BusinessEssentialsTwelfthEditionChapter15TheRoleofAccountantsandAccountingInformationCopyright?2019,2016,2013PearsonEducation,Inc.AllRightsReserved.IntroductionInthischapterweexplorethefundamentalconceptsofaccountingapplythemtofamiliarbusinesssituationsdiscusshowyouasanemployee,taxpayer,orowner—willbeabletoparticipatewhentheconversationturnstothefinancialmattersthatconstitutesogreatapartofafirm’sdailyoperationsLearningObjectives(1of2)Explaintheroleofaccountantsanddistinguishbetweenthekindsofworkdonebypublicaccountants,privateaccountants,managementaccountants,andforensicaccountants.Explainhowtheaccountingequationisused.Describethethreebasicfinancialstatementsandshowhowtheyreflecttheactivityandfinancialconditionofabusiness.Explainthekeystandardsandprinciplesforreportingfinancialstatements.LearningObjectives(2of2)Describehowcomputingfinancialratioscanhelpusersgetmoreinformationfromfinancialstatementstodeterminethefinancialstrengthsofabusiness.Discusstheroleofethicsinaccounting.DescribethepurposeoftheInternationalAccountingStandardsBoardandexplainwhyitexists.WhatIsAccounting,andWhoUsesAccountingInformation?(1of4)Accountingcomprehensivesystemforcollecting,analyzing,andcommunicatingfinancialinformationBookkeepingrecordingofaccountingtransactionsWhatIsAccounting,andWhoUsesAccountingInformation?(2of4)AccountingInformationSystem(AIS)organizedprocedureforidentifying,measuring,recording,andretainingfinancialinformationforuseinaccountingstatementsandmanagementreportsWhatIsAccounting,andWhoUsesAccountingInformation?(3of4)Businessmanagersuseittodevelopgoalsandplans,setbudgets,andevaluatefutureprospects.Employeesandunionsuseittoplanforandreceivecompensationbenefits.Investorsandcreditorsuseittoestimatereturnstostockholders,determinegrowthprospects,anddecidewhetherafirmisagoodcreditrisk.WhatIsAccounting,andWhoUsesAccountingInformation?(4of4)Taxauthoritiesuseittoplanfortaxinflows,determinethetaxliabilitiesofindividualsandbusinesses,andensurethatcorrectamountsarepaidontime.Governmentregulatoryagenciesrelyonittofulfilltheirdutiestowardthepublic.WhoAreAccountantsandWhatDoTheyDo?Controllerpersonwhomanagesallofafirm’saccountingactivities(chiefaccountingofficer)CertifiedPublicAccountant(CPA)AccountantlicensedbythestateandofferingservicestothepublicFinancialversusManagerialAccountingFinancialAccountingfieldofaccountingconcernedwithexternalusersofacompany’sfinancialinformationManagerial(Management)Accountingfieldofaccountingthatservesinternalusersofacompany’sfinancialinformationCPAServices(1of2)Auditsystematicexaminationofacompany’saccountingsystemtodeterminewhetheritsfinancialreportsreliablyrepresentitsoperationsGenerallyAcceptedAccountingPrinciples(GAAP)accountingguidelinesthatgovernthecontentandformoffinancialreportsCPAServices(2of2)TaxServicesassistanceprovidedbyCPAsfortaxpreparationandtaxplanningManagementAdvisoryServicesassistanceprovidedbyCPAfirmsinareassuchasfinancialplanning,informationsystemsdesign,andotherareasofconcernforclientfirmsCoreCompetenciesforAccountingthecombinationofskills,technology,andknowledgethatwillbenecessaryforthefutureCPAEmergingCompetenciesforSuccessinAccountingTable15.1EmergingCompetenciesforSuccessinAccountingSkillsinStrategicThinkingandCriticalProblemSolvingTheaccountantcancombinedatawithreasoningandprofessionalknowledgetorecognizeandhelpsolvecriticalproblemsforbetterstrategicaction.Communications,InterpersonalSkills,andEffectiveLeadershipTheaccountantcancommunicateeffectivelyinvariousbusinesssituationsusingmeaningfulcommunicationsskillsthatprovideinterpersonaleffectivenessandleadership.DedicationtoMeetingCustomerNeedsTheaccountantsurpassesthecompetitioninunderstandingeachclient’suniqueneeds,inmeetingthoseneeds,andinvisualizingtheclient’sfutureneeds.AbilitytoIntegrateDiverseInformationTheaccountantcancombinefinancialandotherkindsofinformationtogainnewmeaningthatprovidesclientswithusefulinsightsandunderstandingforsolvingproblems.ProficiencywithInformationTechnologyTheaccountantcanuseinformationtechnology(IT)inperformingservicesforclientsandcanidentifyITapplicationsthattheclientcanadoptforaddedvaluetothebusiness.PrivateAccountantsandManagementAccountantsPrivateAccountantsalariedaccountanthiredbyabusinesstocarryoutitsday-to-dayfinancialactivitiesManagementAccountantprivateaccountantwhoprovidesfinancialservicestosupportmanagersinvariousbusinessactivitieswithinafirmCertifiedManagementAccountant(CMA)professionaldesignationawardedbytheInstituteofManagementAccountants(IMA)inrecognitionofmanagementaccountingqualificationsForensicAccountantsForensicAccountingthepracticeofaccountingforlegalpurposesCertifiedFraudExaminer(CFE)professionaldesignationadministeredbytheAssociationofCertifiedFraudExaminersinrecognitionofqualificationsforaspecialtyareawithinforensicaccountingFederalRestrictionsonCPAServicesandFinancialReporting:SarboxSarbanes-OxleyActof2002(SarboxorSox)–enactmentoffederalregulationstorestorepublictrustinaccountingpracticesbyimposingnewrequirementsonfinancialactivitiesinpubliclytradedcorporationsSelectedProvisionsoftheSarbanes-OxleyActTable15.2SelectedProvisionsoftheSarbanes-OxleyActCreatesanationalAccountingOversightBoardthat,amongotheractivities,mustestablishtheethicsstandardsusedbyCPAfirmsinpreparingauditsRequiresthatauditorsretainauditworkingpapersforspecifiedperiodsoftimeRequiresauditorrotationbyprohibitingthesamepersonfrombeingtheleadauditorformorethan5consecutiveyearsRequiresthattheCEOandCFOcertifythatthecompany’sfinancialstatementsaretrue,fair,andaccurateProhibitscorporationsfromextendingpersonalloanstoexecutivesanddirectorsRequiresthattheauditedcompanydisclosewhetherithasadoptedacodeofethicsforitsseniorfinancialofficersRequiresthattheSECregularlyrevieweachcorporation’sfinancialstatementsPreventsemployersfromretaliatingagainstresearchanalystswhowritenegativereportsImposescriminalpenaltiesonauditorsandclientsforfalsifying,destroying,altering,orconcealingrecords(10yearsinprison)Imposesafineorimprisonment(upto25years)onanypersonwhodefraudsshareholdersIncreasespenaltiesformailandwirefraudfrom5to20yearsinprisonEstablishescriminalliabilityforfailureofcorporateofficerstocertifyfinancialreportsSource:Multi-source.TheAccountingEquation(1of2)AccountingEquationAssets=Liabilities+Owners’Equityusedbyaccountantstobalancedataforthefirm’sfinancialtransactionsatvariouspointsintheyearTheAccountingEquation(2of2)AssetanyeconomicresourceexpectedtobenefitafirmoranindividualwhoownsitLiabilitydebtowedbyafirmtoanoutsideorganizationorindividualOwners’Equityamountofmoneythatownerswouldreceiveiftheysoldallofafirm’sassetsandpaidallofitsliabilitiesFinancialStatementsFinancialStatementanyofseveraltypesofreportssummarizingacompany’sfinancialstatustostakeholdersandtoaidinmanagerialdecisionmakingbalancesheet,incomestatement,statementofcashflowsBalanceSheets(1of4)BalanceSheetfinancialstatementthatsuppliesdetailedinformationaboutafirm’sassets,liabilities,andowners’equityApple’sBalanceSheetBalanceSheets(2of4)CurrentAssetassetthatcanorwillbeconvertedintocashwithinayearLiquidity

easewithwhichanassetcanbeconvertedintocashFixedAssetassetwithlong-termuseorvalue,suchasland,buildings,andequipmentDepreciation

accountingmethodfordistributingthecostofanassetoveritsusefullifeBalanceSheets(3of4)CurrentLiabilitydebtthatmustbepaidwithinoneyearAccountsPayable(Payables)currentliabilityconsistingofbillsowedtosuppliersLong-TermLiabilitydebtthatisnotdueforatleastoneyearRetainedEarningsearningsretainedbyafirmforitsuseratherthanpaidoutasdividendsBalanceSheets(4of4)IntangibleAssetnonphysicalasset,suchasapatentortrademark,thathaseconomicvalueintheformofexpectedbenefitGoodwillamountpaidforanexistingbusinessabovethevalueofitsotherassetsIncomeStatements(1of3)IncomeStatement(Profit-and-LossStatement)financialstatementlistingafirm’sannualrevenuesandexpensessothatabottomlineshowsannualprofitorlossrevenues,costofrevenues,operatingexpenses,andnetincomeProfit(orLoss)=Revenues?ExpensesApple’sIncomeStatementIncomeStatements(2of3)Revenues

fundsthatflowintoabusinessfromthesaleofgoodsorservicesCostofGoodsSoldcostsofobtainingmaterialsformakingtheproductssoldbyafirmduringtheyearOperatingExpensescosts,otherthanthecostofrevenues,incurredinproducingagoodorserviceIncomeStatements(3of3)GrossProfitpreliminary,quick-to-calculateprofitfigurecalculatedfromthefirm’srevenuesminusitscostofrevenues(thedirectcostsofgettingtherevenues)OperatingIncomegrossprofitminusoperatingexpensesNetIncome(NetProfit,NetEarnings)grossprofitminusoperatingexpensesandincometaxesStatementsofCashFlowsStatementofCashFlowsfinancialstatementdescribingafirm’syearlycashreceiptsandcashpaymentsApple’sStatementofCashFlowsTheBudget:AnInternalFinancialStatementBudgetdetailedstatementofestimatedreceiptsandexpendituresforafutureperiodoftimePerfectPosters’SalesBudgetReportingStandardsandPracticesRevenueRecognitionformalrecordingandreportingofrevenuesattheappropriatetimeFullDisclosureguidelinethatfinancialstatementsshouldnotincludejustnumbersbutshouldalsofurnishmanagement’sinterpretationsandexplanationsofthosenumbersAnalyzingFinancialStatementsSolvencyRatiofinancialratio,eithershort-orlong-term,forestimatingtheborrower’sabilitytorepaydebtProfitabilityRatiofinancialratioformeasuringafirm’spotentialearningsActivityRatiofinancialratioforevaluatingmanagement’sefficiencyinusingafirm’sassetsSolvencyRatios:Borrower’sAbilitytoRepayDebtShort-TermSolvencyRatiofinancialratioformeasuringacompany’sabilitytopayimmediatedebtsCurrentRatiofinancialratioformeasuringacompany’sabilitytopaycurrentdebtsoutofcurrentassetsLong-TermSolvencyDebtcompany’stotalliabilitiesLeverageabilitytofinanceaninvestmentthroughborrowedfundsProfitabilityRatios:EarningsPowerforOwnersEarningsPerShareprofitabilityratiomeasuringthenetprofitthatthecompanyearnsforeachshareofoutstandingstockAICPA’sCodeofProfessionalConductCodeofProfessionalConductcodeofethicsforCPAsasmaintainedandenforcedbytheAICPAHighlightsfromtheCodeofEthicsforCPAs(1of2)Table15.3HighlightsfromtheCodeofEthicsforCPAsByvoluntarilyacceptingCertifiedPublicAccountantmembership,theaccountantalsoacceptsself-enforcedobligations,listedhere,beyondwrittenregulationsandlaws.ResponsibilitiesasaProfessionalTheCPAshouldexercisetheirdutieswithahighlevelofmoralityandinamannerthatissensitivetobringingcredittotheirprofession.ServingthePublicInterestTheCPAshoulddemonstratecommitmenttotheprofessionbyrespectingandmaintainingthepublictrustandservingthepublichonorably.MaintainingIntegrityTheCPAshouldperformallprofessionalactivitieswithhighestregardsforintegrity,includingsincerityandhonesty,soastopromotethepublic’sconfidenceintheprofession.HighlightsfromtheCodeofEthicsforCPAs(2of2)Table15.3ContinuedBeingObjectiveandIndependentTheCPAshouldavoidconflictsofinterest,andtheappearanceofconflictsofinterest,inperformingtheirprofessionalresponsibilities.Theyshouldbeindependentfromclientswhencertifyingtothepublicthattheclient’sstatementsaretrueandgenuine.MaintainingTechnicalandEthicalStandardsThroughDueCareTheCPAshouldexercise“duecare,”throughprofessionalimprovement,abidingbyethicalstandards,updatingpersonalcompetencethroughcontinuingaccountingeducation,andimprovingthequalityofservices.ProfessionalConductinProvidingServicesTheCPAinpublicpracticeshouldabidebythemeaningandintentoftheCodeofProfessionalConductwhendecidingonthekindsofservicesandtherangeofactionstobesuppliedcompetentlyanddiligentlyforclients.Source:Basedon“CodeofProfessionalConduct,”AICPA,at/Research/Standards/CodeofConduct/Pages/sec50.aspx,accessedonApril19,2017ExamplesofUnethicalandIllegalAccountingActionsTable15.4ExamplesofUnethicalandIllegalAccountingActionsCorporationAccountingViolationAOLTimeWarnerAmericaOnline(AOL)inflatedadrevenuestokeepstockpriceshighbeforeandaftermergingwithTimeWarner.FreddieMacThisU.S.governmentcorporationfraudulentlymisstated$5billioninearnings.HCA,Columbia/HCAHealthcareassociationandhospitaldefraudedMedicare,Medicaid,andTRICAREthroughfalsecostclaimsandunlawfulbillings(paid$1.7billionincivilpenalties,damages,criminalfines,andpenalties).TycoCEODennisKozlowskiillegallyusedcompanyfundstobuyexpensiveartforpersonalpossession(hereceivedan8-to25-yearprisonsentence).WasteManagementOverstatedincomeinfinancialstatements(falseandmisleadingreports)byimproperlycalculatingdepreciationandsalvagevalueforequipment.WorldComHid$3.8billioninexpensestoshowaninflated(false)profitinsteadoflossinanannualincomestatement.InternationalizingAccountingInternationalAccountingStandardsBoard(IASB)organizationresponsiblefordevelopingasetofglobalaccountingstandardsandforgainingimplementationofthosestandardsApplyingWhatYou’veLearned(1of2)Explaintheroleofaccountantsanddistinguishbetweenthekindsofworkdonebypublicaccountants,privateaccountants,managementaccountants,andforensicaccountantsExplainhowtheaccountingequationisusedDescribethethreebasicfinancialstatementsandshowhowtheyreflecttheactivityandfinancialconditionofabusinessExplainthekeystandardsandprinciplesforreportingfinancialstatementsApplyingWhatYou’veLearned(2of2)DescribehowcomputingfinancialratioscanhelpusersgetmoreinformationfromfinancialstatementstodeterminethefinancialstrengthsofabusinessDiscusstheroleofethicsinaccountingDescribethepurposeoftheInternationalAccountingStandardsBoardandexplainwhyitexistsCopyrightBusinessEssentialsTwelfthEditionChapter16UnderstandingMoneyandtheRoleofBankingCopyright?2019,2016,2013PearsonEducation,Inc.AllRightsReserved.IntroductionInthischapterwedescribewheremoneycomesfromandhownationaleconomiesdependonit,andthepublic’strustinitsvaluewillgiveyouasolidunderstandingofthedifferentformsofmoneyandhowitssupplyiscreatedandcontrolledbydifferentkindsoffinancialinstitutionsandgovernmentregulationsLearningObjectives(1of2)Definemoneyandidentifythedifferentformsthatittakesinthenation’smoneysupply.DescribethedifferentkindsoffinancialinstitutionsthatcomposetheU.S.financialsystemandexplaintheservicestheyoffer.Explainhowfinancialinstitutionscreatemoneyanddescribethemeansbywhichtheyareregulated.LearningObjectives(2of2)DiscussthefunctionsoftheFederalReserveSystemanddescribethetoolsthatitusestocontrolthemoneysupply.Identifythreeimportantwaysinwhichthemoneyandbankingsystemsarechanging.Discusssomeoftheinstitutionsandactivitiesininternationalbankingandfinance.WhatIsMoney?Moneyobjectthatisportable,divisible,durable,andstable,andthatservesasamediumofexchange,astoreofvalue,andameasureofworthTheFunctionsofMoneyItisamediumofexchangeItisastoreofvalueItisameasureofworthM-1:TheSpendableMoneySupply(1of2)M-1measureofthemoneysupplythatincludesonlythemostliquid(spendable)formsofmoneyCurrency(Cash)government-issuedpapermoneyandmetalcoinsM-1:TheSpendableMoneySupply(2of2)CheckdemanddepositorderinstructingabanktopayagivensumtoaspecifiedpayeeCheckingAccount(DemandDeposit)bankaccountfunds,ownedbythedepositor,thatmaybewithdrawnatanytimebycheckorcashM-2:M-1PlustheConvertibleMoneySupply(1of2)M-2measureofthemoneysupplythatincludesallthecomponentsofM-1plustheformsofmoneythatcanbeeasilyconvertedintospendableformsM-2:M-1PlustheConvertibleMoneySupply(2of2)TimeDepositbankfundsthathaveafixedtermoftimetomaturityandcannotbewithdrawnearlierortransferredbycheckMoneyMarketMutualFundfundofshort-term,low-riskfinancialsecuritiespurchasedwiththepooledassetsofinvestor-ownersFinancialInstitutions(1of2)CommercialBankcompanythatacceptsdepositsthatitusestomakeloans,earnprofits,payinteresttodepositors,andpaydividendstoownersSavingsandLoanAssociation(S&L)financialinstitutionacceptingdepositsandmakingloansprimarilyforhomemortgagesFinancialInstitutions(2of2)MutualSavingsBankfinancialinstitutionwhosedepositorsareownerssharinginitsprofitsCreditUnionnonprofit,cooperativefinancialinstitutionownedandrunbyitsmembers,usuallyemployeesofaparticularorganizationNondepositInstitutions(1of2)PensionFundnondepositpooloffundsmanagedtoprovideretirementincomeforitsmembersInsuranceCompanynondepositinstitutionthatinvestsfundscollectedaspremiumschargedforinsurancecoverageNondepositInstitutions(2of2)FinanceCompanynondepositinstitutionthatspecializesinmakingloanstobusinessesandconsumersSecuritiesInvestmentDealer(Broker)financialinstitutionthatbuysandsellsstocksandbondsbothforinvestorsandforitsownaccountsThePrimeRateTheGrowthofFinancialServicesIndividualRetirementAccount(IRA)tax-deferredpensionfundthatwageearnerssetuptosupplementretirementfundsTrustServicesmanagementbyabankofanestate,investments,orotherassetsonbehalfofanindividualInternationalServicesLetterofCreditbankpromise,issuedforabuyer,topayadesignatedfirmacertainamountofmoneyifspecifiedconditionsaremetBanker’sAcceptancebankpromise,issuedforabuyer,topayadesignatedfirmaspecifiedamountatafuturedateElectronicFundsTransferElectronicFundsTransfer(EFT)communicationoffund-transferinformationoverwire,cable,ormicrowaveAutomatedTellerMachine(ATM)electronicmachinethatallowsbankcustomerstoconductaccount-relatedactivities24hoursaday,7daysaweekGlobalDispersionofATMsHowBanksCreateMoneyRegulationoftheBankingSystemFederalDepositInsuranceCorporation(FDIC)federalagencythatguaranteesthesafetyofdepositsupto$250,000inthefinancialinstitutionsthatitinsuresFederalDepositInsuranceCorporationPreservesconfidencebysupervisingbanksandinsuringdepositsinbanksandthriftinstitutionsCommercialbankspayfeesformembershipintheFDICGuaranteesthesafetyofalldepositsofeveryaccountowneruptothecurrentmaximumof$250,000MaintainstherighttoexaminetheactivitiesandaccountsofallmemberbanksTheFederalReserveSystemFederalReserveSystem(TheFed)centralbankoftheUnitedStates,whichactsasthegovernment’sbank,servesmembercommercialbanks,andcontrolsthenation’smoneysupplyTheTwelveFederalReserveDistrictsTheStructureoftheFedTheBoardofGovernorsReserveBanksOpenMarketCommitteeMemberBanksOtherDepositoryInstitutionsTheFunctionsoftheFedTheGovernment’sBankTheBankers’BankCheckClearingControllingtheMoneySupplyControllingtheMoneySupplyMonetaryPolicymanagementofthenation’seconomicgrowthbymanagingthemoneysupplyandinterestratesBycontrollingthesetwofactors,theFedinfluencestheabilityandwillingnessofbanksthroughoutthecountrytoloanmoney.TheToolsoftheFed(1of2)ReserveRequirementpercentageofitsdepositsthatabankmustholdincashorondepositwiththeFedDiscountRateinterestrateatwhichmemberbankscanborrowmoneyfromtheFedTheToolsoftheFed(2of2)FederalFundsRate(KeyRate)interestrateatwhichcommercialbankslendreservestoeachother,usuallyovernightOpen-MarketOperationstheFed’ssaleandpurchaseofsecuritiesintheopenmarketTheChangingMoneyandBankingSystemGovernmentInterventionGovernmentEmergencyInvestmentAssurancesofRepaymentAnti-CrimeandAnti-TerrorismRegulationsBankSecrecyAct(BSA)U.S.PatriotActAutomatedClearingHouse(ACH)Network(1of2)AutomatedClearingHouseelectronicfundstransfersystemthatprovidesinterbankclearingofelectronicpaymentsforthenation’sfinancialinstitutionsnetworkallowsbusinesses,government,andconsumerstochooseanelectronic-over-paperalternative