Module 1--Introduction to Accounting Flashcards
What must HR do to become A Strategic Business Partner?
■ Gain credibility with upper management
* Learn the business
* Connect with the business
* Use the same organizational language and methods
– Accounting is the language of the business
– Communication with senior management and line management
■ Define the strategic business partner role
* Test HR priorities against business imperatives
* Financial measures (usually budget driven)
* Customer
* Operational
* Learning and growth
* Ongoing discussions with line managers to determine strategic priorities
■ Develop strategic HR activities that meet the following criteria:
* Ability to affect profits, earnings and growth
– Compensation and benefits costs
– Incentive plans based on financial performance
* Ability to implement business strategies
– Attract, retain and reward competent employees
* Ability to positively and directly affect employee performance
– Motivate workforce to meet corporate financial goals.
What are the GOVERNING BODIES?
■ Governing bodies
*FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) 1973 to present
– Body of professional accountants, not a government agency
– The FASB Accounting Standards Collection
❙ The source of authoritative generally accepted accounting principles (GAAP)
❙ Recognized by the FASB to be applied to nongovernmental entities
– Predecessors to FASB
❙ Accounting Research Bulletins (ARB) 1939 – 1959. Issued by the Committee on
Accounting Procedure of the Accounting Review Board
❙ Accounting Principles Board (APB) 1959 – 1973. Issued “opinions” and “statements”
– Reorganizes U.S. GAAP pronouncements into accounting topics and displays them using
Accounting Standards Codification (ASC) 2009
- SECURITIES and EXCHANGE COMMISION (SEC)
– Confirms standards set by FASB
– Requires publicly owned companies to provide financial information to shareholders
using generally accepted accounting principles (GAAP)
– Responsible for enforcement; can impose fines and prohibit companies from selling
shares of stock - INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB) – issues International Financial Reporting Standards
- For companies with operations or corporate headquarters outside the US, different rules can impact expenses and profitability from compensation and benefit programs
What are the GOVERNING POLICIES?
U.S. GAAP – a set of practices/guidelines established to ensure that financial statements will be understandable to users
– The basis to convert business transactions into accounting entries
– Different accounting rules exist outside the US
What is the SARBANES OXLEY Act of 2002
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 significantly increased the focus on corporate governance and public accounting.
■ Definition – a federal law regulating accounting oversight, corporate responsibility (to include certified financial statements), documentation and reporting
■ Provisions
* Reporting structure – Companies must structure reports and processes according to external auditors’ requirements.
* Senior management responsibility – Senior management must accept responsibility for the effectiveness of internal controls over financial reporting.
– The goal is to improve accuracy of financial statements for investor reliance.
■ Compliance
* Identify, evaluate and document existing internal controls – To comply with Sarbanes- Oxley, companies must identify and document existing internal controls and evaluate their
effectiveness as they relate to financial reporting.
* Analyze gaps – Companies must analyze gaps and design appropriate controls.
* Correct material weaknesses – Companies must disclose changes in internal controls and take corrective actions regarding deficiencies or material weaknesses.
What are the FIVE Major Groups of Accounts?
There are five major groups of accounts.
■ Balance sheet accounts:
* ASSETS– what the organization owns
* LIABILITIES– what the organization owes
* EQUITY – what owners/investors have put in the business
■ Income statement accounts:
* REVENUE/SALES – money generated from sale of goods or services provided
* EXPENSES – cost of doing business. At the end of the year, the income statement is closed out and the net income (loss) is transferred to the equity section of the balance sheet.
What are the FOUR Financial Statements included in company’s annual report?
The following are the four financial statements included in a company’s annual report.
■ Balance sheet
* What’s owned, what’s owed and the equity of an entity
* Shows the book value of a company
* Represents the financial health of a company
* Statement of financial position as of a specific date
■ Income statement
* Revenues earned and expenses incurred over a period of time
* Shows the profitability of a company
* Covers a period of time
■ Statement of cash flows
* Shows the liquidity of a company
* Includes cash flows from operating, investing and financing transactions
* Covers a period of time
■ Statement of shareholders’ equity
* Capital invested by the shareholders
* Retained earnings (profit earned and retained by company)
* Covers a period of time
What are the BOOKS that need to be kept?
Books that Need to Be Kept
Due to the different accounting methods used, companies need to keep at least two sets of books (balance sheets and income statements). Two sets of books are needed because of the different
depreciation methods used (tax return based on the Internal Revenue Code [IRC]; shareholder books are prepared per GAAP and the timing differences [IRS versus GAAP]).
■ Tax books (IRC)
■ Shareholders (GAAP)
■ Additional sets of books for various industries: utilities, banks, insurance companies, health care, etc.
What are the TWO ACCOUNTING TYPES?
Accounting Types – The type of accounting used can result in
significant differences in the calculation of net income.
■ Accrual accounting
* Revenues and expenses are recorded in the time period to which they apply, irrespective of the timing of the cash flows.
■ Cash accounting
* Revenues and expenses are recorded based on when cash is received or paid.
What is Accrural Accounting?
■ Recognizes revenue and expenses when incurred, regardless of cash flow
■ Used by publicly held companies and most privately owned companies
* Companies that deal with products, and service companies with sales in excess of $5 million
are required by GAAP to use accrual accounting.
What is an ACCRUED Revenue Example
■ Accrued revenue example:
* When a company ships an order to the customer with the appropriate invoice, it is recorded as a sale, even though the customer’s payment will not be received until sometime in the future.
What is an ACCRUED Expense Example?
- Payday is Jan. 6 for the prior two weeks.
- Accrued costs for two weeks are recorded in the prior year’s income statement, including base salary and related benefits (e.g., payroll taxes, health welfare and retirement benefits).
- Example:
If total cost of compensation and benefits for the 2-week period is $1 million, then that amount is expensed in the current year (i.e., 2030). Under cash accounting, the $1 million expense is booked in 2031.
What is CASH ACCOUNTING?
■ Recognizes revenues when money actually is received
■ Recognizes expenses when money actually is spent
■ Individuals, governments and some service companies with sales less than $5 million use cash accounting.
* Example:
Employee (individual) is paid on Jan. 6 for services that occurred in the last two weeks in December. Employee recognizes income on the day pay is received, Jan. 6.
What is the CONCEPT of DOUBLE ENTRY Accounting?
The Concept of Double Entry Accounting
The concept of double entry accounting states that there are two parts to every transaction: debit and credit. The books always are in balance regardless of the sophistication of the system. The two parts are:
■ Debit: use of funds
■ Credit: source of funds
Double entry accounting is used in both accrual accounting and cash accounting, and can reduce the risk of errors
What are FINANCIAL MEASURES–MANAGEMENT ACCOUNTING and ANALYSIS?
Financial measures are the tools used for the financial analysis of the operating financial aspects of a company. Terminology and formulas may vary from one analyst or company to another. Therefore, it is
important to know the formula a company is using when a particular financial measure is being used.
Financial measures are not governed by the rules of any organizations, such as how GAAP governs
accounting. Managerial accounting is for internal analysis.
What are the ADVANTAGES of FINANCIAL MEASURES–MANAGEMENT ACCOUNTING and ANALYSIS?
■ Advantages
* May assist in forecasting future performance
* Used to appraise financial condition, efficiency, profitability
* Used for comparisons between companies (even of different sizes)
* Can compare one year to the next for the same company
