1.6: Summary
- Page ID
- 10093
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)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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Key Terms
- accounting
- process of organizing, analyzing, and communicating financial information that is used for decision-making
- auditing
- process of ensuring activities are carried out as intended or designed
- consulting
- 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
- creditor
- 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)
- lender
- 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
- stakeholder
- someone affected by decisions made by a company; may include an investor, creditor, employee, manager, regulator, customer, supplier, and layperson
- stockholder
- owner of stock, or shares, in a business
- transaction
- business activity or event that has an effect on financial information presented on financial statements