The Different Users of Accounting Information - Report Example

I. Who are the different users of accounting information? What are the differences between managerial and financial accounting? What are the differences between the CMA and the CPA certifications? What is the value of the accounting function in your organization, both internally and externally? The different users of accounting information can be categorized into three categories: first, the managers of the organization who use the information for the day-to-day decisions, for purposes such as short-term planning; next, the managers of the organization who use the information for decisions for purposes other than the day-to-day operations of the company, such as capital budgeting decisions, and determining the profitability of product lines and where to focus in order to maximize profitability; then, the external entities such as creditors, stockholders, government authorities, etc. which make relevant decisions that involve the company. Financial reporting information, also known as financial accounting information, is information that is usually prepared for stakeholders such as the shareholders, other investors, government and the public at large. As a social citizen, a business transacts with various stakeholders, such as its shareholders, other investors—debtors such as banks, the government, and the public at large. When transacting with other stakeholders, a business has to show the health of its operations, which is measured and presented by financial reporting. Because these stakeholders do not have access to information from inside of the business, they have to rely on financial reporting information. Financial reporting information are made and presented in order to come up with an objective view of the health of the business, in order to protect the interests of the other stakeholders it is dealing with. Financial reporting information is usually done by the business, in compliance with accounting rules such as the country’s generally accepted accounting principles, and rules set by the International Accounting Standard. This information is further checked and verified by an independent auditor in order to ensure objectivity, for the protection of these stakeholders’ interests (Horngren, Sundem and Stratton, 2005, p.5). The information that financial reports provide, while usually sufficient for investors and other external stakeholders in order for them to come up with a decision as regards their financial objective, is not enough for the internal stakeholders of the business, i.e. the managers. In order to come up with sufficient information about how to best manage and control the costs of operations, managerial accounting information is necessary. Managerial accounting information delves with how the costs within an organization behaves, and how to best control these costs, and management of resources through internal management systems for management to ensure profitability, effectiveness and efficiency—in order to meet the demands of the customers, and meet the financial objectives of their shareholders. The differences between the two sets of information lie in their purpose and the audiences they serve. In the case of managerial accounting, in order for managers to come up with decisions pertaining to the business’ operations, this information is vital. According to Horngren, Harrison and Bamber in their book “Accounting”, the distinction between CPAs and CMAs are as follows: “certified public accountant is a licensed accountant who serves the general public rather than one particular company. Certified management accountants are licensed accountants who work for a single company (2002, p.7)” The major difference between the two certifications is that the certified public accountants adhere to “rules that govern public accounting information which are called generally accepted accounting principles (GAAP) (2002 p.7).” The generally accepted accounting principles are determined by the Financial Accounting Standards Board or FASB. As it has always been said that accounting is the language of business, the accounting function is very valuable to our organization. Internally, it provides our managers the information to make decisions regarding the operations of the company; externally, it enables us to present our financial health to creditors and investors who provide us access to funds whenever we need it in order to maintain the company’s operations. II. What are the four different adjusting entries? What accounting assumptions necessitate the use of adjusting entries? What accounts are subject to adjusting journal entries? What are the advantages and disadvantages of using automated accounting systems to do adjusting entries? The different types of adjusting entries include prepaid expenses, depreciation of plant assets, accrued expenses, accrued revenues, and unearned revenues. The first type of adjusting entries is prepaid expenses which according to Horngren, Harrison and Bamber, “are advanced payments of expenses. [This] category includes prepayments that typically expire or that will be used up in the near future (2002, p.88).” Depreciation is another type of adjusting entries; as equipment that are bought become subject to wear and tear in the future, this calls for an adjustment and deduction in the book value of the equipment measured in the form of depreciation. The third type of adjusting entries is accrued expenses which are expenses that are incurred but does not call for immediate cash payments. On the other hand, there is the accrued revenue which is the fourth type: while accrued revenues are revenues that are recognized even when cash associated with the revenues is not collected yet. The last type of adjusting entries is unearned or deferred revenue, which according to Horngren, Harrison and Bamber “[creates a] liability [that] arises from receiving cash in advance of providing a product or service (2002, 94).” The theory behind adjusting these entries lies on various accounting assumptions that accompany the timing of various transactions as practiced by the accrual basis of accounting. The accrual basis of accounting “records the effect of every business transaction as it occurs (Horngren, Harrison, Bamber 2002, p.83).” Because of accounting assumptions that a company operates within a given accounting period within which its performance will be measured, every transaction that occurs even though there is no immediate cash flows yet should be recorded—revenues are recognized although cash is not yet collected, and expenses are incurred although no cash has been paid yet. For prepaid expenses, the accounts that are subject to adjusting entries include prepayments that will later be recognized as expenses such as prepaid rent, prepaid insurance, as well as supplies etc. and will later be adjusted against their expense counterpart accounts such as supplies expense, rent expense and insurance expense. The accounts that are subjected to depreciation include all fixed assets that are subject to wear and tear, and are adjusted through a contra asset account which is called accumulated depreciation, as well as an expense counterpart which is called depreciation expense. As for accrued expenses, the expenses that are incurred are subject to adjusting entries as they are represented by liability accounts when they are recorded—salary payable for salary expense, rent payable for rent expense, etc. The liability will be written off as soon as the company makes the payment in cash—a necessary adjustment. As for accrued revenues, the revenues are recorded under the revenue account such as service revenue or sales revenue, with an asset counterpart such as accounts receivable or notes receivable which will later be adjusted when the cash collections are received. The unearned revenues are recorded under the unearned revenue account which is adjusted later to service or sales revenue account, when the service has been performed or the product has been sold and the revenue is considered earned. Automated accounting systems provide the company real time record of the transactions which will lessen the errors that can be associated with manual recording. Also, because the company has access to real time records which are adjusted as soon as the transactions occur, the company can make more informed decision in a much faster time. As for the disadvantage, automated accounting systems are costly and will require a significant investment. III. What are the different inventory cost flow assumptions? How does a company determine what cost flow assumption they should use? How can the choice of cost flow assumptions impact the company’s cost of goods sold and ending inventory balance? There are four different inventory cost flow assumptions: the specific unit cost method which values inventory on the basis of the cost of the specific unit; the weighted average cost method, which values inventory on the basis of the average cost of it within a given period; the first-in-first-out or FIFO method where according to Horngren, Harrison and Bamber, “the first costs into inventory are the first costs out to cost of goods sold [… and the…] ending inventory is based on the costs of the most recent purchases (2002, p.355)”; and the LIFO method where “the last costs into inventory are the first costs out to cost of goods sold [ and the …] ending inventory is based on the older costs—those of beginning inventory and plus the earliest purchases of the period (Horngren, Harrison and Bamber, 2002, p.355).” A company determines the cost flow assumption it should use depending on the company’s business objectives and the role of inventory costing in it. The different choices of cost flow assumptions offer different impact on the company’s cost of goods sold and ending inventory balance, therefore there are significant impacts on some financial figures. Specific unit cost method is usually used when the inventory items are so much different from one another that appropriate costing will only be reflected by adopting this method. FIFO on the other hand presents the “most current cost of ending inventory [as well as] maximizes reported income when costs are rising (Horngren, Harrison and Bamber, 2002, p. 366).” LIFO, on the other hand presents the “most current measure of cost of goods sold and net income [and] minimizes income tax when costs are rising (Horngren, Harrison and Bamber, 2002, p. 366).” Lastly, the weighted average cost method is considered “middle-of-the-road approach for income tax and reported income (Horngren, Harrison and Bamber, 2002, p. 366).” IV. What is the control environment? How does the control environment affect a company’s internal controls? What are the negative and positive elements of a control environment? The control environment is the tone that is set by the people who has authority within the company as regards the policies for internal control. As the internal control of the environment is determined by the relative values of the people who set policies for this, the people’s values have a huge play in determining the control environment and the level of internal control within the company. The control environment is reflective of a company’s organizational culture. As the control environment is determined by the control consciousness of the people within the company, this control consciousness is guided by the relative values that the people hold, especially the values that the upper management holds. If the people within the company value an honest work environment with work ethics that is centered in trust and transparency, the level of internal control will then be determined accordingly. [insert answer for negative and positive elements of a control environment here] V. What is risk assessment when related to internal control? Why is risk assessment important? What conditions affect an organization’s risk assessment? How can management overcome these risks? Risk assessment in relation to internal control delves with the risks that a company faces as regards its duty of financial reporting. When the company has a duty to present its financial health to external parties such as government agencies, the way it presents its financial reports will be governed by the internal control procedures of the company. The government creates regulations over financial reporting, both in order to provide the public an accurate representation of the company’s financial health, and to create a fair corporate atmosphere by ensuring that companies are paying their due in terms of taxes. These regulations foster some risks to the company when there are discrepancies in its financial reporting practices. These risks range from small sums for fines up to costly litigations and lawsuits that can injure the company’s reputation due to errors in financial reporting. Therefore, assessment of these risks is important. Management can overcome these risks by setting up an internal control system that is mainly comprised by two auditing positions: the internal auditor and the independent external auditor. The internal auditor focuses on the financial transactions within the company, and checks if they are in line with the management policies. The independent external auditor on the other hand focuses on the accounts of the company as well as financial reports in line with the government regulations and rules that govern public accounting. These two sets of auditors that comprise the company’s internal control system will aid the management in overcoming the risks that are associated with corporate disclosure of its financial accounts. VI. What are some internal controls related to cash? Why control over cash important? Why is bank reconciliation considered an internal control over cash? What control violations will the bank reconciliation highlight? Internal controls related to cash both involve control over receipts and control over payments. The control over the receipts delves with the checking that the cash receipts that the company collects all go to the company’s bank accounts, and that the records that reflect these transactions are correct. On the other hand, the control over the cash payments ensure that all the cash payments are done to pay for the legitimate obligations and expenditures of the company, and the funds do not get stolen away. These internal controls over cash in order to both protect the company—guarding assets from being stolen, and the employees in order to protect from litigations that may arise from fraud within the company. Bank reconciliation is one internal control over cash as it reconciles the amount of cash that is recorded in the company’s books with the cash that is currently stored in the company’s bank account. Differences may occur in those two figures when the company has recorded items that the bank has not recorded yet, or vice versa. When these differences occur, bank reconciliation aims to explain the difference. Therefore, any item that does not reconcile the two figures calls for probing. The bank reconciliation will highlight violations of both controls over cash receipts and cash payments. Bank reconciliation will uncover the causes for discrepancies between the two figures—the cash figure in the company’s bank account as well as the figure in the company’s book. Reference List Horngren, H., Sundem, G., & Stratton, W. (1996). Introduction to Management Accounting. New Jersey: Prentice Hall. Horngren, C. T., Harrison Jr., W. T., & Bamber, L. S., (2002) Accounting. 5th edition. New Jersey: Prentice-Hall International, Inc. Keown, A. J., Martin, J. D., Petty, J. W., Scott, Jr., D. F. (2005) Financial Management: Principles and Applications. New Jersey: Pearson Education, Inc. Read More