Chapter Opener

Chapter Opener

Chapter Opener
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Learning Objectives

AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO:

	Discuss accounting as the language of business and the role of accounting information in making economic decisions.
	Discuss the significance of accounting systems in generating reliable accounting information and understand the five components of internal control per COSO’s Internal Control–Integrated Framework.
	Explain the importance of financial accounting information for external parties—primarily investors and creditors—in terms of the objectives and the characteristics of that information.
	Explain the importance of accounting information for internal parties—primarily management—in terms of the objectives and the characteristics of that information.
	Discuss elements of the system of external and internal financial reporting that create integrity in the reported information.
	Identify and discuss several professional organizations that play important roles in preparing and communicating accounting information.
	Discuss the importance of personal competence, professional judgment, and ethical behavior on the part of accounting professionals.
	Describe various career opportunities in accounting.

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WORLDCOM, INC., AND MCI

WorldCom began in 1983 as a small company called Long Distance Discount Services, Inc., in Jackson, Mississippi. Within 15 years it became one of the largest telecommunications companies in the world. In 2002, WorldCom filed the largest bankruptcy in U.S. history. WorldCom renamed itself MCI and is in the process of being acquired by Verizon Communications, Inc. With more than 20 million business and residential customers, MCI has a workforce that includes 55,000 employees deployed around the world. MCI service spans six continents and over 200 countries.

How does a company as global and large as WorldCom (MCI) come under the careful scrutiny of federal bankruptcy regulators and the Securities and Exchange Commission (SEC)?

Acting on a hunch and a few tips, Cynthia Cooper and two other WorldCom internal auditors investigated the accounting practices at WorldCom. What they found—that the company had artificially boosted profits—eventually led to charges by U.S. regulators that WorldCom committed fraud. Its management admitted it hid almost $4 billion of costs. The 2000 and 2001 WorldCom financial accounting statements had to be restated for adjustments to revenue, expenses, and earnings as well as write-downs of assets and adjustments to liabilities resulting in a cumulative net reduction of $74.4 billion to previously reported income numbers. The scandal pushed the now defunct WorldCom stock to an all-time low of just a few cents after being over $60 per share at one point.

SOURCE: “Special Report—The Best and Worst Managers,” BusinessWeek, January 13, 2003. Reprinted by permission © 2003 by The McGraw-Hill Companies, Inc., and www.mci.com.

Understanding and using accounting information is an important ingredient of any business undertaking. Terms such as sales revenue, net income, cost, expense, operating margin, and cash flow have clearly defined meanings and are commonly used in business-related communications. Although the precise meaning of these terms may be unfamiliar to you at this point, to become an active participant in the business world, you must gain a basic understanding of these and other accounting concepts. Our objective in this book is to provide those who both use and prepare accounting information with that basic understanding.

Information that is provided to external parties who have an interest in a company is sometimes referred to as financial accounting information. Information used internally by management and others is commonly referred to as managerial accounting information. Whereas these two types of information have different purposes and serve different audiences, they have certain attributes in common. This text focuses on and introduces you to financial accounting concepts that are critical in order to understand the financial condition of a business enterprise. The situation described in the chapter opener involving WorldCom, Inc., is an example of the importance of providing reliable financial accounting information to investors and creditors. Determining a company’s net income by subtracting its expenses from its revenue is a particularly important part of financial reporting today. This may appear to be a simple process of keeping accounting records and preparing reports from those records, but a great deal of judgment is required. For example, when should the cost of acquiring a resource that is used for several years be recognized as an expense in the company’s financial statements? How should information be packaged and presented for maximum understanding by those with a financial interest in the company? What information is particularly useful for management, but not appropriate for public distribution because of the potential competitive disadvantage that might result? These are among the many complex issues that business faces on a day-to-day basis and which have a critical impact on the company’s responsibility to its owners, creditors, the government, and society in general.

As we begin the study of financial accounting, keep in mind that business does not exist solely to earn a return for its investors and creditors that supply a company’s financial resources. As shown by the chapter opener, business also has a responsibility to operate in a socially responsible manner and to balance its desire for financial success within this broader social responsibility. We begin our development of these ideas in this chapter, and continue their emphasis throughout this text.

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Home > Chapter 1 > Chapter Opener

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	eBook
		Chapter Opener Accounting Information... Accounting Systems Financial Accounting I... Management Accounting ... Integrity of Accountin... Careers in Accounting Concluding Remarks Summary of Learning Ob... Key Terms Introduced o... Assignment Material Exercises Self-Test Questions Critical Thinking Cases Brief Exercises Answers to Self-Test Q... Demonstration Problem

	More Resources
		PowerPoint Presentations
	eBook
		Chapter Opener Accounting Information... Accounting Systems Financial Accounting I... Management Accounting ... Integrity of Accountin... Careers in Accounting Concluding Remarks Summary of Learning Ob... Key Terms Introduced o... Assignment Material Exercises Self-Test Questions Critical Thinking Cases Brief Exercises Answers to Self-Test Q... Demonstration Problem