Cash Effects Accounting Help

Reporting information about the cash activities of an enterprise is a particularly important aspect of providing information to both external and internal decision makers. Cash is ultimately what business activity is all about. Despite the importance of cash and information about an enterprise’S cash activities, flancialreporting is much more than simply displaying the increase and decreases in an
enterprise’s cash balance. Estimating future cash flows requires a great deal of information about things other than a company’s historical record of cash transactions. Many-future cash events are impounded today in things other than cash. For example, a company may have many dollars of receivables from its customers as a result of credit sales that have not yet been collected in cash.

Those .receivables represent expected future cash flows, even though at this moment they are not in cash from. As we develop our knowledge of financial statements, we shall see that this same concluslon can be reached for many items that appear in a company’s financial statement

Characteristics of Externally Reported Information

Financial information that is reported to investors, creditors, and xhers external to the > reporting enterprise has certain qualities that must be understood lor the information to have maximum usefulness. Some of these qualities are discussed in the following paragraphs.’

Historical in Nature

Externally reported financial information is largely historical in nature. It looks back in. time and reports the results of events and trarisactions that already have occurred. While historical information is very useful in assessing the future, the information itself is more about the past than it is about the future.

Financial Statements A lens to view  business

Financial Statements A lens to view business

Inexact and Approximate Measures

Externally reported financial information may nave a look of great precision, but in fact much of it is based on estimates, judgments, and assumptions that must be made about both the past and the future. For example, assume a company purchases a piece of equipment for use in its business. To account for” that asset and to incorporate the impact of it into the company’s externally reported financial information, some assumptions must be made about how long it will be used by the company-how many years it will be used, how many machine-hours it will provide. and so on. The fact that a great deal of judgment underlies most accounting information is a limitation that is sometimes misunderstood.

Usefulness Enhanced Via Explanation

The accounting profession believes that the value of externally reported financial information is enhanced by including explanations
from management. This information is often non quantitative and helps to interpret the financial numbers that are presented. For this reason, financial information, including financial statements, is often accompanied by a number of notes and other explanations that help explain and interpret the numerical information

DECISION MAKING BY INTERNAL PARTIES’

Management accounting is the design and use of accounting information, systems to achieve the organization’s objectives by supporting decision makers inside the enterprise. Internal decision makers are employed by the enterprise. These internal decision makers create and use internal accounting information not only for’ exclusive use inside the organization but also with the purpose of sharing some of it with external decision makers. For example, in order to meet it production schedule, a producer will design an accounting information system for suppliers detailing its production plans. The producer shares this information with its supplier companies so that they can help the producer meet its objectives. Thus, .although the creator and distributor of the management accounting information is an internal decision maker, the recipient of the information is. in this case, an extemal decision maker. Other types of management accounting information, however, will not be available to external decision makers. Long-range plans. ‘ research and development results, capital budget details. and competitive strategies typically are closely guarded corporate secrets.

DECISION MAKING BY INTERNAL PARTIES'

DECISION MAKING BY INTERNAL PARTIES’

Internal Users of Accounting Information

Every internal employee of the enterprise uses accounting information. From basic labor categories to the chief executive officer (CEO), all employees are paid, and their

Decision Making by Internl Parties

Decision Making by Internl Parties

including required external financial reports. For example. detailed cost information about a production process’ is used by the production line supervisor to help control production costs. A process design engineer; when considering the best configuration of equipment and employees. uses the same information to reduce costs or to increase efficiency. Finally. production process cost information appears in the external tinancial statements used by investors and creditors

Objectives of Management Acconting

Each enterprise has implicit and. explicit goals and objectives .. Many enterprises have a mission statement that describes their goals. These goals can vary widely among enterprises ranging from nonprofit organizations, where goals are aimed at serving specified constituents. to for-profit organizations •.where goals are directed toward maximizing the owners’ objectives. For example. the American Cancer Society, a nonprofit organization . . has the following mission:

Dedicated to helping’ everyone who faces cancer through research; patient services. early detection, treatment and education.

Enterprises design and use their management accounting information systems in three primary ways to help them achieve their stated goals and missions. First. management accounting systems assign decision-making authority over the enterprise’s resources to its employees. The primary vehicles for assigning decision-making authority are the budget process and the internal accounting responsibility -structure. Second. management accounting systems provide a wealth of information for supporting decision-making activity. Multiple reports, some as part of the normal reporting process and some that . are specially constructed and designed. are produced and distributed regularly. Finally. the management accounting system is used to evaluate and reward decision making performance. When the accounting system compares the plan or budget to the actual outcomes for a period, it creates a signal about the performance of the employee” responsible for that part of the budget. In many enterprises management creates a reward system linked to performance as measured by the accounting system. For example, a manager’s bonus may be based on meeting or exceeding the budget.

Revenues- Costs = Profits

That is, the’plant manager overseessales ..personnel that generate revenuethrough sales orders. The plant managermust also have decision-making authority over cost-related resources. The manager must make or delegatej choices related to the supply of materials, the supply, of labor, equipment usage, and so on. At the end of the corning year, the actual outcome for the plant will be compared to.the budgeted figures, and the manager may be given a raise, a bonus,or a promotion based on the comparison.

Financial Accounting standerd Board

Today, the most authoritative source of generally accepted accounting principles is the Financial Accounting Standards Board. The FASB is an independent rule-making body, consisting .of seven members from the accounting profession, industry, government, and accounting education. Lending support . to these members are an advisory council and a large research staff

Internal Control Structure

The decisions made by management are based to a conslderable. extent on information developed by the accounting system. Therefore, management needs assurance that the accounting Information it receives is accurate and rellable. This assurance is provided by the company’s Internal control s) A simple example of an internal control procedure Is, tbe use of serial numbers on , eheeks Issued, A~cQunting for an unbroken sequence of serial numbers provides assurance that e.very check Issued has been recorded in the accounting records. The I~temal control Itruet1,lre Includes all measures used by an organization to guard against errors, waste, and fraudi to assure the reliability of accounting informationi to promote compliance with management policlesi and to ‘~valuate the level of performance ·In all divisions of the company. In short, the Internal control structure is intended to sure that the enure organization operatts according to plan.

There Is a strong Interrtlatlonshlp between accounting and internal control. We have stated that the Internal control structure includes me~su:es designed to promote the reo lllibllity of accounting information. At the same time, Of .e goal of the accounting system is to provide manaaement with Inform~tion useful in establishing internal control throughout the organization, Thus the topic of internal control goes hand in hand with the study of accounting,

Audits of Financial Statements

What assurance do outsiders have that the financial statements issued by management provide  reliable picture of the cornpuny’s financial position and results? In large part, this assurance-is provided  by un audit of the company. performed by a firm oflie’ accountants (CPA,\’). These auditors arc experts in the field of financial reporting and are independent of the company issuing the financial statement

in auditing financial statement, generally accepted accounting principles are the standard by which t» are judged.’ For to reach the conclusion that .  statements arc  representations-of a  position, results of , ‘ the statements must comply in  ways with: generally accepted .

CASE IN POINT

CASE IN POINT

Professional organization

Several professional accounting organizations play an active role in improving the quality of accounting information that is-used by  creditors. management, and In  to the Financial Accounting Standards Board and the Securities and Exchange Commission,’ discussed earlier, the American Institute of CPAs, the Institute of Management Accountants, the .lnstitute of Internal Auditors, and the American Accounilng ‘Associatiori are particularly important.

American Institute of CPAs(AICPA)

The American Institute of CPAs is a professional association of certified public uccounuuus. lis mission is to provide members with the resources, information, and leadership to enable them to provide valuable services in the highest professional man-ner to benefit the public, employers, and clients. The AICPA particlpetes The CPA. Never Underestimate in many uspeets of lthe accounting profession, including the establish- Cuurlusyer The Amerlcun ment of’auditing standurds to be followed by CPAs in the audit of financial statements. lnsuune or CI~”H The AICPA conducts accounting research and works closely with the FASB in the estubllshment and interpretation of generally accepted accounting principles. In fact, prier 10 the, establishment of the FASB, the AICPA had primary responslbility for the estublishmcnt of accounting principles.

Institute of Internal Auditors (IIA)

With more than 70,()()O members in 129 countries. The Institute.of lnternal Auditors i~ till’ primary international professional association dedicated to the promotion and development or the pructice of internal auditing. It provides professional development through the Certificd Internal Auditor” Program and leading-edge conferences and seminars: research through The IIA Research Foundation on trends, hest practices. and other internal auditing issues: guidance through the Standards ./(1/’ the Projessional Practice o] 1111(‘/’11(// Auditing: and educational products on virtually an aspects of the profession. The itA also prov ides audit specialty services and industry-specific auditing’ programs, as well as quality assurance reviews and bench marking services.

Institute of Internal Auditors

Institute of Internal Auditors

 

Posted on November 21, 2015 in Accounting Information for Deacision Making

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