3-9
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Chapter 9:
Chapter
Understanding Financial Information and Accounting
The Accounting System
2
The Influence of Accounting Information • Managers– Financial reports pinpoint problems/opportunities
• Investors, Suppliers, & Creditors– Provides a means to analyze business
• Government– Assists with tax collection
3
Top Business Uses of Accountants Valuation, Merger, Acquistion Personal Financial Planning Market Strategy & Planning Cash Mgmt. & Forecasting Tax/Auditing 0%
20%
40%
60%
80%
100%
120% 4
Types of Accountants • Public – Auditing – Tax Consulting & Compliance – Management Consulting
• Private – Management Accounting – Government Accounting – Academia
5
“Cooking the Books” • Early Recognition of Revenue • Late Recognition of Expense • Inadequate Reserves for Bad Debts, Returns, & Liabilities • Changing Inventory Valuation Methods - 1 Time Boost to Income • Phony Transactions With Partnerships Courtesy of B. Lilly- De Anza College
6
Steps to Control Accounting Practices 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Review Change Create/Expand Hire Independent Restructure Current Internal Audits Firm for Executive Procedures Consulting Compensation Plans Source: USA Today, “Snapshots”, Section B, pg. 1, March 26, 2003
7
Steps In The Accounting Cycle
Analyze Source Documents
Record Transactions in Journals
Post Journal Entries to Ledger
Take a Trial Balance
Prepare Financial Statements
Analyze Financial Statements 8
Financial Statements • Balance Sheet– Statement of Financial Position
• Income Statement– Statement of Revenues & Expenses
• Statement of Cash Flows – – Statement of Cash Receipts & Disbursements
9
Accounting Equation Assets = Liabilities + Owner’s Equity
Owned = Owed + Owner’s Claims
10
Sarbanes-Oxley Timeline Effective
Requirements
July 30, 2002
Prohibit personal loans to officers/directors. CEOs/CFOs return incentive-based compensation after erroneous financial report.
August 29, 2002
CEOs/CFOs must certify annual/quarterly reports. Officers must make certifications regarding company’s internal controls.
January 26, 2003
Responsibilities for attorneys/audit firms increased. Disclosure requirements for off-balance sheets transactions tightened.
April 26, 2003
Audit committees must: be independent directors, be responsible for compensation & oversight of certifying accountants. 11
Chapter
Understanding Financial Information and Accounting
The Accounting System
2
The Influence of Accounting Information • Managers– Financial reports pinpoint problems/opportunities
• Investors, Suppliers, & Creditors– Provides a means to analyze business
• Government– Assists with tax collection
3
Top Business Uses of Accountants Valuation, Merger, Acquistion Personal Financial Planning Market Strategy & Planning Cash Mgmt. & Forecasting Tax/Auditing 0%
20%
40%
60%
80%
100%
120% 4
Types of Accountants • Public – Auditing – Tax Consulting & Compliance – Management Consulting
• Private – Management Accounting – Government Accounting – Academia
5
“Cooking the Books” • Early Recognition of Revenue • Late Recognition of Expense • Inadequate Reserves for Bad Debts, Returns, & Liabilities • Changing Inventory Valuation Methods - 1 Time Boost to Income • Phony Transactions With Partnerships Courtesy of B. Lilly- De Anza College
6
Steps to Control Accounting Practices 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Review Change Create/Expand Hire Independent Restructure Current Internal Audits Firm for Executive Procedures Consulting Compensation Plans Source: USA Today, “Snapshots”, Section B, pg. 1, March 26, 2003
7
Steps In The Accounting Cycle
Analyze Source Documents
Record Transactions in Journals
Post Journal Entries to Ledger
Take a Trial Balance
Prepare Financial Statements
Analyze Financial Statements 8
Financial Statements • Balance Sheet– Statement of Financial Position
• Income Statement– Statement of Revenues & Expenses
• Statement of Cash Flows – – Statement of Cash Receipts & Disbursements
9
Accounting Equation Assets = Liabilities + Owner’s Equity
Owned = Owed + Owner’s Claims
10
Sarbanes-Oxley Timeline Effective
Requirements
July 30, 2002
Prohibit personal loans to officers/directors. CEOs/CFOs return incentive-based compensation after erroneous financial report.
August 29, 2002
CEOs/CFOs must certify annual/quarterly reports. Officers must make certifications regarding company’s internal controls.
January 26, 2003
Responsibilities for attorneys/audit firms increased. Disclosure requirements for off-balance sheets transactions tightened.
April 26, 2003
Audit committees must: be independent directors, be responsible for compensation & oversight of certifying accountants. 11
