Chapter 1

5Managerial Accounting/Cost AccountingManagerial accounting is concerned with the use of economic and financial information to plan and control many of the activities of the entity and to support the management decision-making process.Cost accounting relates to the determination and accumulation of product, process, or service costs.

L O 3McGraw-Hill/Irwin 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-#1-#5Managerial accounting focuses on the management process of planning, organizing, and controlling the entitys activities to accomplish the entitys goals. Cost accounting relates to the processes used by management to determine and allocate costs based upon current, relevant information.6AuditingPublic AccountingPublic accounting firms and individual Chartered Accountants (CAs) provide auditing services and issue an independent auditors report.

An independent auditors report usually contains four brief paragraphs and states whether the financial statements are prepared in conformity with International Financial Reporting Standards. An auditors report can be unqualified (a clean opinion), qualified, emphasis over matter or disclaimer.L O 3McGraw-Hill/Irwin 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-#1-#6Work done by public accounting firms varies depending on the size and classification of the firm. Small local firms primarily provide bookkeeping, accounting, tax preparation, and financial planning services to individuals and small businesses. Larger regional firms concentrate on auditing services, corporate tax returns, and management advisory services. Larger domestic and international firms also provide auditing, corporate tax returns, and management advisory services, but their clients are large domestic and international corporations.7 Internal AuditingInternal auditors are professional accountants who perform functions much like those of an external auditor. However, internal auditors are employed in industry rather than public accounting.

L O 3McGraw-Hill/Irwin 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-#1-#7The internal auditor is generally responsible for reviewing the financial statements of an individual company or analyzing the operating efficiency of an entitys activities. A Certified Internal Auditor (CIA) has similar qualifications of other accountants, but has also passed an examination to become a CIA.8Governmental and Not-for-Profit AccountingGovernmental units (e.g., district, state, and federal agencies) and not-for-profit entities (e.g., universities, hospitals, and religious organizations) require the same accounting functions to be performed as do other accounting entities.

L O 3McGraw-Hill/Irwin 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-#1-#8The Governmental Accounting Standards Board (GASB) provides the guidelines for financial accounting and reporting by state and local governmental entities and public colleges and universities. These entities employ accountants with similar educational qualifications as those employed in business and public accounting. 9Income Tax AccountingTax practitioners often develop specialties in the taxation of individuals, partnerships, corporations, trusts and estates, or international tax law issues.

L O 3McGraw-Hill/Irwin 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-#1-#9The United States Internal Revenue Code and related regulations coupled with state and local tax laws specify rules and procedures to be followed to determine an entitys tax liability. Accountants use their judgment and expertise to design transactions so that an entitys overall income tax liability is minimized. Accountants also prepare tax returns and represent clients whose tax returns are being reviewed or challenged by tax authorities. 10How Has Accounting Developed?Mesopotamians record tax receipts on clay tablets.3000 B.C.L O 4McGraw-Hill/Irwin 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-#1-#10Learning Objective 4: Understand the development of accounting from a broad historical perspective.Evidence of record keeping dates back to the clay tablets of the earliest civilizations about 3000 B.C. The clay tablets were used to record tax receipts.

11How Has Accounting Developed?Luca Pacioli published the first textbook describing a comprehensive double-entry bookkeeping system.3000 B.C.1494L O 4McGraw-Hill/Irwin 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-#1-#11In 1494, Luca Pacioli, a Franciscan monk and mathematics professor published the Methods of Venice system, the first known text that fully described a comprehensive double-entry bookkeeping system. Todays modern bookkeeping systems have evolved directly from Paciolis system. 12How Has Accounting Developed?The industrial revolution of the 19th century generated the need for large amounts of capital to finance the enterprises that supplanted individual craftsmen.This need resulted in the corporate form of organization and the need to provide investors with reports showing the financial position and the results of operations.3000 B.C.14941800sL O 4McGraw-Hill/Irwin 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-#1-#12In the mid-19th century, absentee owners and investors trusted mangers with the operations of their companies. These owners and investors required reports from the managers showing the companys financial position and results of operations. This created a need for the independent audit function to add credence to those reports. 13How Has Accounting Developed?Accounting professionals in this country organized themselves in the early 1900s and worked hard to establish certification laws, standardized audit procedures, and other attributes of a profession.3000 B.C.14941800s1900sL O 4McGraw-Hill/Irwin 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-#1-#13The first professional accounting organization, the American Institute of Accountants (AIA) (the predecessor of the American Institute of Certified Public Accountants), was established in the early 1900s. This organizations role as a standard-setting body for the accounting profession becomes evident with the 1929 stock market crash. 14How Has Accounting Developed?The Securities Act of 1933 and the Securities Exchange Act of 1934 gave the Securities and Exchange Commission (SEC) the authority to establish accounting principles for companies whose securities had to be registered with the SEC.Between 1932 and 1934, the American Institute of Accountants and the New York Stock Exchange agreed on five broad principles of accounting.3000 B.C.14941800s1900s1932to19341933&1934L O 4McGraw-Hill/Irwin 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-#1-#14Between 1932 and 1934, the AIA and the New York Stock Exchange agreed upon five broad principles of accounting, which was the first formal standard-setting activity. Accounting, financial reporting, and auditing weaknesses related to the 1929 stock market crash necessitated this activity.

To restore investor confidence and set forth accounting and disclosure requirements for the stocks and bonds market, in 1933 and 1934, the Securities and Exchange Commission created rules and regulations that apply to securities offered for sale in interstate commerce. 15How Has Accounting Developed?The Committee on Accounting Procedure of the American Institute of Accountants issued 51 Accounting Research Bulletins that dealt with accounting principles.Although the SEC has the authority to establish accounting principles, the standard-setting process has been delegated to other organizations over the years.3000 B.C.14941800s1900s1932to19341933&19341939to1959L O 4McGraw-Hill/Irwin 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-#1-#15The Committee on Accounting Procedures Accounting Research Bulletins dealt with specific accounting and reporting problems, but did not provide a conceptual framework for accounting which intensified the existing controversies.16How Has Accounting Developed?The Financial Accounting Foundation (FAF) was created and established the Financial Accounting Standards Board (FASB) as the authoritative standard-setting body within the accounting profession. The FASB has issued 164 Statements of Financial Accounting Standards that have established standards of accounting and reporting for particular issues. 3000 B.C.14941800s1900s1932to19341933&19341939to19591973L O 5McGraw-Hill/Irwin 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-#1-#16Learning Objective 5: Understand the role that the Financial Accounting Standards Board plays in the development of financial accounting standards.The Financial Accounting Standards Board (FASB) worked diligently to develop the Conceptual Framework of Financial Accounting and Reporting. The FASB has issued seven Statements of Financial Accounting Concepts through September 2009 that provide the foundation for understanding financial accounting reports.17How Has Accounting Developed?The Sarbanes-Oxley Act of 2002 created the five-member Public Company Accounting Oversight Board (PCAOB), which has the authority to set and enforce auditing, attestation, quality control, and ethics standards for public companies. 3000 B.C.14941800s1900s1932to19341933&19341939to195919732002L O 6McGraw-Hill/Irwin 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-#1-#17Learning Objective 6: Understand how financial reporting standards evolve.The most recent and most significant legislation since the 1930's affecting the accounting profession is the Sarbanes-Oxley Act of 2002. This Act created the Public Company Accounting Oversight Board (PCAOB), which has the authority to set and enforce auditing standards for public companies. In addition, the PCAOB is empowered to inspect auditing operations of public accounting firms and to impose disciplinary sanctions for violations of rules, securities laws, and professional standards. 18Managerial/Cost AccountingCost Accounting Standards Board (CASB) for government contractsAuditing/Public AccountingAuditing Standards Board (part of AICPA)State and Local GovernmentsGovernmental Accounting Standards Board (GASB)Standards for Other Types of AccountingL O 6McGraw-Hill/Irwin 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-#1-#18The Cost Accounting Standards Board (CASB) has the authority to establish cost accounting standards for certain government contracts and colleges and universities that are recipients of major federal research funds.

The Auditing Standards Board, part of the American Institute of Certified Public Accountants, issues auditing standards and procedures used to audit privately-held companies.

The Governmental Accounting Standards Board (GASB) establishes guidelines for state and local governmental entities and public colleges and universities. The GASB operates with the authority of the Financial Accounting Foundation, which is also the parent organization of the Financial Accounting Standards Board (FASB).

19International Accounting Standards

The International Accounting Standards Board (IASB) seeks methods of providing comparability between financial statements prepared according to the differing accounting standards of its member nations.L O 6McGraw-Hill/Irwin 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-#1-#19With the advancement of the global marketplace, a need for comparability between financial statements prepared in different countries according to differing standards has developed. The International Accounting Standards Board, (IASB) is a private organization that strives to create and promote harmonization of accounting standards and worldwide acceptance and observation of accounting and financial reporting standards. As of September 2009, the IASB and its predecessor organization has issued 41 international accounting standards and eight international financial reporting standards (IFRS).20Ethics and the Accounting ProfessionIndependenceIntegrityObjectivityCompetence

L O 7McGraw-Hill/Irwin 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-#1-#20Learning Objective 7: Understand the key elements of ethical behavior for a professional accountant. Professional accounting organizations require members to conform to a Code of Professional Conduct or be subject to disciplinary action. The AICPAs Code of Professional Conduct identifies four key elements of ethical behavior. Integrity, being honest and forthright in dealings and communications with others; objectivity, being impartial and free from conflict of interest; independence, related to objectivity, especially important for auditors to be independent both in appearance and in fact; and competence, having the knowledge and professional skills to adequately perform the work assigned. These four elements are essential characteristics of accounting professionals, which enable them to serve the best interests of employers, clients, and the public. 21End of Chapter 1

McGraw-Hill/Irwin 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-#1-#21End of Chapter 1.Sheet1UserDecision/Informed Judgment MadeManagementPlanning, directing and controllingInvestors/ShareholdersAssessing amounts, timing, and uncertainty of future cash returns on their investmentCreditors/SuppliersAssessing probability of collection and the risk of late (or non-) paymentEmployeesPlanning for retirement and future job prospectsSecurities and Exchange CommissionReviewing for compliance of all required information

Sheet2

Sheet3