities to the public
- ((private companies may choose)) to follow US GAAP
((Global impact of US GAAP))
more than ((90 countries adopted)) a similar set of reporting standards
((IASB))
International Accounting Standards Board
- similar to US FASB but membership is global and broad
((IFRS))
International Financial Reporting Standards
-reflection of interdependent economies
-permissible by the SEC for multinational companies that buy/sell securities on US exchanges
Impact of ((Technology)) on evolution of accounting
- efficiency, speed, robotics
- proliferation of data that is analyzed and recorded
- information management systems
Impact of ((Globalism)) on evolution of accounting
-world is interdependent and interconnected
-has become smaller
Impact of ((E-business, E-commerce, and the Internet)) on evolution of accounting
- shopping everywhere, pushing traditional retailers out of business
- business transactions online
What are ((Internal Controls))
((policies and procedures)) with three objectives
((3 objectives)) of internal controls
- promote operational ((efficiency))
- ensure ((accuracy)) of accounting information
- encourage ((compliance)) with laws and regulation
((Example Internal Controls Procedures))
- proper ((authorization)) for transactions
- ((separation)) of duties
- maintenance of adequate ((documentation))
- control over physical ((access)) to assets
- providing ((independent checks))
((ICFR))
Internal Controls over Financial Reporting
-requires public companies to have independent auditor give an opinion on the effectiveness of the ICFR
((4 Assumptions in Accounting))
- ((Monetary Unit)): information is reported in currency form
- ((Periodicity)): reports are prepared for discrete periods of time
- ((Going Concern)): an entity will continue into foreseeable future - assume business will stay in business
- ((Economic Entity)): the business and owner’ financial transactions are separated - separate business and personal
((Decision-making for For-Profit Businesses))
- Is the business ((profitable))?
- Can we ((sustain operations)) through next year?
- Does company have ((sufficient cash))?
- Can we afford the ((expand operations or hire additional)) employees?
revenues/expenses
assets, liabilities, stockholders equity
((Role of Donors in the Non-Profit Organization))
- ((non profits do not have owners : are accountable to donors and contributors))
- donor reports focus on ((how contributed resources were used)), how effectively entity is accomplishing mission
- use of donations towards ((administrative [overhead] vs. program [the mission] expenses))
((Accounting for Governmental Entities))
- ((taxes are revenue)) for government entities
- governmental entities have ((fiscal accountability)) as opposed to for profit
- ((budget is used as a tool to control government spending)) - released to public
Why accounting?
- ((Decisions are best made with relevant information and faithful representation of an entity’s performance and position))
1.organized information
2. decision making
How does ((accounting enable)) people?
- evaluate results of operations
- assess financial position
- decide on the path ahead - operations, products, employees
((RIRPAF))
Report of the Independent Registered Public Accounting Firm
where an auditor offers an opinion on financials and internal controls
Goal of RIRPAF and the Independent Accountant
- ((independent accountants are often referred to as auditors in an audit))
- ((can’t ensure 0 fraud)) but try to provide reasonable assurance to users that
1. financial statements are prepared according to US GAAP
2. financial statement contains no material misstatement
3. ICFR are effective
What happens if you invest 100% of your savings into stock and they go bankrupt?
You lose everything you put in - you can only lose what you put in
