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OSX_FinancialAccounting_Ch01_PPT.pptxChapter 1 ROLE OF ACCOUNTING IN SOCIETY
Principles of Accounting, Volume 1: Financial Accounting
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Chapter Outline
1.1 Explain the Importance of Accounting and Distinguish between Financial and Managerial Accounting
1.2 Identify Users of Accounting Information and How They Apply Information
1.3 Describe Typical Accounting Activities and the Role Accountants Play in Identifying, Recording, and Reporting Financial Activities
1.4 Explain Why Accounting Is Important to Business Stakeholders
1.5 Describe the Varied Career Paths Open to Individuals with an Accounting Education
Module 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 the language of business.”
“Accounting is the language of life.”
Understanding financial and managerial accounting is valuable and necessary for practically any career you will pursue.
Teacher Notes: While accounting is traditionally thought of from a business context, accounting is used in all facets of an individual’s life. Notice that the definition does not say “business decision-making.” Rather, it simply says “decision-making.” While this course is obviously focused on accounting as the language of business, many of the concepts learned will be applicable directly or abstractly to one’s personal financial decision-making.
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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.
The purpose is to communicate information for decision-making by both internal and external users.
External users: owners (stockholders), lenders, and governmental entities such as the Securities and Exchange Commission (SEC) and the Internal Revenue Service (IRS)
Managerial accounting uses both financial and nonfinancial information as a basis for making decisions within an organization.
The purpose is to equip decision makers with information to assist in setting and evaluating business goals by determining what information is needed and how to analyze and communicate this information.
Information tends to be used internally, for purposes such as budgeting, pricing, and determining production costs.
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Module 1.2 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.
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Financial information is primarily communicated through financial statements.
Income Statement, Statement of Owner’s Equity, Balance Sheet, and Statement of Cash Flows and Disclosures
Financial accounting information is mostly historical in nature, although companies and other entities also incorporate estimates into their accounting processes.
Financial information is prepared using a comprehensive, prescribed set of conventions, called generally accepted accounting principles (GAAP). They are set by the Financial Accounting Standards Board (FASB).
Part of an accountant’s responsibility is to quantify activities and events, which are then summarized and reported. Virtually every activity and event that occurs in a business has an associated cost or value and is known as a transaction.
Common computerized accounting systems include QuickBooks, which is designed for small organizations, and SAP, which is designed for large and/or multinational organizations.
Characteristics of Financial Accounting Information
Teacher Notes: Financial statements will serve as a “report card” for a business. Regarding “transactions,” use an example of a multi-national company, such as GE, that has operations in nearly 100 countries and has over 70 subsidiaries. This means they likely have millions of transactions each day (explain that buying a box of pens is a transaction, and so is selling the company’s product), and that through accounting, these millions of transactions that occur each day will be summarized and reported in a manner that allows users to feel confident in using that information—this is the miracle of accounting.
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Managerial accounting is not prepared using a comprehensive, prescribed set of conventions like those required by financial accounting—there is no rule or standard-setting body.
Managerial accountants provide managerial accounting information that is intended to serve the needs of internal users.
Managerial accounting information is rarely shared with those outside of the organization. The information often includes strategic or competitive decisions; managerial accounting information is often closely protected.
Management accounting information as a term encompasses many activities within an organization. Accountants must be adaptable and flexible in their ability to generate the necessary information for management decision-making and have both broad and detailed knowledge.
Management accounting information uses both financial and nonfinancial information. This is important because there are situations in which a purely financial analysis might lead to one decision, while considering nonfinancial information might lead to a different decision.
Characteristics of Managerial Accounting Information
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Figure 1.3
Comparing Reports between Financial and Managerial Accounting. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)
Teacher Notes: Financial and managerial accounting differ in who, what, why, and when they report information. This chart provides the similarities and differences in reporting.
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Module 1.3 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.
Teacher Notes: We can classify organizations into three categories: for profit, governmental, and not for profit. All of these entities use both financial and managerial accounting. What are examples of each type of for-profit business? What are examples of governments or government agencies?
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Figure 1.5
Manufacturing, Retail, and Service. An auto manufacturing plant, a car sales lot, and a taxi represent three types of businesses: manufacturing, retail, and service. (credit left: modification of “Maquiladora” by “Guldhammer”/Wikimedia Commons, CC0; credit center: modification of “Mercedes Benz Parked” by unknown/Pixabay, CC0; credit right: modification of “Taxi Overtaking Bus” by “Kai Pilger”/Pixabay, CC0)
Automobiles can be a component of manufacturing, retail, or service organizations.
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Your Turn: Categorizing Restaurants
So far, you’ve learned about three types of for-profit businesses: manufacturing, retail, and service. Previously, you saw how some firms such as Dell serve as both manufacturer and retailer.
Now, think of the last restaurant where you ate. Of the three business types (manufacturer, retailer, or service provider), how would you categorize the restaurant? Is it a manufacturer? A retailer? A service provider? Can you think of examples of how a restaurant has characteristics of all three types of businesses?
Module 1.4 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.
Teacher Notes: Some companies are “publicly traded,” meaning their stock can be bought and sold on stock exchanges such as the New York Stock Exchange or the Tokyo Exchange. There is something called an initial public offering, which is when a company, such as Lyft, offers stock directly to the public—in other words, interested buyers. Secondary trading is when the current owners of a stock sell that stock to another interested party. For example, if you purchased Lyft stock during the IPO but later decided to sell the stock, you could sell it to anyone who wanted to buy the stock. Other companies are “privately held,” and ownership in those companies is typically limited and can only be purchased directly from the current owners of the private company.
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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.
More Examples of Stakeholders
Profitable operations
Generating income from the day-to-day activities of the business
Borrowing
Also known as debt funding
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. Why?
Ways in Which an Organization Can Raise Funding (Capital)
Teacher Notes: When if first began operations, Amazon did not have positive income for over 9 years. They were supported primarily by venture capital funding, whereas many small businesses can only remain in operations for a few months without generating positive income. A primary reason small businesses fail is lack of capital in the early stages of the business.
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Your Turn: Daily Decisions
Many academic studies have been conducted on the topic of consumer behavior and decision-making. It is a fascinating topic of study that attempts to learn what type of advertising works best, the best place to locate a business, and many other business-related activities.
One such study, conducted by researchers at Cornell University, concluded that people make more than 200 food-related decisions per day (Wansink, B., & Sobal, J. [2007]. Mindless Eating: The 200 Daily Food Decisions We Overlook. Environment & Behavior, 39[1], 106–123.).
This is astonishing considering the number of decisions found in this particular study related only to decisions involving food. Imagine how many day-to-day decisions involve other issues that are important to us, such as what to wear and how to get from point A to point B. For this exercise, provide and discuss some of the food-related decisions that you recently made.
Teacher Notes: Once this discussion has been carried out, ask students to each list ten decisions that a business (you may want to pick a particular business such as Home Depot or CVS) makes each day. This should generate some overlap, but a reasonable number of differences. Emphasize that this list, put together from the entire class, is not exhaustive, and is only a fraction of the daily decisions made by the organization. Many of the students will focus merely on the local store, which is what they are familiar with, but help them to see that a local store is just one piece of the whole organization and, thus, there are many more decisions than they may have previously thought. Add that many, if not all, of these decisions involve accounting in that the decision will be made based on the effect on “the numbers” and/or the impact on meeting strategic goals—which would be measured and evaluated more so from a managerial accounting standpoint.
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Module 1.5 Describe the Varied Career Paths Open to Individuals with an Accounting Education
Characteristics of accounting professionals:
Personal attributes
Goal oriented
Problem solver
Organized and analytical
Good interpersonal skills
Pays attention to detail
Good time-management skills
Outgoing
Education
Entry-level positions: usually require a minimum of a bachelor’s degree
Advanced positions: may consider factors such as years of experience, professional development, certifications, and advanced degrees, such as a master’s or doctorate
Related careers
An accounting degree is a valuable tool for other professions such as financial analysts, personal financial planners, and business executives.
Figure 1.8
Career Paths. There are many career paths open to students of accounting. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)
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Auditing
Taxation
Financial accounting
Consulting
Accounting information services
Cost and managerial accounting
Financial planning
Entrepreneurship
Major Categories of Accounting Functions
Teacher Notes: With little or no accounting knowledge at this point, it is challenging to explain these various positions and how accounting plays a part in these positions. A brief description of each is likely sufficient. Consider mentioning how individuals in these positions would use accounting information as you proceed through the various chapters, or review these positions at the end of the semester, as this may be more meaningful to students.
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Figure 1.10
Accountant Employer Types. Accountants may find employment within a variety of types of entities. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)
Teacher Notes: Every type of business organization uses accountants.
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Certified Public Accountant (CPA)
Certified Management Accountant (CMA)
Certified Internal Auditor (CIA)
Certified Fraud Examiner (CFE)
Chartered Financial Analyst (CFA)
Certified Financial Planner (CFP)
Potential Certifications for Accountants
Teacher Notes: In the chapter, there is more detail about each of these certifications, such as whether or not a test is involved, how long it takes to receive this type of certification, if work experience is required, etc. In the Appendix, there are links to CPA exam sites (NASAB), as well as additional information and links regarding the CPA exam.
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Summary
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.
Summary (continued)
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).
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