Financial Accounting Large Corporations example essay topic

Accounting is the compilation of financial information for use in making economic decisions. BOOKKEEPING provides the basic accounting data, by systematically recording such day-to-day financial information as revenue from the sale of products or services; expenses of business operations such as the cost of merchandise sold; and overhead expenses such as rent, wages, and so forth. Accounting principles determine which financial events and transactions should be recorded in the bookkeeper's ledgers, journals, and computer printouts. The analysis and interpretation of these records is the primary function of accounting. The various financial statements produced by accountants then furnish business and other types of organizations with the basis for their financial planning and control, and provide other interested parties (investors, the government) with information they can use to make decisions about these organizations. FUNCTIONS OF ACCOUNTING Accounting provides informational access to a firm's financial condition for three broad interest groups.

First, it gives the firm's management the information to evaluate financial performance over a previous period of time, and to make decisions regarding the future. Second, it informs the general public, and particularly the firm's stockholders or those interested in buying stock, about the financial status of the firm over the previous quarter or year. Third, accounting provides reports for the tax and regulatory departments of the various levels of government. Accountants also perform many of the same functions for agencies of the government, nonprofit organizations, and other entities. Financial Accounting Large corporations maintain their own internal accounting departments; small firms may hire the services of an outside accountant. In either case, the accountant's principal duty is to gather the figures that relate to such financial matters as profits, losses, costs, tax liabilities, and other debts, and to present them to the firm's management in a form that is logical and readily understood.

For publicly traded companies -- those which offer stocks and bonds for sale to the public -- accountants also prepare regularly published reports of interest to those outside the organization who are concerned with the company's financial condition: investors and potential investors, creditors, and the general public. At the end of the fiscal year, a summary, or annual report, is published, which must include the 'opinion' of an outside reviewer as to its accuracy. The reviewer is an independent accountant called an auditor. These reports represent, usually, the only communication a company has with stockholders and other outsiders.

They are prepared in accordance with rules known as Generally Accepted Accounting Principles, which are established by professional organizations of accountants. A standard set of financial statements is always included in an annual report. The statements include the following: The balance sheet compares the firms's assets and liabilities. Assets include cash, accounts receivable (moneys owed to the company), the cash value of inventories, and the worth of property, plant, and equipment. Liabilities include company debts,'s tockholders' equity,' or the amount of stock held by investors, as well as the amount of 'retained earnings,' or assets that are invested back into the company rather than disbursed in the form of dividends to stockholders.

Although some balance-sheet items, like cash, are easily measured for reporting, the value of others, like plant and equipment, must be estimated. Plant and equipment are usually represented by figures that are reduced by a certain proportion each year. For example, a truck worth $10,000 when it is purchased will be worth $10,000 minus 15% the next year, and $10,000 minus 30% the second year after purchase. The percentage of depreciation (the presumed worth of the truck over time) varies according to the depreciation method used, but almost every item of plant and equipment is subject to depreciation, which is listed by accountants as an expense. Inventory valuation is also subject to a variety of accounting methods, since many inventory items cannot be specifically costed.

The grain in a grain elevator, for example, comes from different sources and may have been bought at several prices. An accountant must choose between one of several methods for valuing the grain; each will provide a slightly different value figure, as well as a different basis for figuring taxes. The statement of changes in financial position shows the sources and applications of working capital, and indicates whether the company generated sufficient cash to fund operations, or whether borrowing was necessary. The income statement shows the results of a company's operations over time, a swell as for the current period. Income is the difference between revenues and expenses. Accountants usually report revenues at the time when they are earned (when a sale is made, not when cash for the sale is received), and expenses only when they are incurred, rather than when they are paid out.

This practice -- of relating current expense with current revenues earned -- is called accrual accounting and is fundamental to almost all accounting systems. The simpler cash method, which records revenues when cash for sales is received and expenses when cash is disbursed, rarely presents a true financial-activity picture of an organization. The statement of retained earnings and stockholder's equity demonstrates for investors what has happened with their ownership in the company, how earnings and new stock issuance have increased its worth, and what dividends were paid. Each of these reports will contain figures for previous quarters and years, as well as for the current period, providing a way of comparing present and past company performance. Accompanying the statements will be a set of notes, presenting information about the particular accounting methods used, as well as explanations of the impact of important events within the previous year.

Managerial Accounting The process of providing management with data to evaluate costs, practice budgetary planning, and review employee and executive performance is the basis of the work of the managerial, or cost, accountant. Cost accounting is primarily responsible for determining the cost of manufacturing a specific product or providing a particular service. This usually requires complex estimates of overhead costs, variable costs, and unit costs for services such as advertising or consulting. Costs may be monitored daily, in order to warn management when performance is off budget; with computerized bookkeeping, reports can be generated almost as soon as the data has been collected. Cost statements will also help management determine whether it might be more profitable to make or to buy a particular item; to invest in more machinery or other capital assets, or to make do with the old; to increase production by hiring more workers or by automating plant facilities; and so forth. Working with each division of the firm, the accountant may also be responsible for creating a budget setting forth goals based on realistic estimates of what can be accomplished.

Comparing actual performance with the planned-for goals is another function of budgetary planning and is useful in evaluating the performance of individual divisions and managers. Tax Accounting Tax and compliance reporting together make up another major accounting function. In the United States, tax accounting isa matter of legal compliance with the Internal Revenue Code and various state and local tax laws. The tax accountant must keep abreast of the numerous changes in tax law that apply to his or her organization. Many tax accountants are, therefore, also lawyers.

The methods chosen to report assets and liabilities will influence the amount of tax to be paid, at least within the fiscal year. In addition, most organizations must adjust their financial reports for the unique requirements of reporting to the Internal Revenue Service and other taxing bodies. Companies must also report to the Securities and Exchange Commission (SEC), which, since 1934, has required it sown form of compliance accounting from publicly traded corporations. The SEC has a well-prescribed reporting process that a company must follow when it issues stocks or bonds to be traded on the open market. In addition to the basic data included in the annual report, the SEC requires disclosure of ownership, und's, company operations, and other information useful to investors in deciding whether to buy into a company.

AUDITING Auditors are accountants who review financial statements, and their responsibility is to verify the accuracy of company reporting. Internal auditors -- those who are hired by and work within the company itself -- help identify accounting weaknesses and correct them before significant errors occur. They are often systems-oriented people who make flowcharts of accounting systems and evaluate these flowcharts to suggest improvements in division of labor, paper flow, cash control, or other accounting responsibilities. They usually work under the company's treasurer or controller, who canthus provide a check and balance on the accounting department. Independent auditors are hired by a company's board of directors to represent the stockholders by reviewing financial statements, in order to reassure outsiders that annual reports are fair representations of the financial position of the company. The independent auditor issues an opinion whose wording is standardized so that readers can easily identify what it implies.

The standard " clean opinion' reads as follows: 'In our opinion, the financial statements present fairly the position of XYZ Corporation as of Dec. 31, 19 -- , and the results of its operations and the changes in its financial position for the year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. ' Any other wording in an opinion probably indicates trouble. Independent auditors may qualify their opinion with a paragraph describing some variance they found. An opinion may also be disclaimed, if the auditor finds some reason that prevents him or her from completing an audit. Finally, and rarely, an opinion can state that the financial statements do not fairly represent the company's actual financial situation.

The notion of " materiality' -- what kind of information is relevant and necessary, and what data can be omitted because it is " immaterial' to a reporting function -- is central to the profession of accounting. To a bookkeeper, even a few cents 'out of balance' constitutes a material misstatement that must be rectified. However, the accountant's reports contain rounded figures, and reflect judgments about what kinds of depreciation, expense accruals, and other data should be included. To the auditor, whose certification will be based on reports involving rounded thousands, or even millions, of dollars, a number may not be 'materially " misstated if it can be proved to within 5%. Thus, at each reporting level, the accuracy required to present fairly the company's financial position changes.

DEVELOPMENT OF ACCOUNTING Historians generally credit 14th-century Italian merchants with developing the practice of double-entry bookkeeping, which is the basis for modern-day accounting. The method was invented when investors sought a way of recording the financial aspects of ventures that might last for months, or even years (the commissioning of a merchant fleet, for example), and in which many investors had bought shares. The Italian system resembled its modern counterpart. The balance sheet had two sections: one listed assets and the effect of sales, purchases, and investments on assets; the other recorded shares and shareholders, along with other liabilities incurred. Thus, owners who had bought shares from the original shareholder, or who had inherited them, could claim their proportion of the profits when and if the venture succeeded. At the end of the 15th century, Luca Paci oli, a Franciscan monk, published a treatise on mathematics that contained, along with discussions of arithmetic and algebra, a description of double-entry bookkeeping.

Other books on accounting began to appear as manufacturing and trade grew more widespread and financing became more complex. The profession of accountant existed by the 18th century, and by the late 19th century regulations controlled the chartering of accountants in both Europe and America. Modern accounting has developed in response to changes in the legal structure of companies, as well as to rising public demand for accurate financial reports, and to government regulations. Of the changes in the legal structures of businesses, the development of the corporation has probably had the greatest impact, because it allowed public scrutiny of accounting records. Under earlier forms of ownership, the sole proprietorship and the partnership, public scrutiny was almost unheard of.

The rise of the multinational corporation has also increased accounting responsibilities, for it requires foreign-currency translation, reporting under a variety of legal environments, and the adjustment of ownership and income reporting to achieve the least costly payments within many different systems of taxes, tariffs, and other government controls. Finally, the extraordinary increase in the number and kinds of financial instruments that has taken place since the mid-1970's has multiplied the work required of accountants. THE ACCOUNTING INDUSTRY Public accountants are those who are available to the public at large for such accounting functions as monthly bookkeeping and tax preparation. Most states do not regulate the qualifications or performance of public accountants. The only accountants permitted to offer opinions about financial statements, however, are Certified Public Accountants (CPAs), who have passed rigorous national examinations and must also fulfill the requirements of the state in which they practice -- including several years of varied experience within the profession. As auditors, CPAs are expected to maintain a relationship of strict independence and professionalism with the firms for whom they work (for example, they do not hold stock in their client companies), so that the independence of their opinions may not be questioned.

Most U.S. CPA firms are relatively small and represent individuals and privately held businesses for whom they prepare financial statements and act as advisors on tax matters. The largest accounting firms in the United States are known collectively as 'The Big Six. ' They are immense organizations with offices throughout the world and the nation's largest companies as their clients. The services they offer reach well beyond their principal function, the auditing of financial reports, and have come to include the lucrative field of management consulting. ACCOUNTING STANDARDS The Financial Accounting Standards Board (FASB) researches accounting issues and writes advisory statements that are generally accepted as accounting principles.

(Other sources of principles include the rules of the SEC, the tax laws, and general practice.) Unfortunately, in undertaking reviews of the accounting problems of individual industries, the Board has not been able to resolve the larger issues of how accounting theory can reflect current economic conditions: the effects of inflation, for example, on the reported value of real estate, or the question of how to record pension assets and liabilities. Such large-scale financial scandals as the savings and loan failures of the late 1980's (see SAVINGS INDUSTRY) have created some public mistrust of auditing practices and accounting principles, and have brought down on the profession -- especially on the Big Six firms -- a number of liability suits. The auditing industry is largely responsible for disciplining itself to ensure the independence of its auditors; and where an auditor differs from management as to the appropriate reporting principles, the auditor will require adherence to generally accepted accounting principles. The American Institute of Certified Public Accountants (AICPA) has developed standards of performance for auditors designed to ensure both independence and that adequate audit work is performed. When financial statements are issued a 'clean opinion' but later are found to be misleading, the independence of the auditor may be challenged.

Although the auditor's task is not specifically to uncover fraud, courts have found auditors liable when their audit work was insufficient or lacked an adequate level of independence. William J. Oliver

Bibliography

Blensly, D.L., and Plank, T.M., Accounting Desk Book, 9th ed. (1989);
Briloff, A.J., Unaccountable Accounting (1972);
Meigs, W.B. andR.F., Accounting: The Basis for Business Decisions, 8 the. (1989);
Weinstein, G.W., The Bottom Line: Inside Accounting Today (1989).