Understanding Accounting Issues

Identify the role of accountants and distinguish between the kinds of work done by public and private accountants.

     By collecting, analyzing, and communicating financial information, accountants provide business managers and investors with an accurate picture of the firm's financial health. Certified public accountants (CPAs) are licensed professionals who provide services such as auditing, tax services, and management advisory services for other firms and individuals. Public accountants who have not yet been certified perform similar tasks. Private accountants provide diverse specialized services for the one firm that employs them.

Explain why journals and double&-entry accounting ledgers are useful tools for financial analysis.

     The use of journals and double&-entry accounting ledgers provides for standardized, accurate record&-keeping Journals are a chronological log of transactions, while ledgers allow managers to assess the firm's current state of finances. Using double&-entry accounting in ledgers provides a system of checks and balances against errors.

Describe the three basic financial statements and how they reflect the financial condition and activities of a business.

     A firm's three basic financial statements are its balance sheet, income statement, and statement of cash flows. The balance sheet summarizes the company's assets, liabilities, and owners' equity at a given point in time. The Income statement details the company's revenues and expenses for a given period of time and identifies any profit or loss. The statement of cash flows reports the firm's cash receipts and payments from operating, investment, and financing activities.

Explain how computing key financial ratios can help in analyzing a business's financial strengths.

     Using data from the financial statements, ratios can help creditors, investors, and managers assess a firm's finances. The current ratio, the quick ratio, and the debt&-to&-equity ratio all measure solvency&-the firm's ability to pay its debts in the short and long run. Return on sales, return on investment, and earnings per share all measure profitability. Inventory turnover ratios show how efficiently a firm is using its funds.

Discuss the importance of budgets in internal planning and control.

     To ensure the overall efficient use of resources, accountants and other managers develop budgets. A budget shows where funds will be obtained (the sources) and where they will be spent (the uses.) Throughout the year, the budget is monitored to ensure that costs are not exceeding revenues.

Describe some ways that companies use computers to handle accounting functions.

     Computerized accounting systems can now record, analyze, and summarize data into information for financial statements and budgets. Electronic spreadsheets and database systems are two of the most useful computerized accounting system tools.