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Reading Notes Chapter 3

Reading Notes Chapter 3 - Accounting Reading Notes Chapters...

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September 10, 2007 Accounting Reading Notes: Chapters 3 1. Accounting definition: recording, classifying, and summarizing transactions and events which are of a financial character, and interpreting the results thereof 1. Accumulate and communicate essential information to understanding activities of the business 2. Accounting to many enterprises 1. Public/private 2. Profit/nonprofit 3. Accountants role in the reporting 1. Communicate information that will aid users in the financial community in making economic decisions 3. Financial reporting is not an end in itself but to provide information to help make decisions 1. Accounting provides information for business decision making 4. The way a business runs has changed 1. Management corporations run the firms for the absentee owners 2. Owners have almost no involvement in day to day activities 3. Professional managers have little firsthand involvement 1. Usually just read reports 2. Summaries prepared using accounting estimates 1. Often people overlook this fact 2. Accounting vs Bookkeeping 1. Bookkeeping: clerical skill referring to the actual recording of business transactions 1. Only one step in accounting 2. Accountant must use professional judgment in design of recordkeeping system, preparation, and communication of data 1. Budgeting, tax planning, forecasting beyond recordkeeping 2. Much greater knowledge and comprehension 3. Accounting as a process of communication 1. Mutual understanding and agreement between the accountant and the people using the report 1. Acct must know users needs 2. Fidelity: relationship between what is understood by the user and what the accountant intended to express 2. Acct report should show a reliable and relevant relationship to the events it attempts to summarize 1. Include all the significant events that took place 2. Significance: relationship between the events that take place and the accounting report that attempts to summarize these events 3. Factors necessary for successful communication 1. Fidelity 1. Mutual understanding exists: what the user understands is what the accountant intended to express 2. Significance 1. Accounting reports are reliable and relevant to events summarized 4. Financial and Managerial accounting 1. The difference between financial and managerial lies in the users they serve 1. Financial information divided into internal and external groups 1. Financial accounting is primarily concerned with users external to the firm
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1. Owners, lenders/suppliers, investors and creditors, employees, customers, financial analysts, taxing authorities, trade associations, teachers 2. Investors and creditors obvious external groups who use financial information 1. They cannot demand reports like the IRS 2. Financial accounting attempts to provide external groups with information concerning the status of the firm 3. Transparency is essential 4. Performance measurement: analysis, valuation, risk assessment, control 2.
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Reading Notes Chapter 3 - Accounting Reading Notes Chapters...

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