Chapter 1 -  Introduction to Accounting

 

This chapter of the text will briefly introduce the role of accounting in a business enterprise and describe various career opportunities in accounting.  In addition, the chapter will identify the groups that are responsible for establishing generally accepted accounting principles.  After reading and studying this chapter you should be able to:

      1.         Define the accounting process and the role of accounting in making informed business decisions.

      2.         Identify the users and uses of accounting information.

      3.         Identify the groups that establish generally accepted accounting principles.

 

 

Key Points to Remember:

 

1.         Accounting – can be defined as an information and measurement system that identifies, records, and communicated information about an organization’s business activities.

 

2.         Users of accounting information -- 

            External users – individuals/entities that have a financial stake or interest in the organization that are NOT directly involved in the managing and operating the organization (investors, lenders, directors, customers, suppliers, regulators, employee groups)

 

            Internal users – individuals that are directly involved in managing and operating the organization (owners, officers, management)

 

3.         Generally accepted accounting principles (GAAP)  -- the conventions, rules, and procedures necessary to define accounting practices at a particular  time.  The groups that establish GAAP include:

            FASB – Financial Accounting Standards Board

            SEC – Securities and Exchange Commission

                        PCAOB – Public Company Accounting Oversight Board

           

 

CHAPTER 1 REVIEW

 

I.          Multiple choice (Select the best answer for each of the following questions.)

 

1.         The primary objective of financial accounting is: 

            a.          To serve the decision-making needs of internal users.

            b.         To provide financial statements to help external users analyze an organization's activities.

            c.         To monitor and control company activities.

            d.         To provide information on both the costs and benefits of looking after products and services.

            e.          To know what, when, and how much to produce.

 

 2.        External users of accounting information include: 

            a.          Shareholders.

            b.         Customers.

            c.         Creditors.

            d.         Government regulators.

            e.          All of these.

3.         Internal users of accounting information include: 
a.          Shareholders.
b.         Managers.
c.         Lenders.
d.         Suppliers.
e.          Customers.

4.         Accounting is an information and measurement system that: 
a.          Identifies business activities.
b.         Records business activities.
c.         Communicates business activities.
d.         Helps people make better decisions.
e.          All of these.

5.         Rules adopted by the accounting profession to make information relevant, reliable and comparable: 
a.          Are comprised of both general and specific principles.
b.         Are known as generally accepted accounting principles.
c.         Are abbreviated as GAAP.
d.         Are established by FASB and SEC.
e.          All of these.

6.         Generally accepted accounting principles: 
a.          Practices adopted by accountants to make accounting easier.
b.         Are only necessary when convenient.
c.         Can be overruled if approved by the SEC.
d.         Strive to make information relevant, reliable and comparable.
e.          None of these.

 

II.        QUESTIONS/PROBLEMS

 

 1.        Define the term "accounting" and state what purposes accounting serves in a business enterprise.

 

 2.        Identify at least types of users of accounting information that would have an interest in a company's financial statements, and indicate their particular interest.

 

 3.        List the major organizations that are responsible for setting accounting standards for publicly held corporations and explain their role in establishing GAAP.

 


ANSWERS

 

I.          MULTIPLE CHOICE

 

1.         b                      4.        e

2.                   e                       5.        e

3.                   b                      6.        d         

 

 

II.        QUESTIONS/PROBLEMS

 

1.         Accounting has been traditionally defined as an information and measurement system that provides quantitative information, primarily financial in nature, about an organization’s business activities that is intended to be useful in making economic decisions.  Its primary functions are to record, measure, classify, summarize, and communicate in a significant manner and in monetary terms transactions that are of a financial character.  In a business enterprise, accounting serves several functions:

1.         to record and summarize economic transactions,

2.         to provide information about the enterprise that will be presented to potential investors and creditors,

3.         to provide information to aid management in making business and financial decisions, and

4.         to provide information to other outside users.

 

 2.        There are a number of users that have a direct or indirect interest in the firm's financial statements.  Some of the users and their interests are listed below:

Users                                                    Interest

Present and potential investors                             The firm's income and financial position

Present and potential creditors                             The firm's ability to repay loans

The Internal Revenue Service                              The firm's income and tax obligations

The Securities and Exchange Commission The firm's compliance with security laws

Management                                                      Financial information necessary for financial decision making

Employees                                                         The firm's income and financial position (to determine wage demands and overall financial stability)

 

 3.        Financial Accounting Standards Board (FASB) – independent board that develops financial                             accounting standards.

            Securities and Exchange Commissions (SEC) – governmental agency which has the legal power to set and enforce accounting principles for companies issuing securities for sale to the public.

            Public Company Accounting Oversight Board (PCAOB) – governmental board created by the Sarbanes-Oxley Act in 2002 to regulate the accounting profession and determine the standards followed by auditors.