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Chapter One Notes

by: Noelle Oleartchick

Chapter One Notes Acct 3001

Noelle Oleartchick
GPA 3.5
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About this Document

These notes cover the main topics discussed in chp 1 and some of the key terms.
Foundations of Accounting
Lesley Davidson
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This 3 page Class Notes was uploaded by Noelle Oleartchick on Friday September 2, 2016. The Class Notes belongs to Acct 3001 at Austin Peay State University taught by Lesley Davidson in Fall 2016. Since its upload, it has received 30 views.


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Date Created: 09/02/16
Chp1: Accounting 1 What is Accounting? Accounting is the process of identifying, measuring and communicating economic information about an organization for the purpose of making decisions. The Process of Accounting: 1. Identifying, measuring, communicating 2. Economic info. about the entity 3. Decisions and judgements 2 Types of Accounting 2.1Financial Accounting  Financial Accounting- refers to the process that results in the preparation and reporting of financial statements for an entity. o Primarily oriented toward an external user.  Financial statements- reflect what has happened in the past. o Financial statements are directed to people who aren’t aware of the day-to-day financial and operating activities of an entity  Bookkeeping- used to accumulate the financial results of an entity’s activities; part of the financial accounting process. 2.2Managerial Accounting/Cost Accounting  Managerial Accounting- concerned with the use of economic and financial information to plan and control activities of the entity. o Supports the management decision-making process o Primarily an internal user  Cost accounting- subset of managerial accounting. Relates to the determination and accumulation of product, process or service costs.  Many of the data used in financial accounting is used with managerial and cost accounting.  Difference is that the data is more likely to be used in a future-oriented way o E.g. to prepare budgets. 2.3Auditing- Public Accounting  Audit- a review of an entity’s financial statements.  Audits are completed by an independent third party  Audits are required if the stocks or bonds of a company are owned and publicly traded by investors.  Public accounting firms- provided auditing services.  Independent auditor’s report- the result of an audit. o Contains 4 brief paragraphs. o 1. Identifies the financial statements that were audited. o 2. Explains that the audit was done “in accordance with the standards of PCMCOB (U.S) o 3. Contains auditor’s opinion about the financial statements. The opinion has to be an unqualified or “clean” opinion. o 4. Auditor’s opinion about the effectiveness of the company’s internal control over financial reporting.  Generally Accepted Accounting Principles (GAAP)- rules, principles, and standards that need to be followed in preparing and reporting financial statements.  Financial Accounting Standards Board (FASB)- the body responsible for establishing U.S. GAAP.  Annual Report- includes financial statements, notes to the financial statements and management’s analysis of financial & operating factors that affect the entity. o Given along with the external auditor’s examination of financial statements. o Is given to the shareholders and other interested parties. 2.3.1Internal Auditing  Usually organizations with many locations or activities involving many financial transactions employ accountants to do internal auditing.  Internal auditors perform functions like external auditors but on a smaller scale. o E.g. reviewing financial statements of one location. 2.4Governmental and not-for-profit accounting  Governmental units- municipal, state, and federal levels  Not-for-profit entities- colleges/universitites, hospitals, and voluntary health & welfare organizations. o Both groups require the same accounting functions to be performed for them as other accounting groups. 2.5Income Tax Accounting  Employ tax practitioners to help individuals with their taxes.  Usually work for corporations, public accounting firms, gov’t units, ect. 3 Development of Accounting  The Securities Act of 1933 and the Securities Exchange Act of 1934 gave the Securities and Exchange Commission (SEC) the authority to establish accounting principles.  Both security acts applied to securities offered for sale in interstate commerce.  In 1973 the Financial Accounting Foundation (FAF) was created as a result of criticism of the accounting standards process. o FAF was a more independent entity. o FAF established the Financial Accounting Standards Board (See section 2.3) Sarbanes-Oxley Act (SOX) of 2002- created a 5 member Public Company Accounting Oversight Board (PCAOB). o PCAOB- has the authority to set and enforce auditing, quality control, and ethical standards for public companies. 4 Standards of Accounting  Cost Accounting Standards Board (CASB)- operated as governmental body to establish standards for gov’t contracts. o Abolished in 1981 o 1988 reestablished as independent body within the Office of Federal Procurement Policy o CASB has authority to establish cost standards for gov’t contracts that excess $700,000.  Governmental Accounting Standards Board (GASB)- develops guidelines for financial accounting and reporting by state and local units. o Established in 1984 o Operates under FAF 4.1International Accounting Standards  International Accounting Standards Board (IASB)- promotes worldwide acceptance and observation of accounting and financial reporting standards. o Created in 2001 o Originally called International Accounting Standards Committee  Goal of IASB: develop a single set of high-quality, understandable and globally accepted financial reporting standards. 5 Ethics  The American Institute of Certified Public Accountants (AICPA) and the Institute of Management Accountants (IMA) have published ethics codes.  Both codes promote integrity and objectivity has key elements of ethical behavior. o Integrity- being honest and forthright o Objectivity- impartiality and freedom from conflict of interest.


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