Introduction to Accounting Flashcards
Accounting is the _____ ___ _____,
which ____ the results of an organization’s _____ _____, and is used by managers to _ _ _.
Accounting is the language of business,
which measures the results of an organization’s economic activities, •and is used by managers to report financial information.
What does accounting do?
It _ _ and _ that have an _ impact on the
company
It _, _ and _ these events
It _ this information to _ parties
It identifies events and transactions that have an economic impact on the
company
It records, classifies and summarizes these events
It communicates this information to interested parties
Accounting process
Identify and measure the business - process data into report - communicate result
Give order from low valu-added to managerial decisions to high
Tax accounting - financial accounting - managial accounting
Tax accounting (history)
Preparation of tax payments and tax returns
Financial accounting (history)
Bookkeeping 账簿本
Cost accounting: Cost of goods sold ；Inventory valuation 存货估价
Payroll 薪资表/管理
Financial statements 财务报告
Managerail accounting
Cost measurement
Planning & analysis
Budgets
Pricing
Internal purpose for __ accounting
___ ___ based
___ oriented reports
management accounting
• It focuses on the measurement, analysis and reporting of information that can help managers in making decisions to fulfill the goals of an organization.
• Internal measures and reports are based on cost-benefit analysis and are not required to follow the generally accepted accounting principle.
• Management accounting produces future-oriented reports, for example the budget for 2021 is prepared in 2020.
Report to outsiders: ____ accounting
Reporting to outsiders: When accounting information is used to report the firm’s financial performance to outsiders, we refer to this activity as financial accounting.
- It is the process of taking financial data from the firm’s accounting records making a summary in the form of an annual report and publishing it for the benefit of people outside the firm.
- Managers are responsible for preparing the annual report, which is a booklet that contains the financial statements of the firm, explanatory notes and detailed analysis of the results
Annual report and Auditor’s report.
• To avoid conflict of interest, the financial statements in the annual report are verified by an external independent party, the auditor.
• The auditor reviews the accounts and produces the auditor’s report, in which the auditor:
-express its opinion about whether the financial statements have been prepared in accordance with the legislation, and
-Financial statements present a true and fair view of the firm’s financial position.
• From the managers’ point of view, the ideal auditor’s report should be a “clean” opinion without any reservation from the external auditors.
Users of financial accounting
- Investors:
- To assess the performance of the firm to decide whether to invest or not.
- Evaluating the effectiveness of management
- Making predictions about the future profitability
Creditors:
• Banks, suppliers, etc. Lenders of money use financial accounting to decide whether to grant credit to the company or not, or to assess the probability of recovering their debts.
- Tax authorities and regulators to verify compliance with regulations.
- Employees: Potential employees, trade unions use financial accounting in collective bargaining over wages, benefits and working conditions for their members.
- Public interest groups: groups pursuing corporate social responsibility to evaluate firms’ policies.
Objectives of financial accounting:
- Provide information to external users that is useful in making resource allocation decisions.
- It is useful when it is relevant and faithfully represents what it aims to represent.
- It should be comparable, verifiable, timely and understandable.
- Relevant financial information can make a difference in the decisions made by users, especially when it has predictive value or confirmatory value.
Why Accounting Standard?
- Users are many and diverse and their needs, objectives and backgrounds are very different.
- This makes it necessary to follow certain rules and conventions so that all users can understand and interpret the information correctly across companies over the time.
Accounting standards
- IFRS (International Financial Reporting Standards) are issued by private body, the IASB (International Accounting Standard Board) and have been adopted by the European Union and by aprox. 120 countries outside the EU.
- U.S. GAAP (U.S. General Accepted Accounting Principles) are used in the United States. They are issued by another private body, the FASB (Financial Accounting Standards Board).
- IFRS and U.S.GAAP are fairly similar for most of the aspects that are relevant for managers.
- Any firm performs three key activities:
- It raises capital,
- Acquires long-term resources,
- Generates profits for the providers of capital
ØExample: An entrepreneur has a business idea to produce fresh juices containing a probiotic bacteria developed during her PhD.
1. Financing round:
üShe needs to raise capital to carry out her business plan.
üCapital can come from:
ØHer own wealth
ØOther parties interested in being part of this business
ØLenders (banks)
- Investing round:
üShe will use the funds raised to acquire resources: Warehouse, equipment, tools, fixtures, etc.
- Operations round:
üShe will put to work these resources to produce and sell the probiotic juices.
- If the product is successful, the firm will generate benefits and part of the profits will be used to reward the capital providers and the rest will be reinvested in the business to generate growth.
To track the stages of the annual business cycle, firms use accounting
• Financial Statements:
Profit & Loss (= P&L = Income Statement = Statement of Earnings):
Summarizes the sales, expenses and the resulting profit, incurred during a period of time.
Balance Sheet: Shows firm’s assets, liabilities and net worth at a specific point in time.
Cash Flow Statement: Shows the inflows and outflows of cash due to the firm’s activities during the period.
Statement of Changes in Equity: Shows variations in Equity during the period.
Financial Statements are part of the Annual Accounts:
- Legal obligation of every corporation’s management to prepare its annual accounts.
- Then, it must be submitted for approval to the general assembly of shareholders (and must be signed).
- It must be filed for recording in the Commercial Registry.
The timely and proper preparation of the company’s annual accounts is one of the main responsibilities of a company’s management.
Double Entry System:
- Double entry is a fundamental concept underlying present-day bookkeeping and accounting, states that every financial transaction has equal and opposite effects in at least two different accounts.
- The system is based on the following principles:
(a) When one party gives (credit), there must be another accepting party (debit)
(b) When an amount is given, there must be the same amount is received.
- For example, if the company transacts a purchase of a copy printer from a pc supplier, the company pays cash and in return, the firm gets a printer.
- In the double-entry system, transactions are recorded in terms of debits and credits. Since a debit in one account offsets a credit in another, the sum of all debits must equal the sum of all credits.
