Accountant

What skills does an accountant require in respect of external reports

For external reporting purposes the accountant has a two-fold obligation an obligation to ensure that the financial statements comply with statutory, professional and Listing requirements this requires the accountant to possess technical expertise an obligation to ensure that the financial statements present the substance of the commercial transactions the company has entered into this requires the accountant to have commercial awareness.2

What skills does an accountant require in respect of internal reports

For the internal user, the accountant is able to tailor his or her reports. The accountant is required to produce financial statements that are specifically relevant to the user requesting them. The accountant needs to be skilled in identifying the information that is needed and conveying its implication and meaning to the user. The user needs to be confident that the accountant understands the user's information needs and will satisfy them in a language that is understandable. The accountant must be a skilled communicator who is able to instil confidence in the user that the information is The accountant is a trained reporter of financial information. Just as for external reporting, the accountant needs commercial awareness. It is important, therefore, that he or she should not operate in isolation.

Accountants reporting role

The accountant's role is to ensure that the information provided is useful for making decisions. For external users, the accountant achieves this by providing a generalpurpose financial statement that complies with statute and is reliable. For internal users, this is done by interfacing with the user and establishing exactly what financial information is relevant to the decision that is to be made.

American Institute Of Certified Public Accountants

The American Institute of Certified Public Accountants (AICPA) is the premier national professional organization for the certified public accountant (CPA) profession in the United States. Its founding in 1887 was a milestone in establishing accountancy as a profession distinguished by rigorous educational requirements, high professional standards, a strict code of professional ethics, and a commitment to serving the public interest. As of 2000, its membership numbers more than 336,000 certified public accountants from around the country employed in various types of environments. Approximately 45 percent work in business and industry, nearly 40 percent work in public accounting firms, and still others are on the staffs of government bodies and agencies or are employed by educational institutions. In ad AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS

Accounting Is Not Just for Accountants

One main source of accounting information is in the form of financial statements that are packaged with other information in a financial report. Accountants keep the books and record the financial activities of an entity (such as a business). From these detailed records the accountant prepares financial statements that summarize the results of the activities. Keep in mind that this is not a book on bookkeeping and recordkeeping systems. I offer a brief explanation of procedures for capturing, processing, and storing accounting information in Chapter 3. Even experienced bookkeepers and accountants should find some nuggets in that chapter. However, this book is directed to users of accounting information. I focus on the end products of accounting, particularly financial statements, and not how information is accumulated. When buying a new car, you're interested in the finished product, not details of the manufacturing process that produced it. Overcoming the stereotypes of accountants I...

The certified management accountant cma

Management accounting has expanded in scope to cover a wide variety of business disciplines such as finance, economics, organizational behavior, and quantitative methods. In line with this development, the National Association of Accountants (NAA) has created the Institute of Management Accounting, which offers a program for becoming a Certified Management Accountant (CMA). The CMA program requires candidates to pass a series of uniform examinations covering a wide range of subjects. (See Problem 1.3 for the subjects covered in the CMA examination.) The objectives of the program are fourfold (1) to establish management accounting as a recognized profession, (2) to foster higher educational standards in the area of management accounting, (3) to establish objective measurement of an individual's knowledge and competence in the area of management accounting, and (4) to encourage continued professional development by management accountants.

How to Prepare Your Records for Your Tax Accountant

Copies of your tax returns should be kept in your home file as part of your tax records, with all records and receipts pertaining to income, deductions, and credits that appear on your tax return. Worksheet 12.1 lists all the tax records you should keep, not only to present to your accountant but also for the reasons listed above. All the 1099 series of forms should be retained to support receipts of different types of income. Other such records, such as brokerage statements and mutual fund statements that can prove the amounts of income shown on your tax return, should be kept in your tax folder. Many people meet with an accountant at least once a year to prepare their income tax returns. By organizing and summarizing your tax information ahead of the appointment, you can save your accountant considerable time, which should reduce the cost of preparing your tax return. By organizing and summarizing your information, you can do the leg-work rather than have your accountant plow...

Certified Public Accountant CPA

Also, like a CPA, the CMA Overview AboutlMAOverview.htm) is a professional certification for accountants working internally for a single corporation, as opposed to the CPA designation, which is for public accountants working for numerous external clients. A single accountant can and frequently does attain both designations. It can be verified by the Institute of Management Accountants, (800) 638-4427, X 173. As with many certifying boards, you can at times also obtain current or previous employment and or educational history.

Institute Of Management Accountants

The Institute of Management Accountants (IMA) is the largest educational, nonprofit association in the world devoted exclusively to management accounting, finance, and information management. It was founded in 1919 in Buffalo, New York, as the National Association of Cost Accountants by a group of businesspeople to expand the knowledge and professionalism of people specifically interested in cost accounting. Subsequently its name was changed to the National Association of Accountants and then in 1991 to the current name. These changes were made to reflect its broadened mission to disseminate the latest knowledge in accounting and finance to all those professionals employed in public and private companies as well as governmental and educational organizations. In its statement of mission, the IMA states that it will provide to members personal and professional development opportunities through education, association with business professionals, and certification in management accounting...

Certified Public Accountant

The designation certified public accountant (CPA) is conferred by a state or jurisdiction to individuals to practice as a licensed certified public accountant. The licensing of CPAs protects the public from incompetent individuals performing substandard accounting work. In the United States, there are fifty-four states or jurisdictions with laws and regulations on the requirements and obligations of licensed CPAs. In 1896, New York State passed the first accountancy law to test the qualifications of public accountants. This led to the issuance of a state license to practice as a certified public accountant and the emergence of accounting as a profession with licensing requirements, professional standards, and a code of professional ethics. Other states followed this lead, and eventually all of the fifty-four states and jurisdictions enacted public accounting legislation. The Boards of Accountancy of each jurisdiction are responsible for licensing candidates and for compliance with the...

International Federation Of Accountants

The International Federation of Accountants (IFAC) was officially constituted in October 1977 at the World Congress of Accountants in Munich. Its constitution was signed by sixty-three accountancy bodies in forty-nine countries. Its original terms of reference emphasized (1) the promotion of harmonized accounting standards, that is, measurement and disclosure standards, and (2) the development of harmonized professional standards, for example, auditing, education, and ethical standards. This duality of purpose placed IFAC in potential conflict with the International Accounting Standards Committee (IASC), whose mission also embraced accounting harmonization. To minimize duplication of effort, both organizations agreed in 1982 to have a uniform membership in which IASC would concentrate on promoting harmonized accounting standards while IFAC would focus on promoting harmonized professional standards. Ethics Committee promotes a current code of ethics for accountants Financial and...

The Role of Economist and Accountant in Business Valuation

We concluded that accounting was never intended to provide the basis for market value and that standard accounting statements can never be relied upon as an indicator of market value. Furthermore, we argue that understanding the economic conditions in the industry is essential to understanding the growth prospects of a business and therefore its value. Economists are certainly trained for this task. However, the first place to start in valuing a firm is its accounting statements. The evaluation of costs, the calculation of profit margins, etc., will normally be done more knowledgeably and effectively by an accountant. To properly value a firm, you must apply both intrinsic economic skills and accounting skills. Some individuals have both many do not. In such cases, we recommend that a person with complementary skills be included on the valuation team. This suggestion is also made by Patrick Gaughan, who describes independently and in very similar terms the advantages and deficiencies...

Electronic Accountant

The site features accounting news stories from Newswire, a daily news feature written by accounting editors, and a selection of feature articles on the accounting industry from the magazines published by the Accounts Media Group (AMG) including Accounting Today, Practical Accountant, and Accounting Technology. The Electronic Accountant site is a product of the AMG (formerly Faulkner and Gray) that is now owned by Thomson Financial. Also on the site are special reports like the Tax Research Survey, interviews with leaders in the accounting profession, and the top 100 links, along with product information and discussion forums (see Exhibit 11.5). Go to the Electronic Accountant for the excellent Newswire and to read stories from the current issues of AMG publications. These features set this site apart from the other accounting sites. Exhibit 11.5 The Electronic Accountant Exhibit 11.5 The Electronic Accountant The cover stories from the current issues of Practical Accountant,...

Uniform Certified Public Accountant Examination

Certified public accountant (CPA) is a designation awarded by a state or other governmental jurisdiction to individuals to practice as a licensed certified public accountant. The candidate for the CPA must meet education, examination, and experience requirements. Examinations were used as early as 1884 to test the qualifications of accountants and to issue certificates of proficiency upon passage of the examination. In the 1880s two competing organizations, the Institute of Accounts and the American Association of Public Accounts the predecessor to the current American Institute of Certified Public Accountants (AICPA) were issuing certificates based on satisfactory completion of an examination or years of experience as an accountant. Neither organization was able to effectively control the practice of accounting by nonmem-bers. Consequently, the two rival organizations cooperated to introduce legislation in New York to regulate the practice of public accounting. In 1896, New York...

Accountants in practice

The accountant in practice has a considerable body of ethical support to work from, particularly if he she is a member of one of the various Chartered Accountancy bodies. the standards of behaviour expected of accountants The POB has recommended that the profession should share experience of dealing with ethical issues or fraud through greater use of 'real-life' case studies as part of training. The professional bodies have responded and included ethics within their examination syllabi. For example, the ICAEW has an Ethics Module as one of the twelve modules examined at the Professional stage and the ACCA in its Paper P1, Professional Accountant, covers personal and professional ethics, ethical frameworks and professional values, as applied in the context of the accountant's duties and as a guide to appropriate professional behaviour and conduct in a variety of situations. In addition, as part of their ethical development, students will be required to complete a two-hour online...

Accountants in business

The accountant working within business has a different set of problems due to the dual position as an employee and a professional accountant. There is a potential clash of issues where the interests of the business could be at odds with professional standards. The various professional bodies approach things in different ways. For example, the ICAEW established the Industrial Members Advisory Committee on Ethics (IMACE) in the late 1970s to give specific advice to members with ethical problems in business. This is supported by a strong local support network as well as a national helpline for the guidance of accountants. At the moment IMACE is dealing with 200 to 300 problems per year but this is more a reflection of the numbers of chartered accountants in business than a reflection on the lack of ethical problems. A survey2 carried out by the Board of Chartered Accountants in Business indicated that 11 of members had put their jobs on the line over ethical issues. The type of problem...

Certified Management Accountant

To establish management accounting as a recognized profession by identifying the role of the management accountant and financial manager, the underlying body of knowledge, and a course of study by which such knowledge is acquired 4. to encourage continued professional development by management accountants.

The role of the accountant as guardian of business ethics

It is therefore a possible function of an accountant's role to be the guardian of ethics within a business because the following attributes are possessed by the accountant skill - the accountant is trained in the establishment and management of control systems and ethics is simply another layer of control stewardship - the accountant already acts as the steward of the shareholders' interests and the function is similar when discussing ethics rule orientation - the accountant is a trained follower of rules and is accomplished at ensuring others obey stated rules and regulations judgement - ethics requires the application of fine judgement, an attribute common in many accountants professionalism - the accountant is one of the main professionals working within businesses and the attributes of a professional are essential to make judgements on ethical breaches.

The role of the accountant in business

The accountant within business could also be seeing a growth in the ethical policing role as internal auditors take on the role of assessing the performance of managers as to their adherence to the ethical code of the organisation. This is already partially happening as conflicts of interest are often highlighted by internal audits and comments raised on managerial practices. This is after all a traditional role for accountants, ensuring that the various codes of practice of the organisation are followed. The level of adherence to an ethical code is but another assessment for the accountant to undertake.

Management and Cost Accounting Standards

Management accountants can use different costs and different information for different purposes, because their discipline is not required to adhere to generally accepted accounting principles when providing information for managers' internal use. In the United States, financial accounting standards are established by the Financial Accounting Standards Board (FASB), a private-sector body. No similar board exists to define universal management accounting standards. However, a public-sector board called the Cost Accounting Standards Board (CASB) was established in 1970 by the U.S. Congress to promulgate uniform cost accounting standards for defense contractors and federal agencies. An organization important to the practice of management and cost accounting is the Institute of Management Accountants, or the IMA. The IMA is a voluntary membership organization of accountants, finance specialists, academics, and others. It sponsors two major certification programs Certified Management...

Procedural steps when reporting to internal users

Figure 1.1 General financial decision model to illustrate the user accountant interface Figure 1.1 General financial decision model to illustrate the user accountant interface ACCOUNTANT USER ACCOUNTANT accountant the from the accountant Note that, although we refer to an accountant user interface, this is not a single occurrence because the user and accountant interface at each of the user decision steps. At step 1, the accountant attempts to ensure that the decision is based on the appropriate appraisal methodology. However, the accountant is providing a service to a user and, while the accountant may give guidance, the final decision about methodology rests with the user. At step 2, the accountant needs to establish the information necessary to support the decision that is to be made. At step 3, the accountant needs to ensure that the user understands the full impact and financial implications of the accountant's report taking into account the user's level of understanding and...

Moving Internal Audit out of Accountancy

Many of the trends behind the development of internal audit point to the ultimate position where the audit function becomes a high profile autonomous department reporting at the highest level. This may depend on moving out audit functions currently based in accountancy. It is possible to establish internal audit as a separate profession so that one would employ internal auditors as opposed to accountants. This is a moot point in that there are those who feel that the auditor is above all an accountant. Not only is this view short-sighted but it is also steeped in the old version of the internal auditor as a poor cousin of the external auditor. The true audit professional is called upon to review complicated and varied systems even if the more complicated and sensitive ones may often be financially based. A multidisciplinary approach provides the flexibility required to deal with operational areas. Many organizations require internal auditors to hold an accounting qualification or have...

Establish Job Descriptions

Exhibit 1.3 Sample Job Description Position Name Cost Accountant Reports to Assistant Controller Supervises None Basic Function This position is accountable for the ongoing analysis of process constraints, target costing projects, and margin analysis. The cost accountant must also construct and monitor those cost-effective data accumulation systems needed to provide an appropriate level of costing information to management.

Issue Performance Reviews

The job description does not provide a sufficient amount of detail about exactly what level of performance is expected to conduct a performance review. To use the job description in Exhibit 1.3 as an example, item number one is ''construct data accumulation systems.'' Does this mean that all possible systems must be created to give the cost accountant a good review, or is some lesser achievement acceptable How will this translate into a salary adjustment If neither the supervisor nor the employee knows the answers to these questions, the expectations of both parties may be far apart, resulting in an interesting performance review. One way to write performance level expectations is to list them in terms of low, medium, and exceptional performance. Each of the categories should be thoroughly described. Exhibit 1.4 contains a review that is based on item 1 in Exhibit 1.3 for the cost accountant to create data collection systems. The cost accountant's performance review criteria will take...

The Value of an Audit

I don't see any reason to pay a CPA to examine my company's books, Patty Hoffstet-ter tells you. They add to the cost of conducting business. Hoffstetter's brother-in-law prepared the company's financial information. He has no formal training in accounting but followed the instructions provided in the accounting software package that he purchased from an office supply company.

Checking Out Types of Reporting

Even if a firm doesn't need to make its financial reports public, if it wants to raise cash outside a very small circle of friends, it has to prepare financial statements and have a certified public accountant (CPA) audit them, or certify that the financial statements meet the requirements of the generally accepted accounting principles (or GAAP, which you can find out more about in the section How the number crunchers are kept in line, later in this chapter). Few banks consider loaning large sums of money to businesses without audited financial statements. Investors who aren't involved in the daily management of a business also usually require audited financial statements. Firms must file this report within 90 days after the end of the fiscal year (companies with more than 75 million in assets must file within 60 days). In addition to the information included in the glossy annual reports sent to shareholders (see the preceding section), investors can find more detailed information...

Working with Financial Statements

We recognize that accounting numbers are often just pale reflections of economic reality, but they are frequently the best available information. For privately held corporations, not-for-profit businesses, and smaller firms, for example, very little direct market value information exists at all. The accountant's reporting function is crucial in these circumstances. Clearly, one important goal of the accountant is to report financial information to the user in a form useful for decision making. Ironically, the information frequently does not come to the user in such a form. In other words, financial statements don't come with a user's guide. This chapter and the next are first steps in filling this gap.

Your Goal Learning All The Facts

As we'll see in this and the next chapter, there are plenty of areas of investigation you're not likely to have expertise in. What you learn in this and the next chapter isn't designed to replace the roles your attorney and accountant should perform. Rather, it's designed to show you all the things your attorney and accountant should do.

Identifying Unusual Transactions and Events

2-46 As the staff accountant for Gil's Plumbing, you notice that a 1,000 check is drawn (payable to Cash ) on the third Monday of each month and is charged to miscellaneous expenses. You also notice that a sleazy character with a canvas bag comes into the office on the third Tuesday of each month for a 30-second meeting with Gil. After inquiring about what the 1,000 check is for and to which account it might more properly be charged, Gil suggests that you should mind your own business and just record the expenses where you are told.

Are All Fords Created Equal

Two companies purchase identical Ford Taurus automobiles. Company A will use its vehicle for occasional corporate visitors, so it's expected to last about five years. Company B will use its vehicle as part of its fleet of taxis, so it's expected to last about 18 months. Over which of the following periods of time would an accountant depreciate or expense the purchase

Taking the Pulse of a Business Financial Statements

Financial statements are prepared at the end of each accounting period. A period may be one month, one quarter (three calendar months), or one year. Financial statements report summary amounts, or totals. Accountants seldom prepare a complete listing of the details of all the activities that took place during a period, or the individual items making up a total amount. Business managers occasionally need to search through a detailed list of all the specific transactions that make up a total amount. When they want to drill down into the details, they ask the accountant for the more detailed information. But this sort of detailed listing is not a financial statement. Other financial statements are different from the balance sheet in one important respect They summarize the flows of activities over the period. (An example of a flow number is the total attendance at Colorado Rockies baseball games over its entire 82 home game regular season the cumulative count of spectators passing...

Income capital and changing price levels

A primary concern of income measurement to both economist and accountant is the maintenance of the capital stock, i.e. the maintenance of capital values. The assumption is that income can only arise after the capital stock has been maintained at the same amount as at the beginning of the accounting period.

Regulation of the Primary Market

Underwriting activities are regulated by the Securities and Exchange Commission (SEC). The Securities Act of 1933 governs the issuance of securities. The act requires that a registration statement be filed with the SEC by the issuer of a security. The type of information contained in the registration statement is the nature of the business of the issuer, key provisions or features of the security, the nature of the investment risks associated with the security, and the background of management. Financial statements must be included in the registration statement, and they must be certified by an independent public accountant.

The Basic Accounting Equation

Two aspects of the definition deserve emphasis. First, the term probable suggests that in some situations accountants are not certain that future economic benefits exist. Many business owners, for example, feel that a loyal customer base and a highly skilled workforce enhance a firm's competitive advantage. Although few would argue with this, the link in any particular situation between customer loyalty or workforce skill and future benefits is sufficiently uncertain that these factors are not recognized as assets. Two aspects of the definition of liabilities need elaboration. First, as with assets, the term probable is used. This is an important part of the definition. Although in some instances, the existence of a liability is virtually certain (as when one arises from obtaining a bank loan), other situations are less clear. For example, consider a firm that has been sued. At the inception of the suit, the outcome may be highly uncertain, but as the litigation proceeds, it may seem...

The economics of information and knowledge in intellectual capitalism

Intangible knowledge assets behave very differently than tangible assets from an economic point of view. As a nonphysical asset, knowledge exists independently of space the same knowledge can be sold as many times as you like without being worn out. The fact that you sold information or knowledge to someone does not prevent you from selling it to someone else. But knowledge and information can be extremely sensitive to time. It can outdate and depreciate faster than an accountant would be able to make the posting for an

Supplier And Customer Relations

The same holds true of customer relations. If the business sells to the retail public, you can learn about the seller's dealings with its customers by visiting the store. But if the seller is a manufacturer or a distributor, you need to be careful. The starting point once again is to get a list of the principal customers and a breakdown of the percentage of sales made to each customer. You (or your accountant) should be able to verify the list by looking at the invoices sent to each customer and comparing them with the total sales figures in the financial statements.

Hedge Fund Manager Organization

Of special importance is the Chief Financial Officer. The CFO will be the investor's most important link with the hedge fund manager after an investment is made because the CFO will be responsible for reporting the hedge fund manager's performance numbers. Consequently, the investor should make certain that the CFO has strong background in accounting, preferably a Certified Public Accountant, a Chartered Accountant, or another professional accounting designation. Last, the investor must determine who are the senior managers in charge of trading, information systems, marketing, and research and development.

GAAP and the Income Statement

A primary reason that accounting income differs from cash flow is that an income statement contains noncash items. The most important of these is depreciation. Suppose a firm purchases a fixed asset for 5,000 and pays in cash. Obviously, the firm has a 5,000 cash outflow at the time of purchase. However, instead of deducting the 5,000 as an expense, an accountant might depreciate the asset over a five-year period. The depreciation deduction is simply another application of the matching principle in accounting. The revenues associated with an asset would generally occur over some length of time. So the accountant seeks to match the expense of purchasing the asset with the benefits produced from owning it. The distinction between fixed and variable costs is important, at times, to the financial manager, but the way costs are reported on the income statement is not a good guide as to which costs are which. The reason is that, in practice, accountants tend to classify costs as either...

Accounting Ramifications of Control

Accounting procedures are more involved when control is achieved through a stock acquisition. The controlling company, the parent, will record only an investment account to reflect its interest in the controlled company, the subsidiary. Both the parent and the subsidiary remain separate legal entities with their own separate sets of accounts and separate financial statements. Accounting theory holds that where one company has effective control over another, there is only one economic entity, and there should be only one set of financial statements that combines the activities of the entities under common control. The accountant will prepare a worksheet, referred to as the consolidated worksheet, that starts with the separate accounts of the parent and the subsidiary. Various adjustments and eliminations will be made on this worksheet to merge the separate accounts of the two companies into a single set of financial statements, which are called consolidated statements.

Following the rules and bending the rules

Estimates are subjective and arbitrary to some extent. The accountant can choose either pessimistic or optimistic estimates, and thereby record either conservative profit numbers or more aggressive profit numbers. One key prediction made in preparing financial statements is called the going-concern assumption. The accountant assumes that the business is not facing imminent shutdown of its operations and the forced liquidations of its assets, and that it will continue as usual for the foreseeable future. If a business is in the middle of bankruptcy proceedings, the accountant changes focus to the liquidation values of its assets. A business may resort to creative accounting to make profit for the period look better, or to make its year-to-year profit less erratic than it really is (which is called income smoothing). Like lawyers who know where to find loopholes, accountants can come up with inventive interpretations that stay within the boundaries of GAAP. I warn you about these...

The Squeaky Collection Wheel Gets The Check

An accounts receivable aging schedule was shown in Exhibit 2.4. The next step is to use it as an analytical tool and as a collection trigger. With most small businesses now using microcomputers and sophisticated accounting software, they can get instantaneous accounts receivable aging schedules and can use the computer as an analytical tool. The company can define the criteria that meet its needs and correspond to its collection philosophy. For instance, the system could highlight on a weekly basis all receivables coming up to 30 days old and those over 30 days old and still unpaid, and on an every-other-day basis all receivables over 60 days old. This allows the company to stay current on all overdue invoices and take appropriate action regularly and persistently. The company may also wish to identify those bills that have been paid each day and

Categorize your financial information The chart of accounts

Suppose that you're the accountant for a corporation and you're faced with the daunting task of preparing the annual federal income tax return for the business. This demands that you report the following kinds of expenses (and this list contains just the minimum ) Where do you start Well, if it's March 1 and the tax return deadline is March 15, you start by panicking unless you were smart enough to think ahead about the kinds of information your business would need to report. In fact, when your accountant first designs your business's accounting system, he or she should dissect every report to managers, the external financial statements, and the tax returns, breaking down all the information into categories such as those I just listed. As a business manager, you should make sure that the controller (chief accountant), or perhaps an outside CPA consultant, reviews the chart of accounts periodically to determine whether the accounts are up-to-date and adequate for the business's needs....

Creating an Income and Expense Tracking Document

Even if you use software such as Quicken by Intuit or Microsoft Money (covered in more detail in Chapter 2, Getting the Figures to Match ), you might find it helpful to keep a separate income and expense tracking document. You can run reports in your money management program that show you how you're doing with your financial goals, but the act of hand-writing or keying in the figures in a separate document can help you see the big picture more easily. I use QuickBooks (the business version of Quicken) to record all my transactions and balance all of my accounts electronically, but I also use another spreadsheet to list all of the data I want to see together, not all of which has a place in QuickBooks where it can be entered. I've tried to create just the right custom report in QuickBooks to eliminate the need for this spreadsheet, but so far nothing has worked as well as my trusty Excel document.

List Of Abbreviations

Association of Chartered Certified Accountants American Institute of Certified Public Accountants Canadian Institute of Chartered Accountants Chartered Institute of Management Accountants Certified Public Accountant Institute of Chartered Accountants in England and Wales

Micro Strategy Changes Its Mind

On March 20, 2000, MicroStrategy announced that it would restate its 1999 revenue, originally reported as 205.3 million, to around 150 million. The company's shares promptly plummeted by 140 to 86.75 a share, slashing chief executive officer Michael Saylor's paper wealth by over 6 billion. The company explained that the revision had to do with recognizing revenue on the software company's large, complex projects.8 Micro-Strategy and its auditors initially suggested that the company had been obliged to restate its results in response to a recent (December 1999) Securities and Exchange Commission (SEC) advisory on rules for booking software revenues. After the SEC objected to that explanation, the company conceded that its original accounting was inconsistent with accounting principles published way back in 1997 by the American Institute of Certified Public Accountants. Until MicroStrategy dropped its bombshell, the company's auditors had put their seal of approval on the company's...

Eliminate All Invoices

Mike Barrie, owner of Pan Pizza Equipment, Inc., has been contacted by several customers who would like to start paying the company based on their production. Pan Pizza produces the rollers that are used to move partially cooked pizzas through a baking oven. The customers will build the rollers into their baking machines, which require one week to build, and then pay Pan Pizza within two additional weeks. This means that payment will occur in three weeks instead of the usual 30 days (a reduction of 30 ). The customers proposing this change make up 65 of Pan Pizza's total sales volume. Its average receivables balance is 1,560,000. The controller feels that there will be difficulty matching customer payments to any internal documents for control purposes, and proposes having some customized programming work done that will match payments received to the company's cumulative record of materials sent to each customer. The programming staff estimates that this project will require four...

Complete the process with endofperiod procedures

I Make a careful sweep of all matters to check for other developments that may affect the accuracy of the accounts For example, the company may have discontinued a product line. The remaining inventory of these products may have to be removed from the asset account, with a corresponding loss recorded in the period. Or the company may have settled a long-standing lawsuit, and the amount of damages needs to be recorded. Layoffs and severance packages are another example of what the chief accountant needs to look for before preparing reports. Lest you still think of accounting as dry and dull, let me tell you that end-of-period accounting procedures can stir up controversy of the heated-debate variety. These procedures require that the accountant make decisions and judgment calls that upper management may not agree with. For example, the accountant may suggest recording major losses that would put a big dent in profit for the year or cause the business to report a loss. The outside CPA...

Compilation And Review Services

Public accountants are qualified to provide a range of services related to financial statements. Among the services are reviews and compilations, which are less comprehensive than audits, which are required for publicly owned companies. Statements on Standards for Accounting and Review Services are issued by the Accounting and Review Services Committee, which is the se nior technical committee of the American Institute of Certified Public Accountants (AICPA) designated to issue pronouncements in connection with the unaudited financial statements or other unaudited financial information of a nonpublic entity. A review is less than an audit inasmuch as a review does not involve obtaining an understanding of internal control, assessing control risk, testing accounting records, and obtaining corroborating evidence to support the financial information shown in the financial statements. The public accountant provides limited assurance with a review. This type of assurance is limited in that...

Leave good audit trails

Good bookkeeping systems leave good audit trails. An audit trail is a clear-cut path of the sequence of events leading up to an entry in the accounts. An accountant starts with the source documents and follows through the bookkeeping steps in recording transactions to reconstruct this path. Even if a business doesn't have an outside CPA do an annual audit, the accountant has frequent occasion to go back to the source documents and either verify certain information in the accounts or reconstruct the information in a different manner. Suppose that a salesperson is claiming some suspicious-looking travel expenses the accountant would probably want to go through all this person's travel and entertainment reimbursements for the past year. If the IRS comes in for a field audit of your business, you'd better have good audit trails to substantiate all your expense deductions and sales revenue for the year. The IRS has rules about saving source documents for a reasonable period of time and...

Ethics Reclassifying Liabilities

Consider the ethical implications of reclassifying the note, assuming that you know the note's maturity is at the end of the current fiscal year. You may assume that the size of the note is significant (or material). As an accountant within the firm, what should would you do As the firm's auditor, how would you view this reclassification

Nature of accounting capital

Income Yo i for the financial year to-i as compiled by the accountant was i,2oo In practice, however, the accountant would compute income Y by compiling a profit and loss account. So, of what use is this formula For reasons to be discussed later, the economist finds use for the formula when it is amended to take account of what we call present values. Computed after the end of a financial year, it is the ex post measure of income.

Accounting conventions

Accountants are often viewed as merchants of gloom, always prone to take a pessimistic point of view. The fact that a point of view has to be taken at all is the root of the problem. The convention of conservatism means that, given a choice, the accountant takes the figure that will result in a lower end profit. This might mean, for example, taking the higher of two possible expense figures. Few people are upset if the profit figure at the end of the day is higher than earlier estimates. The converse is never true.

Track Software Inc. Integrative Case

Seven years ago, after 15 years in public accounting, Stanley Booker, CPA, resigned his position as Manager of Cost Systems for Davis, Cohen, and O'Brien Public Accountants and started Track Software, Inc. In the 2 years preceding his departure from Davis, Cohen, and O'Brien, Stanley had spent nights and weekends developing a sophisticated cost-accounting software program that became Track's initial product offering. As the firm grew, Stanley planned to develop and expand the software product offerings all of which would be related to streamlining the accounting processes of medium- to large-sized manufacturers.

Preparing a profit and loss statement for January June

Their accountant insists that Brother and Sister prepare a profit and loss statement for the first half-year of the company's operations. The accountant explains that o It is important they know how the new company has performed thus far o Brother and Sister have to pay an estimated tax payment to the IRS on July 15 based on their profit for the first half year. The main difference between the profit and loss statements shown thus far and the statement that the accountant prepares is depreciation. There are several different interpretations of depreciation o The accountant depreciates the computer over a 2-year useful life. The monthly

Example 63 Book Rate of Return

We have already seen that cash flows and accounting income may be very different. For example, the accountant labels some cash outflows as capital investments and others as operating expenses. The operating expenses are deducted immediately from each year's income, while the capital investment is depreciated over a number of years. Thus the book rate of return depends on which items the accountant chooses to treat as capital investments and how rapidly they are depreciated. Book rate of return is not generally the same as the internal rate of return and, as you can see in Self-Test 6.4, the difference between the two can be considerable. Book rate of return therefore can easily give a misleading impression of the attractiveness of a project.

P317 Endof Period Adjustments and Closing

0t)js. 4 5 At December 31, 2004, the accountant at Puget Sounds, a recording studio, has entered all the firm's transactions into the accounting system and is beginning the end-of-period process. He asks your help in identifying the necessary adjusting entries. In the first column on page F121, the accountant has listed the company's account balances before considering adjustments. In addition, he has provided other information that may cause you to recommend that certain adjusting entries be made.

Taking care of some housekeeping details

I want to point out a few things about income statements that accountants assume everyone knows but, in fact, are not obvious to many people. (Accountants do this a lot They assume that the people using financial statements know a good deal about the customs and conventions of financial reporting, so they don't make things as clear as they could.) For an accountant, the following facts are second-nature i Profit isn't usually called profit. As you see in Figure 4-1, bottom-line profit is called net income. Businesses use other terms as well, such as net earnings or just earnings. (Can't accountants agree on anything ) In this book, I use the terms net income and profit interchangeably.

Handling Bad Debt Write Offs

In the early stages, the bad debt accrual does not appear on the books, since we don't know which accounts will go bad. To accommodate this need, some companies, especially those that are audited, set up accounts based on aging categories or on a certain rate multiplied by sales. To set up such an account in the amount of 5,000, for example, the accountant debits Bad Debt Expense for 5,000, credits Reserve for Bad Debt Expense for 5,000, and notes this transaction as Records accrual for bad debts.

Provisions of the

Non-interference in the audit process Under Section 303, the Act states it is unlawful for directors, officers (or persons acting under their direction) to take any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant auditing the firm's financial statements.

Profits Versus Cash Flow

When Pepsi's accountants prepare the income statement, they do not simply count the cash coming in and the cash going out. Instead the accountant starts with the cash payments but then divides these payments into two groups current expenditures (such as wages) and capital expenditures (such as the purchase of new machinery). Current expenditures are deducted from current profits. However, rather than deducting the cost of machinery in the year it is purchased, the accountant makes an annual charge for depreciation. Thus the cost of machinery is spread over its forecast life. When calculating profits, the accountant does not deduct the expenditure on new equipment that year, even though cash is paid out. However, the accountant does deduct depreciation on assets previously purchased, even though no cash is currently paid out.

The cash that the company receives is equal to the sales shown in the income statement less the increase in unpaid bills

The accountant also tries to match the costs of producing the goods with the revenues from the sale. For example, suppose that it costs 60 in period 1 to produce the goods that are then sold in period 2 for 100. It would be misleading to say that the business made a loss in period 1 (when it produced the goods) and was very profitable in period 2 (when it sold them). Therefore, to provide a fairer measure of the firm's profitability, the income statement will not show the 60 as an expense of producing the goods until they are sold in period 2. This practice is known as accrual accounting. The accountant gathers together all expenses that are associated with a sale and deducts them from the revenues to calculate profit, even though the expenses may have occurred in an earlier period. Of course the accountant cannot ignore the fact that the firm spent money on producing the goods in period 1. So the expenditure will be shown in period 1 as an investment in inventories. Subsequently in...

Accounting Historical Perspectives

With the increase in the number of corporations, there also arose a demand for additional financial information that A.C. Littleton (1933 1988) in his landmark book, The Rise of the Accounting Profession, called figure knowledge. With no direct knowledge of a business, investors had to rely on financial statements for information, and to create those statements, more complex accounting methods were required. The accountant's responsibility, therefore, expanded beyond simply recording entries to include the preparation, classification, and analysis of financial statements. As John L. Carey (1969) wrote in The Rise of the Accounting Profession, the nineteenth century saw bookkeeping expanded into accounting'' (p. 15). Additionally, as the development of the corporation created a greater need for the services of accountants, the study of commerce and accounting became more important. Although there had been trade business schools and published texts on accounting bookkeeping, traditional...

Other Opportunities Courtesy of Accounts Payable

When it doesn't work, the consequences can be serious. Your accountant should be an expert in cash management and be committed to making the float work. Balance reporting simply refers to checking company accounts via direct online access to the bank's records using a personal computer. Similar in technique to presentment accounts, automated balance reporting allows direct access to information and gives your accountant the ability to deposit just as much money into the payment account as necessary and no more.

Transaction Costs and Value Adding

Attorney, accountant, broker, and syndicator fees can vary substantially across new entity types. Typically the cheapest entity to form is a sole proprietorship, for which most jurisdictions require little legal documentation. The next cheapest is the general partnership, for which usually only an operating agreement must be kept. Limited partnerships must file articles of partnership, and corporations must file articles of incorporation with the government in the country where they are located. The attorney fees for drafting these depend on the number of owners and the number and complexity of legal arrangements that the entrepreneur desires. LLCs also must file documents with the government, which are more expensive to draft. If outside financing is sought (see Chapter 4 for more details), the transactions costs are typically higher for equity than debt, and increase proportionately with the number of investors and amount of the financing.

Discount Cash Flows Not Profits

If the firm lays out a large amount of money on a big capital project, you would not conclude that the firm performed poorly that year, even though a lot of cash is going out the door. Therefore, the accountant does not deduct capital expenditure when calculating the year's income but instead depreciates it over several years. The project costs 2,000 today, but accountants would not treat that outlay as an immediate expense. They would depreciate that 2,000 over 2 years and deduct the depreciation from the cash flow to obtain accounting income Thus an accountant would forecast income of 500 in Year 1 and an accounting loss of 500 in Year 2. Here is another example of the distinction between cash flow and accounting profits. Accountants try to show profit as it is earned, rather than when the company and the customer get around to paying their bills. For example, an income statement will recognize revenue when the sale is made, even if the bill is not paid for months. This practice...

Criteria for getting a listing

You will need to be supported by a team that will include a sponsor, stockbroker, reporting accountant and solicitor. These should be respected firms, active in flotation work and familiar with the company's type of business. You and your company may be judged by the company you keep, so choose advisers of good repute and make sure that the personalities work effectively together. It is very unlikely that a small local firm of accountants, however satisfactory, will be up to this task. Sponsor. You will need to appoint a financial institution, usually a merchant banker, to fill this important role. If you do not already have a merchant bank in mind, your accountant will offer guidance. The job of the sponsor is to coordinate and drive the project forward. Timetable. It is essential to have a timetable for the final months during the run-up to a float - and to adhere to it. The company's directors and senior staff will be fully occupied in providing information and attending...

Professional Services

If the accountant took the same aggressive position with respect to a certain item(s) on the tax returns for other years, you may be faced with an audit for those years as well. If the large increase in professional services was due to legal fees, it probably means the business was involved in a lawsuit. Keep digging.

Personal Finance Software

There are several software packages that allow individuals or small businesses to manage finances, such as paying bills either electronically or by check, and monitor investments. The packages are fairly sophisticated in that they provide for secure communications for electronic bill paying and other online banking services such as account reconciliation, as well as the importing of current stock-market quotes. The most widely used package is Quicken and, for small businesses, Quickbooks. Microsoft Money is also a comparable and popular package.

Why Finance and Accounting Think Differently

Accountants smooth asset values over time. Accountants use impairment schedules. Both accountants and financiers are interested in firm value. But the principal difference between them is that the accountants try to approximate changes in the current value of the firm, while the latter try to understand the exact timing of hard cash inflows and outflows over the entire future. The former want to learn about earnings the latter want to learn about cash flows. The main difference between these two concepts of income and cash flows are accruals economic transactions that have delayed cash implications. For example, if I owe your firm 10,000 and have committed to paying you tomorrow, the accountant would record your current firm value to be 10,000 (perhaps time- and credit-risk adjusted). In contrast, the financier would consider this to be a zero cash-flow today until tomorrow when the payment actually occurs. The contrast is that the accountant wants the financial statements to be a...

Implement A Perpetual Inventory System

Extensive review of the bills of material indicates that they are accurate and have been accurate in the past. Also, the purchasing department calculates that it spends an extra 12,000 per year on rush freight charges to bring in materials that were supposedly in the warehouse, but could not be located. The warehouse must be enclosed for the perpetual inventory it will cost 8,000 to fence in the warehouse area, plus 4,500 to install a computer and link it to the accounting software on the company network. In addition, two warehouse clerks must be hired at salaries of 25,000 each, plus a 10 overtime premium for the clerk working the second shift. Finally, two hourly employees must be assigned to the warehouse for three months to help with arranging the inventory, tagging it, and logging it into the computer each of these employees is paid 14 per hour. Is it a good idea to install a perpetual inventory system

Solve Now 16 Solutions

However bad my answers to exercises in earlier chapters may have been, the solutions in this chapter are probably worse. I am notoriously bad when it comes to keeping the correct signs. I have no future as an accountant Before this chapter is formally finished, this section will be quadruply checked.

Beware of allocated overhead costs

We have already mentioned that the accountant's objective in gathering data is not always the same as the investment analyst's. A case in point is the allocation of overhead costs such as rent, heat, or electricity. These overhead costs may not be related to a particular project, but they must be paid for nevertheless. Therefore, when the accountant assigns costs to the firm's projects, a charge for overhead is usually made. But our principle of incremental cash flows says that in investment appraisal we should include only the extra expenses that would result from the project. A project may generate extra overhead costs, but then again, it may not. We should be cautious about assuming that the accountant's allocation of overhead costs represents the incremental cash flow that would be incurred by accepting the project.

Some Preliminary Pointers

Don't agree on the price or the terms until you, your attorney, and your accountant have had a chance to conduct a thorough investigation. If you later find there are skeletons you didn't know about, the negative things you find may result in a lower price or better terms. This won't happen if you and the seller have already agreed on a price. There's nothing that frustrates an attorney more than having a client who has already agreed on all the terms of a sale and who shows up the day before the scheduled closing asking the attorney to review all the paperwork. If that review reveals assets tied up by UCC-1 filings, leases about to expire, or any of a host of other problems, having already agreed to the terms is going to make it that much more difficult to cut a better deal. If the seller offers you what sounds like good terms, your response should be along these lines Your offer sounds good, but I just don't know. I'll have to have it reviewed by my attorney or accountant. There are...

Estimate Cash Flows on an Incremental Basis

Beware of Allocated Overhead Costs We have already mentioned that the accountant's objective is not always the same as the investment analyst's. A case in point is the allocation of overhead costs. Overheads include such items as supervisory salaries, rent, heat, and light. These overheads may not be related to any particular project, but they have to be paid for somehow. Therefore, when the accountant assigns costs to the firm's projects, a charge for overhead is usually made. Now our principle of incremental cash flows says that in investment appraisal we should include only the extra expenses that would result from the project. A project may generate extra overhead expenses then again, it may not. We should be cautious about assuming that the accountant's allocation of overheads represents the true extra expenses that would be incurred.

Prepare That Pro Forma

There are two very good reasons for preparing a pro forma You'll need it, and your banker will require it. You'll need it because no matter what fancy footwork your accountant can accomplish, keeping a business going ultimately boils down to how much cash is in the till. If you don't plan and two years down the road there's no cash, you're in big trouble. This is why lenders won't lend you any money unless they've had the opportunity to eyeball your pro forma very carefully. Even if you don't need to borrow any money to buy a business, you still should prepare the pro forma. There are few absolutes contained in this book, but here's one Anyone who buys a business without first preparing a pro forma is crazy Let's assume that you and your accountant have obtained five years' worth of financial statements from Houston. Your accountant should then summarize most of the relevant information on a one-page spread sheet. Study the one in Table 5.1 for a few minutes. As you can see, the...

Analyzing Your Own Pro Forma

We have an entry called depreciation in the income statement, but we don't on the pro forma. Even though it's an item of expense for accounting purposes, it increases cash to the extent it reduces federal and state taxes. We've assumed your accountant has computed the effect of the purchase of the equipment on the estimated taxes the business will have to pay. With the aid of a personal computer, it's easy to change assumptions and see the results instantly. Numerous software packages on the market are designed to help you prepare and play with your pro forma. Most accountants own or have access to this type of software.

Stop Collecting Actual Workinprocess Costs

Does not report on actual work-in-process costs, relying instead on bills of material generated by the engineering department and updated with selected information gathered from the shop floor. Mr. Smith is determined to try this as well, but must convince the top managers of Steady State Systems that they will still receive high-quality cost information despite the associated reduction in personnel costs. After considerable investigation, Mr. Smith finds that Steady State's bills of material currently show costs that vary from actual costs by an average of 15 . In order to report information that will not lead to poor decision making, Mr. Smith must reduce this variance to 5 . To do so, an engineer must be hired to continually update bills of material information this person's salary will be 55,000. Also, the warehouse staff must report on items returned to the warehouse from the shop floor, as well as on extra parts issued to the shop floor (which reveals excesses or shortages on...

Topics for Class Discussion

You have just bought a 12-year zero coupon bond at a 6 yield to maturity. Your accountant has told you that you must pay a federal income tax, at 28 , on the accrual, even though you aren't actually collecting any cash. How will this affect the return on your investment What will be the size of the effect, in dollars and in yield

How To Value The Sellers Business

Let's assume that you, your accountant, and your attorney have conducted as diligent an investigation as possible of Houston Sash & Door. Your accountant has analyzed the financial statements for the business's five preceding years, has compared them with the business's accounting ledgers, and has even sampled the invoices and check registers to verify their accuracy. The accountant has prepared a number of detailed pro formas for you that provide you with good estimates of the future of the business based on a number of assumptions. Your attorney has reviewed the leases, contracts, and loan agreements and has conducted a UCC-1 search at the secretary of state. So far, everything's a go. Step 5. Multiply the result in step 4 by a cap factor. You're now at the very heart of the problem. What kind of cap factor will you apply At this point you're on your own. The full investigation that you, your attorney, and accountant have conducted

The Statement of Cash Flows

Ample, you can see that the increase of 303 million in accounts receivable is subtracted from income, because this represents sales that Pepsi includes in its income statement even though it has not yet received payment from its customers. On the other hand, Pepsi increased accounts payable by 253 million. The accountant deducted this figure as part of the cost of the goods sold by Pepsi in 1998, even though Pepsi had not yet paid for these goods. Thus the 253 million increase in accounts payable must be added back to calculate the cash flow from operations. We have pointed out that depreciation is not a cash payment it is simply the accountant's allocation to the current year of the original cost of the capital equipment. However, cash does flow out the door when the firm actually buys and pays for new capital equipment. Therefore, these capital expenditures are set out in the second section of the cash-flow statement. You can see that Pepsi spent 1,271 on new capital equipment and...

Ratio analysis spreadsheets

Bookkeeping and accounting software often has 'report generator' programs that crunch out ratios for you, sometimes with helpful suggestions on areas to be probed further. Biz ed (www.bized.co.uk Company information Financial ratio analysis) and the Harvard Business School have free tools that calculate financial ratios from your financial data. They also provide useful introductions to ratio analysis as well as defining each ratio and the formula used to calculate it. You need to register on the Harvard website to be able to download their spreadsheet.

Intraperiod Purchase under the Simple Equity Method

The accountant will be required to apply special procedures when consolidating a controlling investment in common stock that is acquired during the fiscal year. The D&D schedule must be based on the subsidiary stockholders' equity on the interim purchase date, including the subsidiary retained earnings balance on that date. Also, the consolidated income of the consolidated com

Police Officer versus Consultant

These terms do not conjure up the concept of a helpful, value-add service and here we tackle the fallout of negativity and the need to manage this problem by adopting the stance that merely being genuine is not enough. One has to seriously consider one's position and the impact of the applied audit policies on the behavioural aspects of this role, to uncover any actual or potential barriers to good performance. Alan Marshall outlines his approach when asked by someone, 'So what do you do for a living ' 'The word ''audit'' has negative connotations, fostering the image of tick and turn When announcing that I work as internal auditor perhaps the most frustrating reaction is ''Ah You're an accountant. You check people's books, don't you '' '1

Inventory Valuation Report

This report is used by the accounting staff to review the valuation of inventory items. It includes all the information on the cycle counting and audit reports, as well as the unit cost and extended cost of each item. When it is sorted in descending order of extended cost, an accountant can review the most expensive items for accuracy. Usually, a quick comparison of the extended cost to the part description will suffice to reveal any items that have incorrect extended costs. One of the primary reasons for an inaccurate extended cost is an inaccurate unit of measure, so it is important that the units of measure be included in the report. Also the accounting staff should occasionally review the

Overhead. On February 28 The Company Had 400 Units In Process 70 Percent Complete

37. (Weighted average) You have just been hired as the cost accountant for Sun Valley Micro, a producer of personal computer cases. This position has been vacant for one month. John Amos, manager of the firm's tax department, has performed some computations for last month's information however, he confesses to you that he doesn't remember a great deal about cost accounting.

The Probvalue approach

Notice that Table A2 gives the Prob-value for a one-tail test for a two-tail test the Prob-value should be doubled. Thus for the accountant, using the two-tail test, the significance level is 6.88 and this is the level at which the null hypothesis can be rejected. Alternatively we could say we reject the null with 93.12 confidence. This does not meet the standard 5 criterion (for the significance level) which is most often used, so would result in non-rejection of the null.

Gain or Loss on Disposal of Fixed Assets

Later, at a family reunion, Swen mentioned that he had sold his mixer at a loss of 1,000. Jerry, while smiling under his beard, said that he had done better than that, and that Swen should check with his accountant because Jerry had realized a gain on the sale of his mixer.

Preparation of accounts in Format 1 following IAS 8 and IFRS

By way of illustration, assume you are the chief accountant of Lewes Road Wines plc, a UK wholesale distributor currently operating from a single warehouse office complex in London. Until June 20X2 the company had a plant at Dover, where wine that was imported in bulk was bottled prior to its sale to retail outlets. The profitability of this activity had declined and the plant had closed.

Analyzing the Average Accounting Return Method

The most important flaw in the AAR method is that it does not use the right raw materials. It uses the net income figures and the book value of the investment (from the accountant's books) to figure out whether to take the investment. Conversely, the NPV rule uses cash flows.

The problem of distinguishing between avoidance and evasion

The problem lies in distinguishing clearly between legal avoidance and illegal evasion. It can be difficult for accountants to walk the careful line between helping clients (in tax avoidance) and colluding with them against the Inland Revenue.7 When clients seek advice, accountants have to be careful to ensure that they have integrity in all professional and business relationships. Integrity implies not merely honesty but fair dealing and truthfulness. 'In all dealings relating to the tax authorities, a member must act honestly and do nothing that might mislead the authorities.'8 As an example to illustrate the problems that could arise, a client company has carried out a transaction to avoid taxation, but failed to minute the details as discussed at a directors' meeting. If the accountant were to correct this act of omission in arrear, this would be a move from tax avoidance towards tax evasion. Another example of such a move from tax avoidance to tax evasion might be where an...

Advance corporation tax the system until 5 April 1999

Unrecovered ACT would have appeared in the balance sheet as an asset. At this point the accountant must have considered the prudence concept. In order for it to have remained as such on the balance sheet it must have been (a) reasonably certain and (b) foreseeable that it would be recoverable at a future date. If the ACT could be reasonably seen as recoverable then it should have been shown on the balance sheet as a deferred asset. If, for any reason, it seemed improbable that there would be sufficient future tax liabilities to 'cover' the ACT, then it had to be written off as irrecoverable. This payment of ACT stopped on 5 April 1999 with a change in the imputation system. Companies which had paid tax for which they had not yet had relief against mainstream corporation tax at 5 April 1999 are permitted to carry it forward against future corporation tax liabilities - this carry-forward is called shadow ACT.

Hypothesis tests and confidence intervals

Formally, two-tail hypothesis tests and confidence intervals are equivalent. Any value which lies within the 95 confidence interval around the sample mean cannot be rejected as the 'true' value using the 5 significance level in a hypothesis test using the same sample data. For example, our by now familiar accountant could construct a confidence interval for the firm's sales. This yields the 95 confidence interval

Appreciating Depreciation Methods

Theories are rarely as simple in real life as they are on paper, and this one is no exception. Do you divide the cost evenly across the asset's lifetime, or do you charge more to certain years than others Furthermore, when it eventually comes time to dispose of fixed assets, the assets may have some disposable, or salvage, value. In theory, only cost minus the salvage value should be depreciated. But in actual practice most companies ignore salvage value and the total cost of a fixed asset is depreciated. Moreover, how do you estimate how long an asset will last in the first place Do you consult an accountant psychic hot line The straight-line depreciation method has strong advantages It's easy to understand, and it stabilizes the depreciation expense from year to year. Nevertheless, many business managers and accountants favor an accelerated depreciation method in order to minimize the size of the checks they have to write to the IRS in the early years of using fixed assets. This...

Beginning Where the Income Statement Ends

There are two or three formats for presenting the cash flow statement in this book we'll use the indirect method of presentation. It's the same format as appears in all published financial reports of public companies and the same format as the report that's readily produced by most accounting software. It's also the format that produces the most useful information with the least paper. And the really good news is that it begins where the income statement ends, literally, because its intent is to answer that important question raised earlier, What is the difference between net profit and net cash flow Accountants have presented cash flow in two ways traditionally, the direct method and the indirect method. That's why the indirect method was developed, why it's the standard report format used in published annual reports, and why it's the format that comes out of nearly all accounting software programs when you ask for a statement of cash flow. It's a bit harder to understand initially,...

How is the useful life of an asset determined

It is conventional for entities to consider the economic lives of assets by class or category, e.g. buildings, plant, office equipment, or motor vehicles. However, this is not necessarily appropriate, since the level of activity demanded by different users may differ. For example, compare two motor cars owned by a business one is used by the national sales manager, covering 100,000 miles per annum visiting clients the other is used by the accountant to drive from home to work and occasionally the bank, covering perhaps one-tenth of the mileage.

Accounting is a series of judgements

Most organisations produce monthly management accounts, so non-performing managers can be found out well before financial accounts have to be published so an under-pressure manager might be tempted to add in (say) two days' sales from the following month to the current month. The plea to the branch accountant might be the promise that things will be put right at the end of the following month. But two days becomes four days and so on. Of course, the opposite might happen. If monthly sales are ahead of plan, then the manager might hold sales back, in case things go wrong sometime in future. Of course, such indiscretions could be relatively minor and not necessarily significant. In other cases, they could be more serious. actions had led to suspensions pending further investigation. The company added that independent accountants would be brought in to conduct a detailed forensic analysis that would likely take 4-6 weeks.

The profit and loss statement PL

The profit and loss statement (also called an income statement ) is a statement of how much the firm has earned over a given period. This period is most often a year, but it can also be a quarter or a month. The accountant's aim in the P&L is to provide a statement of earnings that accurately reflects the underlying economics of the firm's operations. Many readers of P&L statements view them as providing a statement of the amount of cash left in the company's till at the end of the period. These two aims are not equivalent, and the divergence between them provides much material for the conflict between accountants and finance professionals. We've

International Accounting Standards

However, the acceptability of IASs has been on the rise, with an increasing number of companies stating that they prepare financial reports in accordance with IASs. Many countries endorse IASs as their own standards with or without modifications, and many stock exchanges accept IASs for cross-border listing purposes. For example, the Arab Society of Certified Accountants, comprising twenty-two Arab nations, has signed a declaration supporting IASs as the national accounting standards in all its member countries. Some European countries are developing legislation to allow not only foreign but also domestic companies to use IASs in their consolidated financial statements. IFAC. The International Federation of Accountants is a worldwide association formed in 1977 to develop the accounting profession, harmonize its auditing practices, and reduce differences in the requirements to qualify as a professional accountant in its member countries. It currently...

Helping Managers Do Their Jobs

As previous chapters explain, accounting serves critical functions in a business. A business needs a dependable recordkeeping and bookkeeping system for operating in a smooth and efficient manner. Strong internal accounting controls are needed to minimize errors and fraud. A business must comply with a myriad of tax laws, and it depends on its chief accountant (controller) to make sure that all its tax returns are prepared on time and correctly. A business prepares financial statements that must conform with established accounting standards, which are reported on a regular basis to its creditors and external shareowners. In addition, accounting should help managers in their decision-making, control, and planning. This sub-field of accounting is generally called managerial or management accounting. Designing and monitoring the accounting system, complying with tax laws, and preparing external financial reports all put heavy demands on the time and attention of the accounting department...

Selecting The Right Franchise Evaluate Yourself

We spoke in Chapter 1 about the need to analyze your own strengths and weaknesses when buying any business. The things that you should consider when buying a business should also be considered when selecting a franchise. Is this franchise the type of business you'll be comfortable with Do you have any personal conflicts with the methods or hours of operation of this particular franchise operation Once again, analyzing yourself may be the most difficult thing you'll have to do. You may be told about, and may even meet, franchisees who have become very successful. But they may have been better equipped, either through training, education, motivation, or personality, to succeed at this particular operation. Digging deep within yourself is something only you can do your lawyer and accountant can't help.