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Principles of Accounting, Volume 1: Financial Accounting

Summary

Principles of Accounting, Volume 1: Financial AccountingSummary

Summary

1.1 Explain the Importance of Accounting and Distinguish between Financial and Managerial Accounting

  • Accounting is the process of organizing, analyzing, and communicating financial information that is used for decision-making.
  • Accounting is often called the “language of business.”
  • Financial accounting measures performance using financial reports and communicates results to those outside of the organization who may have an interest in the company’s performance, such as investors and creditors.
  • Managerial accounting uses both financial and nonfinancial information to aid in decision-making.

1.2 Identify Users of Accounting Information and How They Apply Information

  • The primary goal of accounting is to provide accurate, timely information to decision makers.
  • Accountants provide information to internal and external users.
  • Financial accounting measures an organization’s performance in monetary terms.
  • Accountants use common conventions to prepare and convey financial information.
  • Financial accounting is historical in nature, but a series of historical events can be useful in establishing predictions.
  • Financial accounting is intended for use by both internal and external users.
  • Managerial accounting is primarily intended for internal users.

1.3 Describe Typical Accounting Activities and the Role Accountants Play in Identifying, Recording, and Reporting Financial Activities

  • Accountants play a vital role in many types of organizations.
  • Organizations can be placed into three categories: for profit, governmental, and not for profit.
  • For-profit organizations have a primary purpose of earning a profit.
  • Governmental entities provide services to the general public, both individuals and organizations.
  • Governmental agencies exist at the federal, state, and local levels.
  • Not-for-profit entities have the primary purpose of serving a particular interest or need in communities.
  • For-profit businesses can be further categorized into manufacturing, retail (or merchandising), and service.
  • Manufacturing businesses are for-profit businesses that are designed to make a specific product or products.
  • Retail firms purchase products and resell the products without altering the products.
  • Service-oriented businesses provide services to customers.

1.4 Explain Why Accounting Is Important to Business Stakeholders

  • Stakeholders are persons or groups that rely on financial information to make decisions.
  • Stakeholders include stockholders, creditors, governmental and regulatory agencies, customers, and managers and other employees.
  • Stockholders are owners of a business.
  • Publicly traded companies sell stock (ownership) to the general public.
  • Privately held companies offer stock to employees or to select individuals or groups outside the organization.
  • Creditors sometimes grant extended payment terms to other businesses, normally for short periods of time, such as thirty to forty-five days.
  • Lenders are banks and other institutions that have a primary purpose of lending money for long periods of time.
  • Businesses generally have three ways to raise capital (money): profitable operations, selling ownership (called equity financing), and borrowing from lenders (called debt financing).
  • In business, profit means the inflows of resources are greater than the outflows of resources.
  • Publicly traded companies are required to file with the Securities and Exchange Commission (SEC), a federal government agency charged with protecting the investing public.
  • Guidelines for the accounting profession are called accounting standards or generally accepted accounting principles (GAAP).
  • The Securities and Exchange Commission (SEC) is responsible for establishing accounting standards for companies whose stocks are traded publicly on a national or regional stock exchange, such as the New York Stock Exchange (NYSE).
  • Governmental and regulatory agencies at the federal, state, and local levels use financial information to accomplish the mission of protecting the public interest.
  • Customers, employees, and the local community benefit when businesses are financially successful.

1.5 Describe the Varied Career Paths Open to Individuals with an Accounting Education

  • It is important for accountants to be well versed in written and verbal communication and possess other nonaccounting skill sets.
  • A bachelor’s degree is typically required for entry-level work in the accounting profession.
  • Advanced degrees and/or professional certifications are beneficial for advancement within the accounting profession.
  • Career paths within the accounting profession include auditing, taxation, financial accounting, consulting, accounting information systems, cost and managerial accounting, financial planning, and entrepreneurship.
  • Internal control systems help ensure the company’s goals are being met and company assets are protected.
  • Internal auditors work inside business and evaluate the effectiveness of internal control systems.
  • Accountants help ensure the taxes are paid properly and in a timely manner.
  • Accountants prepare financial statements that are used by decision makers inside and outside of the organization.
  • Accountants can advise managers and other decision makers.
  • Accountants are often an integral part of managing a company’s computerized accounting and information system.
  • Cost accounting determines the costs involved with providing goods and services.
  • Managerial accounting incorporates financial and nonfinancial information to make decisions for a business.
  • Training in accounting is helpful for financial planning services for businesses and individuals.
  • Accounting helps entrepreneurs understand the financial implications of their business.
  • Accountants have opportunities to work for many types of organizations, including public accounting firms, corporations, governmental entities, and not-for-profit entities.
  • Professional certifications offer many benefits to those in the accounting and related professions.
  • Common professional certifications include Certified Public Accountant (CPA), Certified Management Accountant (CMA), Certified Internal Auditor (CIA), Certified Fraud Examiner (CFE), Chartered Financial Analyst (CFA), and Certified Financial Planner (CFP).
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