42 terms

Chapter 1 Section 1

Accounting: The Language of Business Learning Objectives: 1. Define Accounting 2. Identify and discuss career opportunities in accounting 3. Identify the users of financial information
The process by which financial information is recorded for both business and personal use
What is the GAAP
The GAAP is the Generally Accepted Accounting Principles that define the language of accounting
Why should a company comply with the GAAP?
Publicly owned companies must follow the GAAP in order to demonstrate to the Securities and Exchange Commission that they are following proper accounting standards
Define Accounting
Accounting is the process by which financial information about a business is recorded, classified, summarized, interpreted, and communicated to owners, managers, and other interested parties
Accounting System
An accounting system is designed to accumulate data about a firm's financial affairs, classify the data in a meaningful way, and summarize it in periodic reports called financial statements
Financial Statements
Financial Statements are periodic reports that summarize the data accumulated and classified in an accounting system
Identify career opportunities in accounting

Accounting Clerks

Bookkeepers are responsible for recording business transactions. In large firms, they may also supervise the work of accounting clerks.

Bookkeeper positions usually require one to two years of accounting courses and little or no experience
Accounting Clerk
Responsible for record keeping for a part of the accounting system such as payroll, accounts receivable, or accounts payable

Accounting clerk positions usually require one to two accounting courses and little or no experience
Usually Supervise bookkeepers and prepare the financial statements and reports of the business

Accountant positions usually require a bachelor's degree but are sometimes filled by experienced bookkeepers or individuals with a two-year college degree. Most entry-level accountant positions do not have an experience requirement. Both the education and experience requirements for accountant positions vary according to the size of the firm.
What three areas do accountants typically choose to practice in
Public accounting

managerial accounting

governmental accounting
Public accountants
Work for public accounting firms whcih provide accounting services for other companies.

Usually, public accounting firms offer three services: -auditing

-tax accounting

-management advisory services
What is the "Big Four"
The largest public accounting firms in the United States.

Deloitte & Touche

Ernst & Young


What is a CPA
A CPA is a certified public accountant. To become a CPA, you must:

have a certain number of college credits in accounting courses

demonstrate good personal character

pass the Uniform CPA Examination

fulfill the experience requirements of the stat of practice

and follow the professional code of ethics
Auditing is the review of financial statements to assess their fairness and adherence to generally accepted accounting principles. Accountants who are CPAs perform financial audits
Tax accounting
involves tax compliance and tax planning.

Tax compliance deals with the preparation of tax returns and the audit of those returns

Tax planning involves giving advice to clients on how to structure their financial affairs in order to reduce their tax liability
Management advisory services
involves helping clients improve their information systems or their business performance
Managerial accounting
Also referred to as private accounting

Managerial accounting involves working for a single business in industry. They perform a wide range of activities, including:

-establishing accounting policies

-managing the accounting system

-preparing financial statements

-interpreting financial information

-providing financial advice to management

-preparing tax forms

-performing tax planning services

-preparing internal reports for management
Governmental accounting
involves keeping financial records and preparing financial reports as part of the staff of federal, state, or local governmental units.

Governmental units do not earn profits. However, governmental units receive and pay out huge amounts of money and need procedures for recording and managing this money.
Why do some governmental agencies hire a large number of accountants? Identify a few.
Some governmental agencies hire accountants to audit the financial statements and records of the business under their jurisdiction and to uncover possible violations of the law


(SEC) Securities and Exchange Commission

(IRS) Internal Revenue Service

(FBI) Federal Bureau of Investigation

Homeland Security
Identify the users of financial information
Owners and Managers
Tax Authorities
Regulatory Agencies and Investors
Employees and Unions
Why might owners and managers of a particular firm need its Financial information?
Owners need information that will help them to evaluate the results of their operations and plan and make decisions for the future. Financial information will help the answer otherwise difficult questions such as:

Whether to discontinue a product or reduce its price

How much to charge for a new product

How much to spend on advertising

How one period's profit compares to another

Whether or not to open a new store
Why might suppliers of a particular firm need its Financial information?
to assess the ability of the firm to pay its bills and to set a credit limit for the firm
Why might Banks need the financial information of a particular firm?
If the firm decides to ask the bank for a loan, the bank needs to be sure that the firm will repay the loan on time. The bank will ask for financial information prepared by the firm's accountant, and based on this information the bank will decide whether to make the loan and the terms of the loan
Why Might Tax Authorities need the financial information of a particular firm?
The accounting process provides information for the following:

Income taxes are based on taxable income

sales taxes are based on sales income

property taxes are based on the assessed value of buildings, equipment, and inventory
How might a customer use the financial information of a particular firm?
If a customer is buying a product that might require upkeep for any length of time, he or she would want to make certain the company that sells the product will be around to help with that upkeep
Why might employees and unions need the financial information of a particular firm?
Employees who are members of a profit-sharing plan pay close attention to the financial results because they affect employee income

employees who are members of a labor union use financial information about the firm to negotiate wages and benefits
Why might regulatory agencies and investors need the financial information of a particular firm?
to protect those who invest in publicly owned corporations
What is the SEC?
The Securities and Exchange Commission oversees the financial information provided by publicly owned corporations to their investors and potential investors.

It is responsible for reviewing the accounting methods used by these corporations.

Though it has delegated this review to the accounting profession, it still has the final say on any financial accounting issue faced by publicly owned corporations
What can the SEC do if it does not agree with the reporting results from an accounting method?
It can suspend the trading of a company's shares on the stock exchanges
What two acts of congress were passed in order to protect those who invest in publicly owned corporations?
Securities act of 1933

Securities Exchange Act of 1934
Which act was the most far-reaching regulatory crackdown on corporate fraud and corruption since the creation of the Securities and Exchange Commission in 1934?
Public Company Accounting Reform and Investor Protection Act of 2002

also known as the Sarbanes-Oxley Act
Why was the Sarbanes-Oxley Act passed?
In response to the wave of corporate accounting scandals, including:

The demise of Enron Corporation in 2001

The arrest of top executives at World Com and Adelphai Communications Corporation

and ultimately the demise of Arthur Andersen
Who is Arthur Andersen?
Arthur Andersen was found guilty of an obstruction of justice charge after admitting that the firm destroyed thousands of documents and electronic files related to the Enron audit engagement

Although on May 31, 2005, the Supreme Court of the United States reversed the Andersen guilty verdict, Arthur Andersen has not returned as a viable business

As a result of the demise of Arthur Andersen, the "Big Five" are now the "Big Four"
What did the Sarbanes-Oxley Act do?
The Act significantly tightens regulation of financial reporting by publicly held companies and their accountants and auditors
It created the Public Company Accounting Oversight Board
It provides rules on consulting services, auditor rotation, criminal penalties, corporate governance, and securities regulation
Along with stiff Criminal penalties, how else does the Sarbanes-Oxley Act protect investors from corrupt accounting practices of Publicly held companies?
The act prohibits accountants from offering a broad range of consulting services to publicly traded companies that they audit

it requires accounting firms to change the lead audit or coordinating partner and the reviewing partner for a company every five years

Chief executives and chief financial officers of publicly traded corporations are required to certify their financial statements

Companies must disclose, as quickly as possible, material changes in their financial position

Wall Street investment firms are prohibited from retaliating against analysts who criticize investment-banking clients of the firm

The act contains a provision with broad new protection for whistle blowers and lengthens the time that investors have to file lawsuits against corporations for securities fraud
How long are Auditors required to maintain all audit or review work papers?
Seven years
What are some of the criminal penalties provided in the Sarbanes-Oxley Act for corrupt accounting practices?
it is a felony to knowingly destroy or create documents to "impede, obstruct or influence" any existing or contemplated federal investigation

It imposes criminal penalties up to 20 years in prison for obstruction of justice

It raises the maximum sentence for defrauding pension funds to 10 years

Chief executives and Chief financial officers of publicly traded corporations will face up to 20 years in prison if they "knowingly or willfully" allow materially misleading information into their financial statements
What is the Public Company Accounting Oversight Board?
It is a five-member board which has investigative and enforcement powers to oversee the accounting profession and to discipline corrupt accountants and auditors
Who Oversees the Public Company Accounting Oversight Board?
The board is overseen by the SEC
How many members of the Public Company Accounting Oversight Board have CPAs?
Two members are certified public accountants, to regulate the accountants who audit public companies

the remaining three must not be and cannot have been CPAs
What is required in order to be the chairman of the Public Company Accounting Oversight Board?
The chair of the board may be held by one of the CPA members, provided that the individual has not been engaged as a practicing CPA for five years