C1 Explain the purpose and importance of accounting in the information age.
We live in an information agea time of communication and immediate access to data, news, facts, and commentary. Information affects how we live, whom we associate with, and the opportunities we have. To fully benefit from the available information, we need knowledge of the information system. An information system consists of the collecting, processing, and reporting of information to decision makers.
Providing information about what businesses own, what they owe, and how they perform is an important aim of accounting. AccountingInformation and measurement system that identifies, records, and communicates relevant information about a company's business activities. is an information and measurement system that identifies, records, and communicates relevant, reliable, and comparable information about an organizations business activities. Identifying business activities requires selecting transactions and events relevant to an organization. Examples are the sale of iPods by Apple and the receipt of ticket money by TicketMaster. Recording business activities requires keeping a chronological log of transactions and events measured in dollars and classified and summarized in a useful format. Communicating business activities requires preparing accounting reports such as financial statements. It also requires analyzing and interpreting such reports. (The financial statements and notes of Best Buy are shown in Appendix A of this book. This appendix also shows the financial statements of Circuit City and Apple Computer.) Exhibit 1.1 summarizes accounting activities.
Real company names are printed in bold magenta.
|Exhibit 1.1|| Accounting Activities|
We must guard against a narrow view of accounting. The most common contact with accounting is through credit approvals, checking accounts, tax forms, and payroll. These experiences are limited and tend to focus on the recordkeeping parts of accounting. Recordkeeping,Part of accounting that involves recording transactions and events, either manually or electronically; also called bookkeeping. or BookkeepingPart of accounting that involves recording transactions and events, either manually or electronically; also called bookkeeping., is the recording of transactions and events, either manually or electronically. This is just one part of accounting. Accounting also identifies and communicates information on transactions and events, and it includes the crucial processes of analysis and interpretation.
Margin notes further enhance the textual material.
Point: Technology is only as useful as the accounting data available, and users decisions are only as good as their understanding of accounting. The best software and recordkeeping cannot make up for lack of accounting knowledge.
Technology is a key part of modern business and plays a major role in accounting. Technology reduces the time, effort, and cost of recordkeeping while improving clerical accuracy. Some small organizations continue to perform various accounting tasks manually, but even they are impacted by information technology. As technology has changed the way we store, process, and summarize masses of data, accounting has been freed to expand. Consulting, planning, and other financial services are now closely linked to accounting. These services require sorting through data, interpreting their meaning, identifying key factors, and analyzing their implications.
Users of Accounting Information
Accounting is often called the language of business because all organizations set up an accounting information system to communicate data to help people make better decisions. Exhibit 1.2 shows that the accounting information system serves many kinds of users who can be divided into two groups: external users and internal users.
|Exhibit 1.2||Users of Accounting Information|
Infographics reinforce key concepts through visual learning.
C2 Identify users and uses of accounting.
External Information Users External usersPersons using accounting information who are not directly involved in running the organization. of accounting information are not directly involved in running the organization. They include shareholders (investors), lenders, directors, customers, suppliers, regulators, lawyers, brokers, and the press. External users have limited access to an organizations information. Yet their business decisions depend on information that is reliable, relevant, and comparable.
Financial accountingArea of accounting mainly aimed at serving external users. is the area of accounting aimed at serving external users by providing them with financial statements. These statements are known as general-purpose financial statements. The term general-purpose refers to the broad range of purposes for which external users rely on these statements.
Each external user has special information needs depending on the types of decisions to be made. Lenders (creditors) loan money or other resources to an organization. Banks, savings and loans, co-ops, and mortgage and finance companies often are lenders. Lenders look for information to help them assess whether an organization is likely to repay its loans with interest. Shareholders (investors) are the owners of a corporation. They use accounting reports in deciding whether to buy, hold, or sell stock. Shareholders typically elect a board of directors to oversee their interests in an organization. Since directors are responsible to shareholders, their information needs are similar. External (independent) auditors examine financial statements to verify that they are prepared according to generally accepted accounting principles. Employees and labor unions use financial statements to judge the fairness of wages, assess job prospects, and bargain for better wages. Regulators often have legal authority over certain activities of organizations. For example, the Internal Revenue Service (IRS) and other tax authorities require organizations to file accounting reports in computing taxes. Other regulators include utility boards that use accounting information to set utility rates and securities regulators that require reports for companies that sell their stock to the public.
Point: Google has more than 400 mil. shares of stock outstanding.
Accounting serves the needs of many other external users. Voters, legislators, and government officials use accounting information to monitor and evaluate government receipts and expenses. Contributors to nonprofit organizations use accounting information to evaluate the use and impact of their donations. Suppliers use accounting information to judge the soundness of a customer before making sales on credit, and customers use financial reports to assess the staying power of potential suppliers.
Point: Microsofts high income levels encouraged antitrust actions against it.
Internal Information Users Internal usersPersons using accounting information who are directly involved in managing the organization. of accounting information are those directly involved in managing and operating an organization. They use the information to help improve the efficiency and effectiveness of an organization. Managerial accountingArea of accounting mainly aimed at serving the decision-making needs of internal users; also called management accounting. is the area of accounting that serves the decision-making needs of internal users. Internal reports are not subject to the same rules as external reports and instead are designed with the special needs of internal users in mind.
There are several types of internal users, and many are managers of key operating activities. Research and development managers need information about projected costs and revenues of any proposed changes in products and services. Purchasing managers need to know what, when, and how much to purchase. Human resource managers need information about employees payroll, benefits, performance, and compensation. Production managers depend on information to monitor costs and ensure quality. Distribution managers need reports for timely, accurate, and efficient delivery of products and services. Marketing managers use reports about sales and costs to target consumers, set prices, and monitor consumer needs, tastes, and price concerns. Service managers require information on the costs and benefits of looking after products and services. Decisions of these and other internal users depend on accounting reports.
Decision Insight boxes highlight relevant items from practice.
They Fought the Law Our economic and social welfare depends on reliable accounting information. A few managers in recent years forgot that and are now paying their dues. They include L. Dennis Kozlowski of Tyco, convicted of falsifying accounting records; Bernard Ebbers of WorldCom, convicted of an $11 billion accounting scandal, and Andrew Fastow of Enron, guilty of hiding debt and inflating income.
AP/Wide World Photos
Both internal and external users rely on internal controls to monitor and control company activities. Internal controls are procedures designed to protect company property and equipment, ensure reliable accounting reports, promote efficiency, and encourage adherence to company policies. Examples are good records, physical controls (locks, passwords, guards), and independent reviews.
Opportunities in Accounting
C3 Identify opportunities in accounting and related fields.
Point: The largest accounting firms are Deloitte & Touche, Ernst & Young, PricewaterhouseCoopers, and KPMG.
Accounting information affects many aspects of our lives. When we earn money, pay taxes, invest savings, budget earnings, and plan for the future, we are influenced by accounting. Accounting has four broad areas of opportunities: financial, managerial, taxation, and accounting-related. Exhibit 1.3 lists selected opportunities in each area.
|Exhibit 1.3|| Accounting Opportunities|
The majority of accounting opportunities are in private accounting, as shown in Exhibit 1.4. Public accounting offers the next largest number of opportunities. Still other opportunities exist in government (and not-for-profit) agencies, including business regulation and investigation of law violations.
|Exhibit 1.4|| Accounting Jobs by Area|
Accounting specialists are highly regarded. Their professional standing often is denoted by a certificate. Certified public accountants (CPAs) must meet education and experience requirements, pass an examination, and exhibit ethical character. Many accounting specialists hold certificates in addition to or instead of the CPA. Two of the most common are the certificate in management accounting (CMA) and the certified internal auditor (CIA). Employers also look for specialists with designations such as certified bookkeeper (CB), certified payroll professional (CPP), and personal financial specialist (PFS).
Individuals with accounting knowledge are always in demand as they can help with financial analysis, strategic planning, e-commerce, product feasibility analysis, information technology, and financial management. Benefit packages can include flexible work schedules, telecommuting options, career path alternatives, casual work environments, extended vacation time, and child and elder care.
Demand for accounting specialists is boosting salaries. Exhibit 1.5 reports average annual salaries for several accounting positions. Salary variation depends on location, company size, professional designation, experience, and other factors. For example, salaries for chief financial officers (CFO) range from under $75,000 to more than $1 million per year. Likewise, salaries for bookkeepers range from under $30,000 to more than $80,000.
|Exhibit 1.5|| Accounting Salaries for Selected Fields|
Point: The Census Bureau reports that for workers 18 and over, higher education yields higher average pay:
High school degree
No high school degree
Point: For updated salary information:
Quick Check is a chance to stop and reflect on key points.
What is the purpose of accounting?
What is the relation between accounting and recordkeeping?
Identify some advantages of technology for accounting.
Who are the internal and external users of accounting information?
Identify at least five types of managers who are internal users of accounting information.
What are internal controls and why are they important?
Quick Studies 1-1, 1-2, 1-3, 1-4
Exercises 1-1, 1-2, 1-6
Teamwork in Action, BusinessWeek Activity, Communicating in Practice, Hitting the Road