BUS
100
CHAPTER 14
ROLE OF
ACCOUNTANTS
AND
ACCOUNTING INFORMATION
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LEARNING OBJECTIVES
After reading this chapter, you should be able to:
1. Explain the role of accountants and distinguish
between the kinds of work done by public
accountants, private accountants, management
accountants, and forensic accountants.
2. Explain how the accounting equation is used.
3. Describe the three basic financial statements and
show how they reflect the activity and financial
condition of a business.
4. Explain the key standards and principles for reporting
financial statements.
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L E A R N I N G O B J E C T I V E S (cont’d)
After reading this chapter, you should be able to:
5. Describe how computing financial ratios can help
users get more information from financial statements
to determine the financial strengths of a business.
6. Discuss the role of ethics in accounting.
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What’s in It for Me?
By understanding this chapter’s discussion of
accountants, their methods, and their
responsibilities, you’ll benefit in three ways:
1. if you’re thinking about starting your own business,
you’ll discover your obligations for reporting your
firm’s financial status
2. As an employee or union member, you’ll see how to
evaluate your company’s financial condition and its
prospects for the future
3. As an interested citizen, you’ll learn about
accounting ethics and regulatory requirements for
maintaining public trust in the business system
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What Is Accounting?
Accounting Defined:
 A comprehensive system for collecting, analyzing
and communicating financial information
 Bookkeeping: the recording of transactions
Users of Accounting Information:
 Business managers
 Employees and unions
 Investors and creditors
 Tax authorities
 Government regulatory agencies
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Who Are Accountants
and What Do They Do?
Controller
 Manages all of a firm’s accounting activities
Types of Accounting Systems
 Financial Accounting
Concerned with external information users—the firm’s
external stakeholders
 Prepares income statements, balance sheets, and other
financial reports published for shareholders and the public

 Managerial (Management) Accounting

Serves internal users (managers) by providing information to
make departmental decisions, monitor projects, and plan
future activities
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Who Are Accountants and
What Do They Do? (cont’d)
Certified Public Accountants (CPAs)
 Licensed, offering services to the public
Auditing (GAAP)
 Tax services
 Management advisory services

Noncertified Public Accountants
Private Accountants
 Work exclusively for a firm as accountants
Management Accountants
 Certified management accountant (CMA)
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Who Are Accountants and
What Do They Do? (cont’d)
Forensic Accountants
 Assist in the investigation of business and financial
issues that may have application to a court of law
 Investigative Accounting
Identifying financial evidence that may be pertinent
 Analyzing financial evidence
 Presenting accounting conclusions and their legal
implications

 Litigation Support

Certified Fraud Examiner: A specialty area within forensic
accounting
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The CPA Vision Project
Identifying issues for the future
Global forces as drivers of change
Recommendations
A new direction
 Core services
 Core competencies
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TABLE 14.1
Core Competencies for Accounting
Strategic and Critical
Thinking Skills
The accountant can provide competent advice for
strategic action by combining data, knowledge, and
insight.
Communications and
Leadership Skills
The accountant can exchange information meaningfully
in a variety of business situations with effective delivery
and interpersonal skills.
Focus on the
Customer, Client, and
Market
The accountant can meet the changing needs of clients,
customers, and employers better than the competition
and can anticipate those needs better than competitors.
Skills in Interpreting
Converging
Information
The accountant can interpret new meaning by
combining financial and nonfinancial information into a
broader understanding that adds more business value.
Technology Skills
The accountant can use technology to add value to
activities performed for employers, customers, and
clients
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Federal Restrictions on CPA Services
and Financial Reporting: Sarbox
Sarbanes-Oxley Act of 2002 (Sarbox)
 Enacted to restore public trust in corporate
accounting practices as a direct response to
corporate financial abuses
 Restricts non-audit services that CPAs can provide
Sarbox Compliance Requirements
 CFOs and CEOs must pledge that the company’s
finances are correct and face severe penalties
noncompliance
 Whistleblowers must be protected
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TABLE 14.2
Selected Provisions of the Sarbanes-Oxley Act
• Creates a national Accounting Oversight Board that, among other activities, must establish
the ethics standards used by CPA firms in preparing audits.
• Requires that auditors retain audit working papers for specified periods of time (they cannot
destroy audit records).
• Requires auditor rotation by prohibiting the same person from being the lead auditor for
more than five consecutive years.
• Requires that the CEO and CFO certify that the company’s financial statements are true,
fair, and accurate.
• Prohibits corporations from extending personal loans to executives and directors.
• Requires that the audited company disclose whether it has adopted a code of ethics for its
senior financial officers.
• Requires that the SEC regularly review each corporation’s financial statements.
• Prevents employers from retaliating against research analysts that write negative reports.
• Imposes criminal penalties on auditors and clients for falsifying, destroying, altering, or
concealing records (10 years in prison).
• Imposes fine or imprisonment (up to 25 years) on any person that defrauds shareholders.
• Increases penalties for mail and wire fraud from 5 to 20 years in prison.
• Establishes criminal liability for failure of corporate officers to certify financial reports.
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The Accounting Equation
The Accounting Equation
 Assets = Liabilities + Owners’ Equity
 Assets – Liabilities = Owners’ Equity (or Net Worth)
Asset
 Any economic resource that is expected to benefit a
firm or an individual who owns it
Liability
 A debt that the firm owes to an outside party
Owners’ Equity
 Money that owners would receive if they sold all of a
company’s assets and paid all of its liabilities
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Financial Statements
Balance Sheets
 Supply detailed information about:
Assets
– Current assets: Cash/assets that can be converted into cash
within a year
– Fixed assets: Capital that has long-term use or value
– Intangible assets: Patents, trademarks, copyrights, etc.
 Liabilities
– Current liabilities: debts that must be paid within one year,
including accounts payable
– Long-term liabilities: debts not due for at least a year
 Owners’ Equity
– Paid-in (invested) capital
– Retained earnings (net profits)

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FIGURE 14.1
Google’s Balance Sheet
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Financial Statements (cont’d)
Income Statement (Profit and Loss Statement)
 Its description of revenues and expenses results in a
figure showing the firm’s annual profit or loss

Revenues: the funds that flow into a business from the sale
of goods or services

Cost of revenues: shows the costs of obtaining the
revenues from other companies during the year

Cost of goods sold: costs of obtaining materials to make
products sold during the year

Gross profit: considers revenues and cost of revenues from
the income statement

Operating expenses: resources that must flow out of a
company if it is to earn revenues
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FIGURE 14.2
Google’s Income Statement
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Financial Statements (cont’d)
Statements of Cash Flows
 Describes yearly cash receipts and cash payments
Cash Flows from Operations: Concerns main operating
activities: cash transactions involved in buying and selling
goods and services
 Cash Flows from Investing: Net cash used in or provided
by investing
 Cash Flows from Financing: Net cash from all financing
activities

The Budget
 A detailed report on estimated receipts and
expenditures for a future period of time
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FIGURE 14.3
Google’s Statement of Cash Flows
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FIGURE 14.4
Perfect Posters’ Sales Budget
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Financial Statements Review
Balance Sheet
Assets – Liabilities = Owners’ Equity
Income Statement
Revenues – Expenses = Profit (or Loss)
Statement of Cash Flows
Cash In and Cash Out
Budget
Estimate – Actual = Variance
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Reporting Standards and Practices
Generally Accepted Accounting Principles
(GAAP)
 Revenue recognition: Formal recording and reporting
of revenues at the appropriate time
 Full disclosure

Financial statements should not include just numbers but
should also furnish management’s interpretations and
explanations of those numbers so that users can better
understand information in the statements
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Analyzing Financial Statements
Solvency
Ratios
Profitability
Ratios
Activity
Ratios
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Solvency Ratios
Short-Term
Current Ratio:
Current Assets
Current Liabilities
Leverage: The ability to finance an investment
through borrowed funds
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Solvency Ratios
Long-Term
Debt to Owners’ Equity Ratio:
Debt
Owners’ Equity
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Profitability and Activity Ratios
Return on Equity:
Net Income
Total Owners' Equity
Net Income
Earnings Per Share:
Inventory Turnover Ratio:
# of Shares Outstanding
Cost of Goods Sold
Average Inventory
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Bringing Ethics into the
Accounting Equation
Why Accounting Ethics?
 To maintain public confidence in business
institutions, financial markets, and the products and
services of the accounting profession
AICPA’s Code of Professional Conduct
 Maintained and enforced by the AICPA
 The AICPA identifies six ethics-related areas with
which accountants must comply to maintain
certification
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TABLE 14.3
Overview of Code of Ethics for CPAs
Membership in the American Institute of Certified Public Accountants is voluntary. By
accepting membership, a certified public accountant assumes an obligation of self-discipline
above and beyond the requirements of laws and regulations.
Responsibilities
In carrying out their responsibilities as professionals, members should
exercise sensitive professional and moral judgments in all their activities.
The Public
Interest
Members should accept the obligation to act in a way that will serve the
public interest, honor the public trust, and demonstrate commitment to
professionalism.
Integrity
To maintain and broaden public confidence, members should perform all
professional responsibilities with the highest sense of integrity.
Objectivity and
Independence
A member should maintain objectivity and be free of conflicts of interest in
discharging professional responsibilities. A member in public practice
should be independent in fact and appearance when providing auditing
and other attestation services.
Due Care
A member should observe the profession’s technical and ethical
standards, strive continually to improve competence and the quality of
services, and discharge professional responsibility to the best of the
member’s ability.
Scope and
Nature of
Services
A member in public practice should observe the Principles of the Code of
Professional Conduct in determining the scope and nature of services to
be provided.
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TABLE 14.4
Examples of Unethical and Illegal Accounting Actions
Corporation
Accounting Violation
AOL Time
Warner
America Online (AOL) inflated ad revenues to keep stock prices
high before and after merging with Time Warner.
Cendant
Inflated income in financial statements by $500 million through
fraud and errors.
HCA,
Columbia/
HCA
Defrauded Medicare, Medicaid, and TRICARE through false cost
claims and unlawful billings (must pay $1.7 billion in civil
penalties, damages, criminal fines, and penalties).
Tyco
Dennis Kozlowski illegally used company funds to buy expensive
art for personal possession (he received an 8- to 25-year prison
sentence).
Waste
Management
Overstated income in financial statements (false and misleading
reports) by improperly calculating depreciation and salvage value
for equipment.
WorldCom
Hid $3.8 billion in expenses to show an inflated (false) profit
instead of loss in annual income statement.
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KEY TERMS
accounting
accounting equation
accounting information system
(AIS)
accounts payable (payables)
activity ratio
asset
audit
balance sheet
bookkeeping
budget
Certified Fraud Examiner (CFE)
certified management accountant
(CMA)
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certified public accountant (CPA)
code of professional conduct
controller
core competencies for
accounting
cost of goods sold
cost of revenues
current asset
current liability
current ratio
debt
depreciation
earnings per share
financial accounting
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K E Y T E R M S (cont’d)
financial statement
fixed asset
forensic accounting
full disclosure
generally accepted accounting
principles (GAAP)
goodwill
gross profit
income statement (profit-and-loss
statement)
intangible asset
leverage
liability
liquidity
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long-term liability
management accountant
management advisory services
managerial (management)
accounting
net income (net profit, net
earnings)
operating expenses
operating income
owners’ equity
paid-in capital
private accountant
profitability ratio
retained earnings
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K E Y T E R M S (cont’d)
revenue recognition
revenues
Sarbanes-Oxley Act of 2002
(Sarbox)
short-term solvency ratio
solvency ratio
statement of cash flows
tax services
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