Accounting for Managers

Accounting for Managers Module 3: Accounting Theory

Accounting

Roles of Accounting in Business Accounting is referred to as language of business, but is more formally described as the information system that measures business activities, process information into reports, and communicates results to decision makers Balancing checkbook is essential accounting function but is only small piece of accounting Stakeholders want to know what business owns, how much debt it has, how much revenue it generated, how much it cost company to make amount of revenue, etc. Stakeholders want to make sure financial reports are accurate

Roles of Accounting in Business (cont.) Financial Accounting must be useful, understandable, accurate, and accessible, focuses on external users and investors, GAAP provided set of standard rules for industry to follow Managerial Accounting includes other sources: marketing, volume, demographic and production data, time and cost budgets, & cost/benefit analysis, focus on internal users such as production/sales managers, and employees Accountants turn data into information which is sorted, compiled and turned into useful report Financing is future focused, data is available to inside users only

Financial Accounting Standards Congress created SEC, AICPA, FASB, and GAAP all standards that financial accounts rely on to ensure financial statements are understandable and usable International financial reporting standards more than 116 other nations adopted this standard, which is based on broad principles as opposed to more specific (GAAP) SEC requires publicly traded companies to follow GAAP International Revenue Code Companies are often subject to variety of state and local taxes with differing rules and regulations

Ethics and Accounting Ethics is the code that provides criteria for evaluating right and wrong Accounting s ethical standards are articulated in published code of ethics which provide guidance Different companies have different codes, but are generally similar 1. Recognize and consider all relevant facts and circumstances 2. Consider ethical issues involved 3. Consider established internal procedures 4. Formulate alternative courses of action

Users of Accounting

Users of Accounting Information Most common external user is the investor (institutional or individual) SEC requires public traded companies to undergo annual financial audit (examination of entity s financial statements and disclosures) Lenders require financial statements for any entity, and suppliers may also require them Internal users are dipping into real time accounting data production managers want to know immediate product costs Budget office closes gap by creating budget reports and comparing those to actual results (audited or not)

Organizational Structure Built-in hierarchy that defines roles, responsibilities, and supervision centralized (gives most authority to team at the top) decentralized (distributes authority at lower levels) Functional: marketing, operations, finance, & accounting Culture: develops over time and encompasses everyday social interactions among employees Sales-driven business model allows sales managers to run unfettered by higher management Divisional organizational structure isn t bad Functional and divisional structures part of vast spectrum

Forms of Doing Business As business grows, it tends to gravitate toward a divisional structure Many small businesses are sole proprietorships, meaning one person is owner and responsible for the company can have employees, secure debt, buy assets, sell goods, etc. single drawback is that legal liability for debts and lawsuits lies with owner adding additional owner turns proprietorship into partnership

The Annual Report Management discussion and analysis: provides overview of previous year s operations and how company performed financially Audited financial statements: balance sheet: assets are what company owns, equity and liabilities show who owns it income statement: increases and decreases in net assets statement of retained earnings: reconciles net income from year to balance sheet statement of equity statement of cash flows: shows transactions that affected cash in operations, investing, and financing Footnotes and disclosures, auditor s reports

Accounting Principles

The Accounting Entity Basic underlying assumption of GAAP is that there are boundaries around business organization that defines single economic reporting entity second is that entity observed is a going concern Going concern principle: presumes economic entity will remain in operation for foreseeable future

Basic Accounting Principles Consistency: once you adopt an accounting method, continue to follow it consistently in future accounting periods so that results are comparable Full disclosure: in financial statements, all information that would affect a reader s understanding of principles is included Materiality: accounting standard can be ignored if net impact is so small that reader would not be misled Verifiability: given same data, independent accountant can come up with same result as company

Basic Accounting Principles (cont.) Cost principle: reporting assets at historical cost serves combined principles of consistency, objectivity, and conservatism Objectivity: financial statements of organization are based on solid evidence Monetary unit: you only record business transactions that can be expressed in terms of currency Conservatism: if there is doubt between two options, accountant should choose one that reports lesser assets

Accrual Basis Accounting Recognizing revenue as it is earned, as opposed to as it is received Accrual basis : idea of reporting revenue when it becomes a legally enforceable claim Time period concept: causes some differences between internal and external reports Fiscal year: allows company to process transactions

Accrual Basis Accounting (cont.) Recognized revenue: Realized revenue: when there is every good reason to believe revenue will be received Matching concept: requires that revenues and related expenses are recognized together in same period goal is to match expenses against the revenues requires that revenues and related expenses be recognized together in same period Accrual basis accounting requires matching expenses to revenues whenever possible

Quick Review Accountants take massive amounts of data and turn it into useful financial information Stakeholders want to make sure financial reports are accurate Accounting s ethical standards are articulated in published code of ethics which provide guidance Lenders require financial statements for any entity, and suppliers may also require them Basic Accounting Principles: Consistency, Full Disclosure, Materiality, Verifiability, Cost Principle, Objectivity, Monetary Unit, Conservatism Accrual Basis Accounting