Chapter 1 Section 1

What is a CPA

A CPA is a certified public accountant. To become a CPA, you must: have a certain number of college credits in accounting courses demonstrate good personal character pass the Uniform CPA Examination fulfill the experience requirements of the stat of practice and follow the professional code of ethics

Define Accounting

Accounting is the process by which financial information about a business is recorded, classified, summarized, interpreted, and communicated to owners, managers, and other interested parties

Managerial accounting

Also referred to as private accounting Managerial accounting involves working for a single business in industry. They perform a wide range of activities, including: -establishing accounting policies -managing the accounting system -preparing financial statements -interpreting financial information -providing financial advice to management -preparing tax forms -performing tax planning services -preparing internal reports for management

Accounting System

An accounting system is designed to accumulate data about a firm's financial affairs, classify the data in a meaningful way, and summarize it in periodic reports called financial statements

Who is Arthur Andersen?

Arthur Andersen was found guilty of an obstruction of justice charge after admitting that the firm destroyed thousands of documents and electronic files related to the Enron audit engagement Although on May 31, 2005, the Supreme Court of the United States reversed the Andersen guilty verdict, Arthur Andersen has not returned as a viable business As a result of the demise of Arthur Andersen, the "Big Five" are now the "Big Four"

Auditing

Auditing is the review of financial statements to assess their fairness and adherence to generally accepted accounting principles. Accountants who are CPAs perform financial audits

Bookkeeper

Bookkeepers are responsible for recording business transactions. In large firms, they may also supervise the work of accounting clerks. Bookkeeper positions usually require one to two years of accounting courses and little or no experience

Identify career opportunities in accounting

Bookkeeping Accounting Clerks Accountants

Why might employees and unions need the financial information of a particular firm?

Employees who are members of a profit-sharing plan pay close attention to the financial results because they affect employee income employees who are members of a labor union use financial information about the firm to negotiate wages and benefits

Financial Statements

Financial Statements are periodic reports that summarize the data accumulated and classified in an accounting system

How might a customer use the financial information of a particular firm?

If a customer is buying a product that might require upkeep for any length of time, he or she would want to make certain the company that sells the product will be around to help with that upkeep

Why might Banks need the financial information of a particular firm?

If the firm decides to ask the bank for a loan, the bank needs to be sure that the firm will repay the loan on time. The bank will ask for financial information prepared by the firm's accountant, and based on this information the bank will decide whether to make the loan and the terms of the loan

Why was the Sarbanes-Oxley Act passed?

In response to the wave of corporate accounting scandals, including: The demise of Enron Corporation in 2001 The arrest of top executives at World Com and Adelphai Communications Corporation and ultimately the demise of Arthur Andersen

What can the SEC do if it does not agree with the reporting results from an accounting method?

It can suspend the trading of a company's shares on the stock exchanges

What is the Public Company Accounting Oversight Board?

It is a five-member board which has investigative and enforcement powers to oversee the accounting profession and to discipline corrupt accountants and auditors

Identify the users of financial information

Owners and Managers Suppliers Banks Tax Authorities Regulatory Agencies and Investors Customers Employees and Unions

Why might owners and managers of a particular firm need its Financial information?

Owners need information that will help them to evaluate the results of their operations and plan and make decisions for the future. Financial information will help the answer otherwise difficult questions such as: Whether to discontinue a product or reduce its price How much to charge for a new product How much to spend on advertising How one period's profit compares to another Whether or not to open a new store

Which act was the most far-reaching regulatory crackdown on corporate fraud and corruption since the creation of the Securities and Exchange Commission in 1934?

Public Company Accounting Reform and Investor Protection Act of 2002 also known as the Sarbanes-Oxley Act

What three areas do accountants typically choose to practice in

Public accounting managerial accounting governmental accounting

Why should a company comply with the GAAP?

Publicly owned companies must follow the GAAP in order to demonstrate to the Securities and Exchange Commission that they are following proper accounting standards

Accounting Clerk

Responsible for record keeping for a part of the accounting system such as payroll, accounts receivable, or accounts payable Accounting clerk positions usually require one to two accounting courses and little or no experience

What two acts of congress were passed in order to protect those who invest in publicly owned corporations?

Securities act of 1933 Securities Exchange Act of 1934

How long are Auditors required to maintain all audit or review work papers?

Seven years

Why do some governmental agencies hire a large number of accountants? Identify a few.

Some governmental agencies hire accountants to audit the financial statements and records of the business under their jurisdiction and to uncover possible violations of the law Identify: (SEC) Securities and Exchange Commission (IRS) Internal Revenue Service (FBI) Federal Bureau of Investigation Homeland Security

What did the Sarbanes-Oxley Act do?

The Act significantly tightens regulation of financial reporting by publicly held companies and their accountants and auditors It created the Public Company Accounting Oversight Board It provides rules on consulting services, auditor rotation, criminal penalties, corporate governance, and securities regulation

What is the GAAP

The GAAP is the Generally Accepted Accounting Principles that define the language of accounting

What is the SEC?

The Securities and Exchange Commission oversees the financial information provided by publicly owned corporations to their investors and potential investors. It is responsible for reviewing the accounting methods used by these corporations. Though it has delegated this review to the accounting profession, it still has the final say on any financial accounting issue faced by publicly owned corporations

Why Might Tax Authorities need the financial information of a particular firm?

The accounting process provides information for the following: Income taxes are based on taxable income sales taxes are based on sales income property taxes are based on the assessed value of buildings, equipment, and inventory

Along with stiff Criminal penalties, how else does the Sarbanes-Oxley Act protect investors from corrupt accounting practices of Publicly held companies?

The act prohibits accountants from offering a broad range of consulting services to publicly traded companies that they audit it requires accounting firms to change the lead audit or coordinating partner and the reviewing partner for a company every five years Chief executives and chief financial officers of publicly traded corporations are required to certify their financial statements Companies must disclose, as quickly as possible, material changes in their financial position Wall Street investment firms are prohibited from retaliating against analysts who criticize investment-banking clients of the firm The act contains a provision with broad new protection for whistle blowers and lengthens the time that investors have to file lawsuits against corporations for securities fraud

Who Oversees the Public Company Accounting Oversight Board?

The board is overseen by the SEC

What is required in order to be the chairman of the Public Company Accounting Oversight Board?

The chair of the board may be held by one of the CPA members, provided that the individual has not been engaged as a practicing CPA for five years

What is the "Big Four"

The largest public accounting firms in the United States. Deloitte & Touche Ernst & Young KPMG PricewaterhouseCoopers

Accounting

The process by which financial information is recorded for both business and personal use

How many members of the Public Company Accounting Oversight Board have CPAs?

Two members are certified public accountants, to regulate the accountants who audit public companies the remaining three must not be and cannot have been CPAs

Accountant

Usually Supervise bookkeepers and prepare the financial statements and reports of the business Accountant positions usually require a bachelor's degree but are sometimes filled by experienced bookkeepers or individuals with a two-year college degree. Most entry-level accountant positions do not have an experience requirement. Both the education and experience requirements for accountant positions vary according to the size of the firm.

Public accountants

Work for public accounting firms whcih provide accounting services for other companies. Usually, public accounting firms offer three services: -auditing -tax accounting -management advisory services

Management advisory services

involves helping clients improve their information systems or their business performance

Governmental accounting

involves keeping financial records and preparing financial reports as part of the staff of federal, state, or local governmental units. Governmental units do not earn profits. However, governmental units receive and pay out huge amounts of money and need procedures for recording and managing this money.

Tax accounting

involves tax compliance and tax planning. Tax compliance deals with the preparation of tax returns and the audit of those returns Tax planning involves giving advice to clients on how to structure their financial affairs in order to reduce their tax liability

What are some of the criminal penalties provided in the Sarbanes-Oxley Act for corrupt accounting practices?

it is a felony to knowingly destroy or create documents to "impede, obstruct or influence" any existing or contemplated federal investigation It imposes criminal penalties up to 20 years in prison for obstruction of justice It raises the maximum sentence for defrauding pension funds to 10 years Chief executives and Chief financial officers of publicly traded corporations will face up to 20 years in prison if they "knowingly or willfully" allow materially misleading information into their financial statements

Why might suppliers of a particular firm need its Financial information?

to assess the ability of the firm to pay its bills and to set a credit limit for the firm

Why might regulatory agencies and investors need the financial information of a particular firm?

to protect those who invest in publicly owned corporations