Chapter 1 Accounting: The Key to Success

What’s so important about Accounting? Accounting is at the heart of every business It is the means through which we determine if a business is being successful It is the score keeping for the business world. So what is accounting? –It is an information system that identifies, measures, records and communicates relevant, reliable, consistent and comparable info about an organization Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Qualitative Standards for Accounting Relevance: Accounting info must be useful Reliability: Accounting info should be verifiable and objective Consistency: Accounting info must be prepared in a consistent manner from period to period and within industries Comparability: Accounting info must provide for comparisons within one company over several periods or across companies within an industry Note that some of these standards are at odds with each other (relevance vs. reliability of historical costing) Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Forms of Organization Sole Proprietorship –A business owned by one person, with no separate legal or taxation identification from that person –The owner reports business income as personal income –The owner is personally liable (unlimited liability) for debts Partnership –Owned by two or more persons –The partnership is not a separate entity from the owners, thus income is taxed as shared in the hands of the partners –Generally, unlimited liability Corporation –a separate legal entity from its owners chartered under the laws of the province or the country –It is responsible for its own profits and losses, can enter into its own contracts –Has unlimited life since it is not connected to a person –Shareholders are owners and are liable to the limit of their investment Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Users of Accounting Information External Users are not directly involved in running the organization Financial Accounting is the area of accounting aimed at serving external users by providing financial statements to help users analyze the organization’s activities. Internal Users are individuals directly involved with the managing and operations of the organization They use accounting info to determine how to improve the efficiency and effectiveness of the organization Managerial Accounting provides special purpose (often highly customized) reports to provide decision making information Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Types of Accounting There are two areas of accounting: Financial and Managerial This course is about Financial accounting. Generally, Financial accounting –Provides reports of past performance –Is primarily intended for communication with external stakeholders –And therefore requires standards so that info is communicated consistently Managerial Accounting –Looks at past cost information to inform future decisions about running the business –Is used to make near term business decisions (decisions about the next week, month, quarter or year) –Does not have to follow any consistent way of preparation because it is internal managers who are using the data for decision making Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Ethics Ethics are beliefs that differentiate right from wrong Ethics is crucial in accounting. Accounting information is used by internal and external users to make decisions that are designed to achieve their goals. They rely on the accuracy of the info. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD Audit Users of financial information have no real way of assuring themselves that the data is accurate The Board of Directors of a public corporation must hire auditors to independently review and test the organization’s accounting system Auditing uses statistical sampling to select a subset of accounts and transactions to test. –The results of this test are used to infer the accuracy of the remaining information

Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD Sarbanes-Oxley S-O is an American act signed in 2002 to try to deal with the rash of corporate financial scandals (Worldcom, Enron, Arthur Anderson) Its major provisions include: –CEOs and CFOs must certify financial reports as accurate –Ban on personal loans to Executive Officers and Directors –Accelerated reporting of insider trading –Prohibition on insider trades during pension fund blackout periods –Auditors must be independent bans on certain types of work and pre-certification by the company's Audit Committee of all other non-audit work Prohibition on audit firms providing extra "value-added" services to their clients including actuarial services, legal and extra services (such as consulting) unrelated to their audit work.

Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD Sarbanes-Oxley More: –Significant criminal and civil penalties ($1,000,000 and 10 years in jail) for securities violations –A requirement that publicly traded companies furnish independent annual audit reports on the existence and condition (i.e., reliability) of internal controls as they relate to financial reporting. S-O is an American act, but the equivalent (C-Sox) has some similar (albeit more relevant to Canada) features –Canada’s securities trading is governed separately in each province –Canada’s business structure is made up of much smaller businesses –There are significant costs implied by S-O –C-Sox tries to address these in a more relevant implementation for Canada Chapter 2