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Accounting—along with such fields as architecture, engineering, law, medicine, and theology—is recognized as a profession. What distinguishes a profession from other disciplines? There is no single recognized definition of a profession, but all of these fields have several characteristics in common. First, all professions involve a complex and evolving body of knowledge. In accounting, the complexity and the ever-changing nature of the business world, financial reporting requirements, management’s demands for increasingly complex information, and income tax laws certainly meet this criterion. Second, in all professions, practitioners must use their professional judgment to resolve problems and dilemmas. Throughout this text, we will point out situations requiring accountants to exercise professional judgment. Of greatest importance, however, is the unique responsibility of professionals to serve the public’s best interest, even at the sacrifice of personal advantage. This responsibility stems from the fact that the public has little technical knowledge in the professions, yet fair and competent performance by professionals is vital to the public’s health, safety, or well-being. The practice of medicine, for example, directly affects public health, while engineering affects public safety. Accounting affects the public’s well-being in many ways, because accounting information is used in the allocation of economic resources throughout society. Thus accountants have a basic social contract to avoid being associated with misleading information. Accountants tend to specialize in specific fields, as do the members of other professions. Career opportunities in accounting may be divided into four broad areas: (1) public accounting, (2) management accounting, (3) governmental accounting, and (4) accounting education. PUBLIC ACCOUNTINGCertified public accountants offer a variety of accounting services to the public. These individuals may work in a CPA firm or as sole practitioners. The work of public accountants consists primarily of auditing financial statements, income tax work, and management advisory services (management consulting). Management advisory services extend well beyond tax planning and accounting matters; CPAs advise management on such diverse issues as international mergers, manufacturing processes, and the introduction of new products. CPAs assist management because financial considerations enter into almost every business decision. A great many CPAs move from public accounting into managerial positions with organizations. These “alumni” from public accounting often move directly into such top management positions as controller, treasurer, chief financial officer, or chief executive officer. The CPA Examination To become a CPA, a person must meet several criteria, including an extensive university education requirement, passing the CPA examination, and meeting a practice experience requirement. CPA certificates are granted by 55 legal jurisdictions (50 U.S. states, Guam, Puerto Rico, the Virgin Islands, Washington, D.C., and the Mariana Islands). The CPA examination is a rigorous, two-day examination that covers a variety of accounting and business subjects that allow candidates to demonstrate their knowledge and skills in areas believed important for protecting the public. Prior to 2004, the CPA examination was given in traditional paper-and-pencil form. Beginning in the spring of 2004, the examination was converted to a computer-based examination, and the content was updated to expand the breadth of coverage in both accounting and other business subjects. Candidates are no longer required to congregate in a single location twice a year, as was previously the case, but can now schedule the four-part examination at their convenience at one of the many testing centers at which the CPA exam is available. In addition to testing via computer a broader set of knowledge and skills, candidates are expected to be able to integrate their knowledge in different areas much like what is required of them in the business world. The computerization and expansion of the content of the CPA examination are important elements in protecting the public by licensing to practice only those individuals who have demonstrated a high level of knowledge and skill. MANAGEMENT ACCOUNTINGIn contrast to the public accountant who serves many clients, the management accountant works for one enterprise. Management accountants develop and interpret accounting information designed specifically to meet the various needs of management. The chief accounting officer of an organization usually is called the chief accounting officer (CAO) or controller. The term controller has been used to emphasize the fact that one basic purpose of accounting data is to aid in controlling business operations. The CAO or controller is part of the top management team, which is responsible for running the business, setting its objectives, and seeing that these objectives are met. In addition to developing information to assist managers, management accountants are responsible for operating the company’s accounting system, including the recording of transactions and the preparation of financial statements, tax returns, and other accounting reports. Because the responsibilities of management accountants are so broad, many areas of specialization have developed. Among the more important are the following. Financial Forecasting A financial forecastA plan of financial operations for some future period. (or budget) is a plan of financial operations for some future period. Actually, forecasting is much like financial reporting, except that the accountant is estimating future outcomes, rather than reporting past results. A forecast provides each department of a business with financial goals. Comparison of the results actually achieved with these forecast amounts is one widely used means of evaluating performance. Cost Accounting Knowing the cost of each business operation and of each manufactured product is essential to the efficient management of a business. Determining the per-unit cost of business activities and of manufactured products, and interpreting these cost data, comprise a specialized field called cost accountingDetermining the cost of certain business activities and interpreting cost information.. Internal Auditing Large organizations usually maintain a staff of internal auditors. Internal auditingThe study of internal control structure and evaluation of the efficiency and effectiveness of many different aspects of the enterprise’s operations. is the study of the internal control structure and evaluation of the efficiency and effectiveness of many different aspects of the company’s operations. As employees, internal auditors are not independent of the organization. Therefore, they do not perform independent audits of the company’s financial statements. Careers in management accounting often lead to positions in top management—just as do careers in public accounting. GOVERNMENTAL ACCOUNTINGGovernmental agencies use accounting information in allocating their resources and in controlling their operations. Therefore, the need for management accountants in governmental agencies is similar to that in business organizations. The GAO: Who Audits the Government? The Government Accountability OfficeA federal government agency that audits many other agencies of the federal government and other organizations that do business with the federal government and reports its findings to Congress. (GAO) audits many agencies of the federal government, as well as some private organizations doing business with the government. The GAO reports its findings directly to Congress, which, in turn, often discloses these findings to the public. GAO investigations may be designed either to evaluate the efficiency of an entity’s operations or to determine the fairness of accounting information reported to the government. The IRS: Audits of Income Tax Returns Another governmental agency that performs extensive auditing work is the Internal Revenue ServiceA government organization that handles millions of income tax returns filed by individuals and businesses and performs audit functions to verify the data contained in those returns. (IRS). The IRS handles the millions of income tax returns filed annually by individuals and business organizations and frequently performs auditing functions to verify data contained in these returns. The SEC: The “Watchdog” of Financial Reporting The SEC works closely with the FASB in establishing generally accepted accounting principles. Most publicly owned corporations must file audited financial statements with the SEC each year. If the SEC believes that a company’s financial statements are deficient in any way, it conducts an investigation. If the SEC concludes that federal securities laws have been violated, it initiates legal action against the reporting entity and responsible individuals. Many other governmental agencies, including the FBI, the Treasury Department, and the FDIC (Federal Deposit Insurance Corporation), use accountants to audit compliance with governmental regulations and to investigate suspected criminal activity. People beginning their careers in governmental accounting often move into top administrative positions. ACCOUNTING EDUCATIONSome accountants, including your instructor and the authors of this textbook, have chosen to pursue careers in accounting education. A position as an accounting faculty member offers opportunities for teaching, research, consulting, and an unusual degree of freedom in developing individual skills. Accounting educators contribute to the accounting profession in many ways. One, of course, lies in effective teaching; second, in publishing significant research findings; and third, in influencing top students to pursue careers in accounting. WHAT ABOUT BOOKKEEPING?Some people think that the work of professional accountants consists primarily of bookkeeping. Actually, it doesn’t. In fact, many professional accountants do little or no bookkeeping. BookkeepingThe clerical dimension of accounting that includes recording the routine transactions and day-to-day record keeping of an enterprise. is the clerical side of accounting—the recording of routine transactions and day-to-day record keeping. Today such tasks are performed primarily by computers and skilled clerical personnel, not by accountants. Professional accountants are involved more with the interpretation and use of accounting information than with its actual preparation. Their work includes evaluating the efficiency of operations, resolving complex financial reporting issues, forecasting the results of future operations, auditing, tax planning, and designing efficient accounting systems. There is very little that is “routine” about the work of a professional accountant. A person might become a proficient bookkeeper in a few weeks or months. To become a professional accountant, however, is a far greater challenge because this requires more than understanding the bookkeeping systems. It requires years of study, experience, and an ongoing commitment to keeping current. We will illustrate and explain a number of bookkeeping procedures in this text, particularly in the next several chapters. But teaching bookkeeping skills is not our goal; the primary purpose of this text is to develop your abilities to understand and use accounting information in today’s business world. ACCOUNTING AS A STEPPING-STONEWe have mentioned that many professional accountants leave their accounting careers for key positions in management or administration. An accounting background is invaluable in such positions, because top management works continuously with issues defined and described in accounting terms and concepts. An especially useful stepping-stone is experience in public accounting. Public accountants have the unusual opportunity of getting an inside look at many different business organizations, which makes them particularly well suited for top management positions in other organizations. BUT WHAT ABOUT ME? I’M NOT AN ACCOUNTING MAJORMost students who use this book are not accounting majors. However, the study of accounting is still important to you. You need to understand accounting concepts, both for your professional careers and for many aspects of your personal life. Finance students need to understand accounting concepts if they seek positions in investment banking, consulting, or in corporate America as a financial analyst. Approximately 50 percent of the chief financial officers of large U.S. corporations have a background in accounting. A management student seeking a career as a management trainee—with the ultimate goal of running a corporation or a corporate division—needs to understand accounting in order to be able to run, control, and evaluate the performance of a business unit. Accounting is the language of business, and trying to run a business without understanding accounting information is analogous to trying to play sports without understanding the rules. Marketing students often take positions in sales. It is imperative that marketing students understand the principles of revenue recognition, as well as the obligations of a public company under the U.S. securities laws. A lack of this understanding has led many a marketing/sales executive to become involved in improper revenue recognition schemes. Many of these executives have been subject to civil and criminal prosecution.
Finally, accounting knowledge is helpful in many aspects of your personal lives. Accounting concepts are integral to such everyday decisions as personal budgeting, retirement and college planning, lease versus buy decisions, evaluation of loan terms, and evaluation of investment opportunities. Since accounting skills are designed to help you make better economic decisions, you will be using these skills for the rest of your life. The only question is the degree of skill with which you will apply these concepts. Exercise 1.15 | |||||||||
