How to do Your Own Accounting

Explain the functions of accounting, and identify the three basic activities involving accounting:

• Accountant professionals prepare the financial information that organizations present in their annual reports.
• Accounting is the process of measuring, interpreting, and communicating financial information to enable people inside and outside the firm to make informed decisions.
  Managers with a business, government agency, or not-for-profit organization are the major users of accounting information, because it helps them plan and control daily and long-range operations.
• Accountants play fundamental roles not only in business but also in other aspects of society.
• Their work influences each of the business environments. They clearly contribute important information to help managers deal with the competitive and economic environments.

Describe the roles played by public, management, government, and not for profit accountants:

• A public accountant provides accounting services to individuals or business firms for a fee. Most public accounting firms provide three basic services to clients: 1 auditing, or examining, financial records; 2 tax preparation, planning, and related services; and 3 management consulting.
• Because public accountants are not employees of a client form, they can provide unbiased advice about the firms financial condition.
• An accountant employed by a business other than a public accounting firm is called management accounting.
• Management accountants frequently specialize in different aspects of accounting.
  Federal, state, and local governments also require accounting services. Government accountants and those who work for not for profit organizations perform professional services similar to those of management accountants.
• Not for profit organizations, such as churches, labor unions, charities, schools, hospitals, and universities, also hire accountants.

Identify the foundations of the accounting system, including GAAP and the role of the Financial Accounting Standards Board: (FASB.)

• To provide reliable, consistent, and unbiased information to decision makers, accountants follow guidelines, or standards, known as generally accepted accounting principles (GAAP.)
• These principles encompass the conventions, rules, and procedures for determining acceptable accounting and financial reporting practices at a particular time.
  In the United States, the Financial Accounting standards Board is primarily responsible for evaluating, setting, or modifying GAAP.
• The foreign corrupt practices act is a federal law that prohibits U.S citizens and companies from bribing foreign officials in order to win or continue business.
• The law was later extended to make foreign officials subject to penalties if they in any way cause similar corrupt practices to occur within the United States or its territories.
• The Business Etiquette feature provides some tips on Foreign corrupt practice act compliance.

Outline the steps in the accounting cycle, and define double entry bookkeeping and the accounting equation:

• Accounting deals with financial transactions between a firm and its employees, customers, supplies, and owners, bankers; and various government agencies.
• Cash, check, and credit purchases by customers generate funds to cover the costs of operation and to earn a profit.
• The procedure by which accountants convert data about individual transactions to financial statements is called the accounting cycle.
• Three fundamental terms appear in the account equation : Assets, liabilities, and owners equity.
• An asset is anything of value owned or leased by a business. Assets include land, buildings, supplies, cash, accounts receivable and marketable securities.
• Liability of a business is anything owed to creditors - that is, the claim of a firms Creditors.
  Owners equity is the owners initial investment in the business plus profits that were not paid out to owners over time in the form of cash dividends.
• The accounting equation also illustrates double - entry bookkeeping

Explain the functions and major components of the four principal financial statements: the balance sheet, the income statement, the statement of owners equity, and the statement of cash flows:

• Financial statements provide managers with essential information they need to evaluate the liquidity position of an organization - its ability to meet current obligations and the needs of converting assets into cash; the firms profitability; and its overall financial health.
• Of the four financial statements, only the balance sheet is considered to be a permanent statement; income statement, statement of owners equity, and statement of cash flows are considered temporary because they are closed out at the end of the year.
• A firms balance sheet shows its financial position on a particular date. It is similar to a photography of a firms assets together with its liabilities and owners equity at a specific moment in time.
• Balance sheets must be prepared at regular intervals, because a firm’s managers and other internal parties often request this information every day, every week, or at least every month.
  Whereas the balance sheet reflects a firms financial situation at a specific point in time, the income statement represents the flow of resources that reveals the performance of the organization over a specific time period.
• In addition to reporting the firms profit or loss results, the income statement helps decision makers focus on overall revenues and the costs involved in generating these revenues.

Discuss how financial ratios are used to analyze a companies financial strengths and weaknesses:

• Accounting professionals fulfill important responsibilities beyond preparing financial statements. In a more critical role, they help managers interpret the statements by comparing data about the firms current activities to those for previous periods and to results posted by other companies in the industry.
• Ratios assist managers by interpreting actual performance and making comparisons to what should have happened. Comparisons with ratios of similar companies help managers understand their firms performance relative to competitors results.
• A firms ability to meet its short term obligations when they must be paid is measured by liquidity ratios. Increasing liquid reduces the like hood that a firm will face emergencies caused by the need to raise funds to repay loans.
• Activity ratios measure the effectiveness of managements use of the fire resources. One of the most frequently used activity ratios, the inventory turnover ratio, indicates the number of times merchandise moves through a business.
• Some ratio measure the organizations overall financial performance by evaluating its ability to generate revenues in excess of operating costs and other expenses.
• Over a period of time, profitability ratios are gross profit margin, net profit margin, and return on equity.