Chapter 1 Lecture and Notes

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

Distinguish between Financial and Managerial Accounting

Financial accounting measures the financial performance of an organization using standard conventions (rules) to prepare and distribute financial reports.

Managerial accounting uses both financial and nonfinancial information as a basis for making decisions within an organization.

Identify Users of Accounting Information and How They Apply Information

Users of accounting information are generally divided into two categories: internal and external. 

• Internal users are those within an organization who use financial information to make day-to-day decisions. They include managers and other employees who use financial information to confirm past results and help make adjustments for future activities.

• External users are those outside of the organization who use the financial information to make decisions or to evaluate an entity’s performance. They include investors, financial analysts, loan officers, governmental auditors, such as IRS agents, and an assortment of other stakeholders.

Characteristics of Accounting Information

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

Three categories of organizations:

• For-profit businesses: the primary purpose is to earn a profit by selling goods and services. 
  • Manufacturing: use raw materials, or component parts, to produce a final product that is sold to another manufacturer or consumers
  • Retail: buy goods that are already produced and sell them to other businesses or consumers
  • Service: do not sell tangible products to customers, but rather provide intangible benefits (services) to customers

• Governmental entities: provide services to the general public (taxpayers). Governmental agencies exist at the federal, state, and local levels. These entities are funded through the issuance of taxes and other fees.
• Not-for-profit entities: the primary purpose or mission is to serve a particular interest or need in the community. A not-for-profit entity tends to depend on donations and grants.

Explain Why Accounting Is Important to Business Stakeholders

Stakeholder refers to a person or group who relies on financial information to make decisions. Examples of stakeholders are:

• Stockholders
  •  owner of stock in a business.
  • Owners are called stockholders because in exchange for cash, they are given an ownership interest (stock) in the business. Owners are concerned with the success, and other factors, of the company they own. If the company’s value increases, then the stockholder’s stock (ownership) value increases.
• Creditors and lenders
  • Must assess the risk of not being repaid
  • Rarely do businesses pay for goods and services they purchase at the time the goods or services are delivered; rather the good or service provider extends credit to the purchasing business who will pay at a later date.
  • Companies also borrow money from banks when needed to finance certain aspects of their operations and typically pay this money back over time along with interest on those borrowed funds.
• Governmental and regulatory agencies
  • Publicly traded companies are required to file financial and other informational reports with the Securities and Exchange Commission (SEC), a federal regulatory agency that regulates corporations with shares listed and traded on security exchanges through required periodic filings.
  • The SEC is responsible for establishing guidelines for the accounting profession called accounting standards or generally accepted accounting principles (GAAP).
  • Although the SEC also had the responsibility of issuing standards for the auditing profession, they relinquished this responsibility to the Financial Accounting Standards Board (FASB).
• Customers
  • Those who purchase products and services from a business
  • Can be another business, often referred to as a B2B (business to business) transaction, such as Nabisco selling products to grocery stores
  • End-user customer, such as a shopper in a grocery store
• Managers and other employees
  • Employees have a strong interest in the financial performance of the organizations; employees want to know their jobs will be secure; an organization that is financially successful is able to reward employees for commitment to the organization through bonuses and increased pay.
  • Managers and others in the organization have the responsibility to make day-to-day and long-term (strategic) decisions for the organization. Understanding financial information is vital to making good organizational decisions. Not all decisions, however, are based on strictly financial information. 

Ways in Which an Organization Can Raise Funding (Capital)

1. Profitable operations
   • Generating income from the day-to-day activities of the business
2. Borrowing
   • Also known as debt funding
3. Issuing (selling) stock
   • Also known as equity funding

Most organizations raise or generate funding in some combination of these methods. A company that is unable to eventually earn profits from their business activities will not likely survive.

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

• 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.
• The primary goal of accounting is to provide accurate, timely information to decision makers.
• 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.
• 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 businesses can be further categorized into manufacturing, retail (or merchandising), and service.
• 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.
• 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).
• 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.
• Accountants have opportunities to work for many types of organizations, including public accounting firms, corporations, governmental entities, and not-for-profit entities.
• 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).