Chapter 1

Chapter 1 ACCOUNTING Financial Accounting 13e

Part I: Itroduction to accounting

This first chapter is a large itroduction to what we are going to deal with in future chapters. In order to save your time and to assure to you a maximum understanding of what this chapter is about, I decided to organize it as a collection of points and ideas that I will try to link them in order to have at the end a complete and clear vision of the chapter.

1. Accounting information a means to an END: you have to konw that the main objective of accounting as a job or profession is to provide reliable information to decision makers in order to asses them in their daily managment's decisions.

2. People who practice acounting are called accountants. Look for the difference between an accountant and a CPA.

3. To understand and use accounting information you have to understand:

   • The nature of economic activities that are described by the accountant.

   • The measurement and assumption techniques involved in developing accounting information

   • The information that is most relevant to decision makers.

4. The accounting cycle:    please have a look at the text book page  5

Explanation: the accounting process produce accounting information that is used in the process of making decisions. Once the decisions are made on papers ( signing contracts...) they have to be followed by activities in the market which ear called economic activities. These economic activities will be analized recorded and studied by the accounting process to produce accounting information and the vicious cycle continue like that with no stop.

1. There are three types of accounting information:

   • Financial accounting information

   • Managerial accounting information

   • Tax accounting

1. The accounting system is composed of:

   • Personnel

   • Procedures

   • Records

   • Technology

     The main objective of the accounting process is to develop and communicate reliable accounting information to decision makers.

1. The information produced by the accounting system should be cost effective. Its value should exceed the cost of producing it.

1. Basic functions of an accounting system:

   • interpret and record the effect of economic transaction

   • classify the effect of similar transaction in a manner that will permit to the users of the information to see Totals and subtotals.

   • Summarize and communicate the information.

2. Internal control is a process designed to provide reasonable assurance that the company:

   • produces reliable financial reports

   • complies with applicable laws and regulations

   • conducts its operation in an efficient and effective manner. Look for the diference between being effective and efficient.

3. The components of internal control are:

   • control environment: is the foundation for all the other elemnts of internal control, setting the overall tone of the organisation

   • risk assessment: involves identifying, analyzing and managing those risks that pose a problem to the achievment of the organisation's objectives.

   • control activities: are the policies and procedures that management puts in place to adress the risks identified in the risk assessment.

   • information and comunication: developing the accounting system.

   • Monitoring enables the company to evaluate the effectiveness of its managerial policies.

Part II: Financial Vs Managerial Accounting information

Now that we talked a litle bit accounting in general and how it play a great rôle in assessing decision makers in their daily work, we will move to the second part of our chapter

In this second part we will be comparing two types of accounting information. Financial accouting information and Managerial accounting information.

Part III: Integrity of accounting information

Integrity refers to the following qualities:

• complete

• unbroken

• unimpaired

• sound

• honest

• sincere

The integrity of accounting information is enhanced via three ways:

1- Institutional features  

• standars for the preoparation of accounting information

• integral control structures

• audits of financial statements

2- Professional accounting organisations

3- The personnel competence judgment and ethical behavior " blablablabla

Institutional Features

• because accounting information has to be understood by a wide variety of people, they have to be made up following some standars. All around the world their are a large number of standars but in this course we will be talking only about two of them.

  • GAAP: generally accepted accounting principle is a set of principles and standards that direct the preparation of accounting reports in USA and some other countries.

    The GAAP is made up by the FASB « financial accounting standards board »

  • IFRS is like the GAAP but it is dedicated to an international use in countries stock exchange. The IFRS is made up by the IASB.

• SEC: security and exchange comission is a governmental agency with the legal power to estabilish accounting principle and financial reporting requierment for publicly owned corporations. The SEC give the legal power to the FASB in order to assure a wide spread acceptance of its new accounting standars.

• PCAOB: public company accounting oversight board is a quasi governmental body charged with the oversight of the public accounting profession

• Audits of financial statements: an audit is an investigation of the company's financial statemnts designed to determine the fairness of these statements. Audits gives a large inssurance to outside users of financial information that these information is reliable

Professional Accounting organizations

professional organization play an important rôle in improving the quality of accounting information.

This is all for this first chapter.

I forgot to talke about ROI AND ROF please have a look at the book pages 10 and 11. it is very well explained and i hope easy to understand.