Introduction to Accounting - Book Report/Review Example

A book review of chapter 1 and 8 of the Accounting Book by Pearson Custom Business Resources, Published by Pearson Learning Solutions The accounting course is imperative for anyone looking for a dynamic and involving course that prompts them to think analytically, critically and wisely. These chapters use a practical approach to making understanding and visualizing accounting in the real world relatively easy. Chapter 1 uses RadioShack Corporation as the subject while chapter 8 uses Steve Ells’ Chipotle Mexican Grill to pass its concepts across. This provides a coherent picture of accounting in real businesses. Chapter 1 is perfect for a beginner as it introduces accounting excellently to any reader. Chapter 8 introduces the reader to managerial accounting and does a somewhat good job as well, except that some of the required concepts have been missed. This essay reviews the book based on chapters 1 and 8. Chapter 1 of the book does a very commendable job explaining how accounting can be applied in the world of business. With a broad analysis of various accounting concepts and principles, the chapter is explicitly designed to give a beginner a comprehensive understanding of accounting. The author uses RadioShack Corporation as the subject with its financial statements being the primary focus. The chapter depicts accounting as having a function in the society. According to the chapter, it is ‘the language of business’ (Harrison, Horngren, & Thomas, 2013). It is the basis by which any individual or groups of individuals use to make decisions. As explained exhaustively in the chapter, accounting information is useful for individuals, investors, creditors, regulatory bodies, and non-profit organizations. Accounting helps individuals plan on how to use their financial resources as well as run their bank accounts. Through accounting information, investors can decide whether to invest in a particular company based on its level of income growth (Harrison, Horngren, & Thomas, 2013). Creditors can also evaluate the creditworthiness of a corporation using accounting information. Other uses of accounting information discussed in the chapter are by regulatory bodies such as the U.S. Securities Exchange Commission (SEC) which provides that companies trading their stock publicly provide it with periodic financial reports (Harrison, Horngren, & Thomas, 2013). Non-profit organizations such as churches and the Red Cross file cyclic financial reports to the state government to show their activities. Their assessments on how to handle their operations are also made based on accounting information. Economies have become extensively globalized. This has resulted in the need for more standardized of financial reporting. This chapter gives an exhaustive image of this current state of affairs and the effect of globalization on financial reporting principles. It takes one back in history where the chief global economies such as the US have used very own their Generally Accepted Accounting Principles (GAAP). Comparing the financial outcomes with companies of other countries would push them to convert their accounting data to different forms to enhance comparison that was considerably costly. The International Accounting Standards Board (IASB) provided a long-term solution to the setback by developing International Financial Reporting Standards (IFRS). However, most accountants in the US have found it quite a difficult task integrating the standards fully into their practice. This, as seen in the chapter, is probably due to the fact that the US GAAP are considered to be the strongest and are overseen by an unbeatable Commission, the U.S. Securities Exchange Commission (SEC) (Harrison, Horngren, & Thomas, 2013). The GAAP have however been slow to evolve to fit the complexities of business today. All the same, the SEC has started effecting change in the GAAP to make them more consistent with the international standards. The IFRSs could slowly replace the GAAP. Nonetheless, the GAAP will still be used by companies based in the US. The chapter suggests that the accounting information studied based on the GAAP will not become outdated. Agreeing with this statement is; however, difficult owing to the notable differences that the GAAP have with IFRS. Furthermore, the continued study of accounting without taking into consideration the international standards will breed inflexible accountants who cannot adapt to global changes. The chapter, however, makes a strong point that globalization provides tremendous opportunities to succeed in the business world (Harrison, Horngren, & Thomas, 2013). The accounting equation is made up of three components as comprehensively explained in the chapter. These include assets, liabilities, and owners’ equity (Harrison, Horngren, & Thomas, 2013). The chapter has described assets as economic resources that a company owns that are expected to generate future benefits. Liabilities are the debts that a corporation owes while owners' equity stands for all claims to the business assets by stockholders of the enterprise. Together, the three components form the following accounting equation: Assets= Liabilities + Owners’ Equity (Harrison, Horngren, & Thomas, 2013). In businesses, when a company is keeping business records, the left side, which is the Assets side, will always be equal to the liabilities and owners' equity side. This balance is maintained in every business transaction. RadioShack Corporation provides a clear picture of how the accounting equation is applied in the chapter. All its cash and cash equivalents, inventory, property, plant, and equipment are recorded as assets. It also has some payables like account payable and taxes payable. These together with all long-term debts are recorded on the liabilities side. Owners’ Equity usually represents the resources that remain when the liabilities are subtracted from the assets. It is expressed in the form of paid-in-capital and retained earnings. The chapter shows that revenues increase retained earnings while expenses and dividends reduce retained earnings (Harrison, Horngren, & Thomas, 2013). Financial statements are prepared to represent its economic status in the eyes of the public (Harrison, Horngren, & Thomas, 2013). This chapter describes four financial statements quite exhaustively. An income statement is prepared using the company’s revenues and gains and expenses and losses. It shows the net income of the business. The statement of retained earnings is readily made by recording the retained earnings and all factors that increase or reduce them. Dividends as demonstrated in the chapter reduce retained earnings. The balance sheet includes all assets on the left side and liabilities and owners’ equity on the right side. The assets side, as showed in the chapter, includes current assets and long-term assets. Liabilities are recorded as current liabilities and long-term liabilities. Stockholders’ equity is also recorded on the left side and as common stock, additional paid-in capital and retained earnings. The statement of cash flows records the business’ cash receipts and cash payments based on its operating activities, investing activities and financing activities. A horizontal model may be used to present the accounting information and make comparisons between financial statements easier. In this case, the balance sheet is presented to the left, followed by the income statement and the further end the statement of cash flows (“Intorodcution”, n.d.). Before 2002, financial reporting regulations were less strict in the US. Many companies were involved with fraudulent activities of financial reporting such as falsifying accounting data. The Sarbanes-Oxley Act redefined the financial reporting regulations. It even led to the closure of one of the largest audit firms in the nation (Singer & You, n.d.). Through this Act, public audit companies could be inspected. It also enhanced transparency, executive accountability and corporate governance (Singer & You, n.d.). It ensured that all business decisions were made ethically. The chapter does an excellent job of backing up the fact that business decisions must be made ethically. It stresses that while certain activities may be profitable, they may not necessarily be right. Companies must come up with their standards and principles to control any selfish desires and to ensure that every activity is ethical. The chapter makes a brilliant observation that ethical conducts bears multiple rewards including economic benefits. Chapter 8 of the book introduces the reader to managerial accounting. It gives a very accurate view of managerial accounting. According to the chapter, unlike financial accounting that focuses on providing information to outside parties, Managerial Accounting focuses on providing the internal managers with information necessary to plan direct and control the organization’s activities. The chapter compares Chipotle's financial accounting system with its management accounting system to come up with a practical comparison (Harrison, Horngren, & Thomas, 2013). The GAAP governs Chipotle's financial reports. This is in contrast with managerial reports that are regulated by the management. Financial accounting focuses on reliable and objective data while Managerial accounting focuses on relevant data. Financial accounting reports are about the company as whole while managerial reports may be of different departments and sections of the enterprise. Financial accounting deals with the economic implications of past activities. Managerial accounting conversely focuses on how their financial decisions will affect the future. Additionally, unlike financial statements that must be audited by independent systems, managerial reports require no independent checks. However, the company must continually evaluate the method in which they are prepared (Harrison, Horngren, & Thomas, 2013). Chapter 8, unfortunately, does not provide substantial information on product costing in manufacturing companies. Instead, it relies on statements by corporations such as Caterpillar, Inc., which states that managerial accountants are required to give information on costing. However, there is more to costing than just that. It involves following a series of steps. They include: Identifying the cost object, the direct are then identified, and finally the overhead costs are identified and allocated to the cost objects at a specified overhead rate (Kimmel, Weygandt & Kieso, 2011). The cost object, in this case, is the product that will be manufactured. The direct costs involved will be those that could be traced to the product in an economically feasible way (Kimmel, Weygandt & Kieso, 2011). They include the direct labor costs and the direct materials costs. The overhead costs that cannot be traced directly to particular units of a product will include indirect material costs and the indirect labor costs. Overhead costs could also include non-manufacturing costs that are related to the product (Kimmel, Weygandt & Kieso, 2011). This would include selling costs and administrative expenses. Finally, the overhead costs are allocated to each particular unit of product at a predetermined overhead rate. It was also quite disappointing that the chapter did not cover the formation of a Schedule of cost of goods manufactured and sold. The schedule usually includes a sequential presentation of all the costs of the manufactured and sold goods, be it direct costs, overhead costs, and all non-manufacturing costs. It also includes the beginning and ending work-in-process inventory (Kimmel, Weygandt & Kieso, 2011). Some credit can be given to the chapter for a concise explanation of the just-in-time (JIT) inventory philosophy. The concept as explained in the chapter is based on the lean thinking philosophy that advocates ‘operating without waste’. The chapter describes JIT inventory philosophy as a practice that can reduce the amount of raw materials and finished products stored before use and distribution respectively. This is turns storage costs such as warehousing, security and shrinkage costs at a minimum. Handling costs are also reduced. Customer orders are fulfilled very fast as the inventory is made just-in-time. The chapter correctly puts that this kind of practice reduces throughput time while still ensuring production of high-quality products (Harrison, Horngren, & Thomas, 2013). The chapter recognizes that management accountants are faced with ethical challenges in their line of work. The Institute of Management Accountants governs their ethical requirements using a set of principles and standards. They are required to uphold their professional proficiency, observe confidentiality, maintain their integrity and enhance their credibility. Unethical behavior, as seen in the chapter, may not be illegal, but all illegal behavior is unethical. An example is where management accountants are required to provide concise, clear and accurate information to support decisions. Not doing this may be unethical but not illegal. Committing a criminal act is immoral for management accountants. The chapter provides that ethics is simply not just following the law. They are much more than that. They include principles such as honesty, fairness, responsibility and objectivity (Harrison, Horngren, & Thomas, 2013). With the increasing complexity of business, various trends are bound to affect how management accounting is practiced. The chapter explains it all. The patterns described in the chapter are sustainability, social responsibility, and the triple bottom line. Practical managerial accounting systems must observe these trends. Sustainability is practiced so as to meet the requirements of today without compromising the ability to meets the future need by the future generations (Harrison, Horngren, & Thomas, 2013). The triple bottom line provides that a company must not only focus on profits but also on its positive impact on the people. Social responsibility involves giving back to the community and ensuring their activities do not affect the earth’s resources negatively. Managerial accounting systems, as explained in the chapter, must also put into consideration the shifting economy. Prior to the tremendous mushrooming of the service sector, managerial accounting systems were designed for manufacturing companies. The U.S. economy is, however, shifting to the service sector. The systems must also evolve to prevent being dated (Harrison, Horngren, & Thomas, 2013). In conclusion, the chapters have brought to the light crucial accounting concepts. On a positive note, it has been able to focus on globalization that is vital for any business and also the changing market trends. They have also succeeded in expanding one's knowledge of financial reporting, the importance of accounting, the differences between financial accounting and managerial accounting and other important accounting concepts. The chapters, therefore, were very resourceful. References Harrison, W. T., & Horngren, C. T., & Thomas, C.W. (2013). Financial accounting. Pearson Education. Introduction to Accounting: Online Accounting Tutorial & Questions. Retrieved 12 June 2015, from http://simplestudies.com/introduction-to-accounting.html/page/7 Kimmel, P., Weygandt, J., & Kieso, D. (2011). Accounting. Hoboken, N.J.: Wiley. pp. 1-27, 511-533. Singer, Z., & You, H. The Effect of Section 404 of the Sarbanes-Oxley Act on Financial Reporting Quality. SSRN Journal. doi:10.2139/ssrn.1052541 Read More