Accounting as the Language of Business - Coursework Example

Communicating the Money Story Introduction Accounting is the language of business. The communication is based on the needs of the potential user. There is a standard set for the measurement of the data. In the USA the standard set is generally accepted accounting principles (GAAP) (Ellis, L.O. Thacker, 1980). Deferred Taxes Components First there is the recognition of a tax liability. Then there is a level of uncertainty as to the amount of the tax. In such cases there is the two step approach (Brenner C Vincent, Vincent C. Brenner, Jr., and Jeancola 2006). First the tax is calculated. Then the second step is to quantify the amount of the uncertainty. The net amount of these values gives a closer approximation of the tax in the future. This is the reported amount in the financial statement. Accounting changes and Errors Overview The change is generally seen as having to do with a change in a legitimate measurement The Error has to do with a non GAAP action or some out right unintentional mistake in the art of bookkeeping. The reporting result for all practical purposes is the same. The corporation is required to show the effect of the difference. The difference must be shown for prior and future periods. Accounting Changes There are three categories. There is the change in estimate, principle or entity. There must be appropriate reporting including foot notes. A determination must be made if it has to be made to the retained earnings account or other wise to give accurate comparative information. In addition the impact must be shown on future periods as required. It is also necessary to show the justification for such change. Accounting Error First it must be established if the error was discovered during or after the report. If is during the period, it is a regular adjusting entry. After period correction is made directly to the retained earnings statement. There should be full disclosure. Appropriate statements should be in the notes to the statements. Deferred Taxes The methodology is based on the need to recognize the difference in measurement of impact for accounting principles and tax rules. Such differences are called temporary differences. It becomes necessary to recognize the tax result proportionately for the present and future periods. This is in keeping with the matching principle concept. Such an approach recognizes appropriate revenues and expenditures in the same associated period. In addition there is the timing difference. The tax is due. The methodology recognizes the period in which it is paid. This has an impact on cash flow. The methods over time have the same effect. The need for deferred tax recognition is to help inform the investors. Management uses the method to be to meet its reporting obligation. The Engagement This is the written process that sets the terms of the work to be performed. The work detail then determines the type of financial statement produced by the CPA. There are essentially two possible documents recognized by law. There is the audited financial statement and the unaudited financial statement. The report, audit or review becomes part of the financial statements. The audit report gives the highest level of assurance to the statement user. It will confirm that the audit work was done based on generally accepted auditing standards (GAAS). In addition it will state the level to which generally accepted accounting principles (GAAP) were followed during the accounting period. This audit report issues an opinion on the fairness of the financial statements as a whole. In addition the CPA evaluates the effectiveness of the internal controls and the evidence supporting the statements. The unaudited financial statement may be compiled or reviewed. In a review, the CPA gives a limited assurance. This statement says the CPA is unaware of any material modifications needed for the financial statements. It would also state the conformity to the basis of accounting. The statement should state the scope of work was less than that of an audit. Subsidiary as a Corporation There are two separate and necessary factors to consider. First there is the legal business entity. There are three possibilities. There is the proprietor the partnership and the corporation (Heintz, J.A. Parry R.W.2002) . The corporation is a person created by instrument of law. The person is recognized as a full separate legal entity. Then there is ownership. There are three possibilities of ownership relationship. The corporation has a separate identity, but is owned. This ownership seeks to establish the degree or percentage of control and responsibility. It can be form 100 percent to some number below. The level of percentage ownership creates a wholly owned subsidiary down to that of controlling interest or to that of minority interest. The subsidiary is controlled by the parent corporation. But the subsidiary as a corporation provides legal protection. The separate corporation is an independent legal entity. Two main benefits are the owning of assets and the responsibilities for liabilities. CPA responsibilities External The Certified Public Accountant (CPA) is a statutory designation. Such an individual is issued a license by a government. The person has to adhere to legal requirements in doing the work of an accountant. This person is responsible to a wider audience. The CPA conducts such test as necessary. The task is to express an opinion as to the accuracy of the financial statements as a whole (Gleim I.2000). The standard in the audit is to give reasonable assurance to the statement user. CPA Responsibilities Internal The responsibility is that of the employer employee. The loyalty is first to the requirements of a servant. This person is expected to perform to the benefit of the employer. Such a person does not work with a licensing requirement. The Professional The CPA provides a lower standard of work and gives a lower standard of assurance. This will result in lower cost to the corporation for the service. This does not absolve the CPA of professional responsibility. The CPA must determine the needs of the user of the statement. Internal Memo Responsibilities The internal memo will explain the needsS of the external accountant. It will give assurance to the manager that the work has been done to meet the requirements of the outside. It will explain the difference between the audit and the review. It would be good to also give a simple explanation of the subsidiary. Conclusion The CPA (internal) duties are determined by the employer. This can be from being responsible for Human resources to Marketing responsibilities. In many cases it could be managing the tax research department. On the other hand, the CPA (external) duties and responsibilities are determined by statute. The external CPA reporting (audit or review) is serious. The audit is called the attest function. It provides information under the requirements of the law. He is therefore required to exercise due professional care. He has an implied contract that reaches those who may be expected to use the information. References Brenner C Vincent, Vincent C. Brenner, Jr., and Jeancola Monica New Reporting Standards for Noncontrolling CPA Review Interests Review Retrieved 2009 June 19 Read More