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Business LibreTexts

1.6: Summary

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  • 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).

    Key Terms

    process of organizing, analyzing, and communicating financial information that is used for decision-making
    process of ensuring activities are carried out as intended or designed
    process of giving advice or guidance on financial and nonfinancial impact of a course of action
    cost accounting
    recording and tracking of costs in the manufacturing process
    business that grants extended, but short-term, payment terms to other businesses
    financial accounting
    measures the financial performance of an organization using standard conventions to prepare financial reports
    Financial Accounting Standards Board (FASB)
    independent, nonprofit organization that sets financial accounting and reporting standards for both public and private sector businesses in the United States that use Generally Accepted Accounting Principles (GAAP)
    for-profit business
    has the primary purpose of earning a profit by selling goods and services
    generally accepted accounting principles (GAAP)
    common set of rules, standards, and procedures that publicly traded companies must follow when composing their financial statements
    governmental accounting
    process of tracking the inflows and outflows of taxpayer funds using prescribed standards
    Governmental Accounting Standards Board (GASB)
    source of generally accepted accounting principles (GAAP) used by state and local governments in the United States; is a private nongovernmental organization
    governmental entity
    provides services to the general public (taxpayers)
    bank or other institution that has the primary purpose of lending money
    managerial accounting
    process that allows decision makers to set and evaluate business goals by determining what information they need to make a particular decision and how to analyze and communicate this information
    manufacturing business
    for-profit business that is designed to make a specific product or products
    nonprofit (not-for-profit) organization
    tax-exempt organization that serves its community in a variety of areas
    not-for-profit (NFP) accounting
    including charities, universities, and foundations, helps ensure that donor funds are used for the intended mission of the not-for-profit entity
    privately held company
    company whose stock is available only to employees or select individuals or groups
    publicly traded company
    company whose stock is traded (bought and sold) on an organized stock exchange
    retail business
    for-profit business that purchases products (called inventory) and resells the products without altering them
    Securities and Exchange Commission (SEC)
    federal regulatory agency that regulates corporations with shares listed and traded on security exchanges through required periodic filings
    service business
    business that does not sell tangible products to customers but rather sells intangible benefits (services) to customers; can be either a for-profit or a not-for-profit organization
    someone affected by decisions made by a company; may include an investor, creditor, employee, manager, regulator, customer, supplier, and layperson
    owner of stock, or shares, in a business
    business activity or event that has an effect on financial information presented on financial statements