Unit 1 Flashcards
Financial accounting
Financial accounting refers to the process that results in the preparation and reporting of financial statements for an entity.
Financial accounting is primarily externally oriented and concerned with the historical results of an entity’s performance.
Social and Environmental Accounting
Social and Environmental Accounting refers to public disclosures about the social and environmental performance of an entity
Management Accounting
Management Accounting is concerned with the use of economic and financial information to plan and control many activities of the entity and to support the management decision-making process
Financial Statements
Financial statements are the product of the financial accounting process.
They are the means of communicating economic information about the entity to individuals (who want to make decisions) and informed judgements about the entity’s financial position.
The main financial statements are:
The Balance Sheet
The Income Statement
The Statement of Cash Flows
The Statement of Changes in Stockholders’ Equity
Accounting
Accounting is the process of identifying, measuring and communicating economic information about an entity for decisions and informed judgements
Cost accounting
Cost accounting is related to the determination and accumulation of product, process, or service costs
Who are the users of accounting information?
Manager
Investors/shareholders
Creditors/Suppliers
Employees
Various governmental agencies
Bookkeeping
Bookkeeping is used to record and accumulate the financial statement results of many of an entity’s activities.
These procedures belong to the financial accounting process.
Why do users find accounting information useful?
Manager:
When performing its functions of planning, directing, and controlling, management makes many decisions and informed judgments.
Investors/shareholders:
When considering whether to invest in the common stock of a company, investors use accounting information to help assess the amounts, timing, and uncertainty of future cash returns on their investment.
Creditors/suppliers:
When determining how much merchandise to ship to a customer before receiving payment, creditors assess the probability of collection and the risks of late (or non-) payment. Banks also become creditors when they make loans and thus have similar needs for accounting information.
Employees:
When planning for retirement, employees assess the company’s ability to offer long-term job prospects and an attractive retirement benefits package.
Various governmental agencies:
When reviewing for compliance of all required information
How has accounting developed from a broad historical perspective?
Dating back to the clay tablets used by Mesopotamians of about 3000 b.c. to record tax receipts, accounting has responded to the information needs of users. In 1494, Luca Pacioli, a Franciscan monk and mathematics professor, published the first known text to describe a comprehensive double-entry bookkeeping system. Modern bookkeeping systems have evolved directly from Pacioli’s “method of Venice” system, which was developed in response to the needs of the Italian mercantile trading practices in that period.
The Industrial Revolution generated the need for large amounts of capital to finance the enterprises that supplanted individual craftsmen. This need resulted in the corporate form of organization marked by absentee owners, or investors, who entrusted their money to managers. It followed that investors required reports from the corporate managers showing the entity’s financial position and results of operations. In mid-19th-century England, the independent (external) audit function added credence to financial reports. As British capital was invested in a growing U.S. economy in the late 19th century, British-chartered accountants and accounting methods came to the United States.
Accounting professionals in this country organized themselves in the early 1900s and worked hard to establish certification laws, standardized audit procedures, and other attributes of a profession.
What is the purpose of producing accounting information?
Accounting provides data to different stakeholders (for example hospitality operators and managers) to inform their actions
What are the key elements of an ethical behavior for a professional accountant?
Integrity: means being honest and forthright in dealings and communications with others.
Objectivity: means impartiality and freedom from conflict of interest.
Independence: it is related to objectivity and it is especially important to the adductor, who must be independent both in appearance and in fact.
Competence: means having the knowledge and professional skills to adequately perform the work assigned
What are the objectives of financial reporting for business enterprises?
Financial reporting is done for individual firms, or entities, rather than for industries or the economy as a whole. It is aimed primarily at meeting the needs of external users of accounting information who would not otherwise have access to the firm’s records. Investors, creditors, and financial advisers are the primary users who create the demand for accounting information. Financial reporting is designed to meet the needs of users by providing information that is relevant to making rational investment and credit decisions and other informed judgments. The users of accounting information are assumed to be reasonably astute in business and financial reporting practices. However, each user reads the financial statements with her or his own judgment and biases and must be willing to take responsibility for her or his own decision making.
Most users are on the outside looking in. For its own use, management can prescribe the information it wants. Reporting for internal planning, control, and decision making need not be constrained by financial reporting requirements–thus the concepts statements are not directed at internal (i.e., managerial) uses of accounting information.
Financial accounting is historical scorekeeping; it is not future oriented. Although the future is unknown, it is likely to be influenced by the past. To the extent that accounting information provides a fair basis for the evaluation of past performance, it may be helpful in assessing an entity’s future prospects. However, financial reports are not the sole source of information about an entity. For example, a potential employee might want to know about employee turnover rates, which are not disclosed in the financial reporting process. The information reported in financial accounting relates primarily to past transactions and events that can be measured in dollars and cents.
Financial accounting information is developed and used at a cost, and the benefit to the user of accounting information should exceed the cost of providing it.
What are the key reasons why business should be ethical?
To meet demands of business stakeholders :
-Organizational stakeholders require that businesses exhibit high level of ethical performance and social responsibility.
To enhance business performance:
-Research shows link between ethically responsible behavior and favorable corporate financial performance
-Promoting positive alliances among business partners
To comply with legal requirements:
-Two legal requirements provide guidance for US companies interested in being more ethical in their business operations
—U.S. Corporate Sentencing Guidelines
—Sarbanes-Oxley Act of 2002
-Although they apply only to U.S.-based firms, these legal requirements also provide a model for firms that operate outside the United States.
To prevent or minizime harm:
-Overriding principle that business should “do no harm”
-Examples include not harming society with toxic waste, protecting businesses from unethical employees and unethical competitors
To promote personal morality:
-Knowing one works in a supportive ethical climate contributes to a sense of psychological security
-People want to work for companies that do the right thing
