Kế toán tài chính 2 - Chapter 1: Uses of accounting information and the financial statements

Uses of Accounting Information and the Financial StatementsMultimedia Slides by: Gail A. Mestas, MAcc, New Mexico State UniversityChapter 1Learning ObjectivesDefine accounting, identify business goals and activities, and describe the role of accounting in making informed decisions.Identify the many users of accounting information in society.Explain the importance of business transactions, money measure, and separate entity to accounting measurement.Identify the three basic forms of business organization.2Copyright © Houghton Mifflin Company. All rights reserved.Learning Objectives (cont’d)Define financial position, state the accounting equation, and show how they are affected by simple transactions.Identify the four financial statements.State the relationship of generally accepted accounting principles (GAAP) to financial statements and the independent CPA’s report, and identify the organizations that influence GAAP.Define ethics and describe the ethical responsibilities of accountants.3Copyright © Houghton Mifflin Company. All rights reserved.Accounting as an Information SystemObjective 1Define accounting, identify business goals and activities, and describe the role of accounting in making informed decisions4Copyright © Houghton Mifflin Company. All rights reserved.Accounting is an information system thatmeasuresprocessescommunicatesfinancial informationabout an identifiable, economic entity5Copyright © Houghton Mifflin Company. All rights reserved.Accountingsupplies the informationdecision makers need to makereasoned choicesamong alternative uses of scarce resourcesin the conduct of business andeconomic activities6Copyright © Houghton Mifflin Company. All rights reserved.Accounting Is a link between business activities and decision makers Decision makers use accounting information to make informed decisions about available alternativesMeasures business activities by recording data about them for future useIs communicated to decision makers through reports7Copyright © Houghton Mifflin Company. All rights reserved.Accounting as an Information SystemInputOutputAccounting System8Copyright © Houghton Mifflin Company. All rights reserved.Business Goals, Activities, and Performance MeasuresBusiness An economic unit that aims to sell goods and services to customers at prices that will provide an adequate return to its owners9Copyright © Houghton Mifflin Company. All rights reserved.Business GoalsProfitabilityThe ability to earn enough income to attract and hold investment capitalLiquidityHaving enough cash available to pay debts when they are due10Copyright © Houghton Mifflin Company. All rights reserved.Business ActivitiesFinancing ActivitiesInvesting ActivitiesOperating Activities11Copyright © Houghton Mifflin Company. All rights reserved.Financing ActivitiesActivities associated with obtaining adequate funds, or capital, to begin and continue operationsOwner investmentsPaying a return to ownersObtaining loans from creditorsRepaying amounts to creditors, plus interest12Copyright © Houghton Mifflin Company. All rights reserved.Investing ActivitiesActivities associated with spending funds to begin and continue operationsBuying resources such as land, buildings, and equipment needed in the operation of the businessSelling these resources when no longer needed13Copyright © Houghton Mifflin Company. All rights reserved.Operating ActivitiesActivities associated with the course of running a businessSelling goods and servicesEmploying managers and workersBuying goods and servicesPaying taxes14Copyright © Houghton Mifflin Company. All rights reserved.Performance MeasuresIndicators Used to determine whetherManagers are achieving their business goalsBusiness activities are well managedIncludeEarned incomeCash flowRatio of expenses to revenueRatio of money owed to total resources controlled15Copyright © Houghton Mifflin Company. All rights reserved.Financial and Management AccountingAccounting’s role is divided into two categoriesManagement accountingFinancial accountingThe functions of both categories overlapPrimary difference between the two is the principal users of the information16Copyright © Houghton Mifflin Company. All rights reserved.Management AccountingFocuses on internal decision makersManagers and employeesReporting format is flexible and based on the type of information needed, such as budgets and sales forecastsUsed to report past performance and expected future performance17Copyright © Houghton Mifflin Company. All rights reserved.Financial AccountingFocuses on external decision makersStockholdersBanks and other creditorsGovernment regulatorsFinancial information of company is reported in the financial statementsUsed to report directly on goals of profitability and liquidity18Copyright © Houghton Mifflin Company. All rights reserved.Bookkeeping versus AccountingBookkeepingRepetitive, mechanical process of recording financial transactions and keeping financial recordsAccountingBookkeeping a small part of accountingIncludes design of an information system to meet users’ needsGoals include the analysis, interpretation, and use of information19Copyright © Houghton Mifflin Company. All rights reserved.Processing Accounting InformationWays in which accounting information is processed:BookkeepingComputerManagement information system (MIS) MISProvides information needed to run a businessConsists of interconnected subsystemsMost important subsystem is the accounting information system20Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat is the difference between profitability and liquidity?ProfitabilityEarning enough income (revenues minus expenses) to attract and hold investors Liquidity Having enough funds available (cash) to pay debts when they are due21Copyright © Houghton Mifflin Company. All rights reserved.Decision Makers:The Users of Accounting InformationObjective 2Identify the many users of accounting information in society22Copyright © Houghton Mifflin Company. All rights reserved.Decision Makers fall into three categoriesThose who manage a businessFinanceInvestmentOperations and ProductionMarketingHuman ResourcesInformation SystemsAccounting23Copyright © Houghton Mifflin Company. All rights reserved.Decision Makers (cont’d)Those with a Direct Financial InterestInvestorsCreditors Those with an Indirect Financial InterestTax AuthoritiesRegulatory AgenciesLabor UnionsFinancial AdvisorsCustomersEconomic Planners24Copyright © Houghton Mifflin Company. All rights reserved.ManagementManagers are internal users of accounting informationMake key decisions using accounting informationBasic management functions require accounting information for decision makingFinancing the businessInvesting resourcesProducing goods and servicesMarketing goods and servicesManaging employeesProviding information to decision makers25Copyright © Houghton Mifflin Company. All rights reserved.Users With a Direct Financial Interest are external users of accounting informationInvestorsPut money into a business in order to make money (by purchasing and selling stocks and receiving dividends)Use financial statements to judge the prospects for profitable investments26Copyright © Houghton Mifflin Company. All rights reserved.Users With a Direct Financial Interest (cont’d)CreditorsLoan money to a business in order to make money (by charging interest)Use financial statements to judge whether a company will have enough cash toPay interest chargesRepay debt at appropriate time27Copyright © Houghton Mifflin Company. All rights reserved.Users With an Indirect Financial Interest are external users of accounting informationTax authoritiesUse accounting information to determine amount of tax dueProcedures for tax reporting mandated by lawGovernment regulatory agenciesFederal, state, and local levelsSecurities and Exchange Commission (SEC)Regulates the issuing, buying, and selling of stocks in the U.S.28Copyright © Houghton Mifflin Company. All rights reserved.Users With an Indirect Financial Interest (cont’d)Other groupsLabor unionsThose advising investors and creditorsFinancial analysts and advisorsBrokersUnderwritersLawyersFinancial pressConsumer groupsCustomersGeneral publicEconomic planners29Copyright © Houghton Mifflin Company. All rights reserved.Government and Not-for-Profit OrganizationsIncludeHospitalsUniversitiesProfessional organizationsCharitiesHave the same categories of decision makers as profit-oriented organizationsManagersThose with a direct financial interestThose with an indirect financial interest30Copyright © Houghton Mifflin Company. All rights reserved.DiscussionHow do management accounting and financial accounting differ?Focus on internal usersFocus on external users as well as internal usersSpecific informationAll types of informationCommunicated in financial statementsCommunicated in format most suitable to purpose Financial AccountingManagement Accounting31Copyright © Houghton Mifflin Company. All rights reserved.Accounting MeasurementObjective 3Explain the importance of business transactions, money measure, and separate entity to accounting measurement32Copyright © Houghton Mifflin Company. All rights reserved.Accounting MeasurementFour Basic QuestionsWhat is measured?Business transactions affecting the financial position of the business entity When should the measurement be made?Discussed in Chapter 2, The Recognition Issue 33Copyright © Houghton Mifflin Company. All rights reserved.Accounting Measurement (cont’d)What value should be placed on what is measured?Discussed in Chapter 2, The Valuation Issue How should what is measured be classified?Discussed in Chapter 2, The Classification Issue 34Copyright © Houghton Mifflin Company. All rights reserved.Business Transactions are economic events that affect the financial position of a business entityInvolve an exchange of valuePurchaseSalePaymentCollectionEvents that have the same effect as an exchange of valueLoss from fire, flood, theftPhysical wear and tear on equipmentAccumulation of interest35Copyright © Houghton Mifflin Company. All rights reserved.Money MeasureRecording of all business transactions in terms of moneyMoney is the only factor common to all business transactionsBasic unit of money determined by the country in which business residesExchange rates are used to translate transactions from one currency to another36Copyright © Houghton Mifflin Company. All rights reserved.Money Measure (cont’d)Exchange RateThe value of one currency in terms of anotherChanges dailyExample:Assume the price of one British pound is 1.61 U.S. dollars. How many British pounds would one U.S. dollar buy?1 British pound ÷ 1.61 U.S. dollars = 0.62 British pounds per U.S. dollar37Copyright © Houghton Mifflin Company. All rights reserved.Separate EntityA business is distinct from itsOwner(s)CreditorsCustomersIts financial records and reports should refer only to its own financial affairs 38Copyright © Houghton Mifflin Company. All rights reserved.Identify each of the following as most closely related to aDiscussionbusiness transaction, separate entity, ormoney measurePartnershipU.S. dollarPayment of an expenseCorporationSale of an asset(b)(c)(a)(b)(a)39Copyright © Houghton Mifflin Company. All rights reserved.Forms of Business OrganizationObjective 4Identify the three basic forms of business organization40Copyright © Houghton Mifflin Company. All rights reserved.Forms of Business EnterprisesThree basic forms of business enterprises Sole proprietorship Partnership Corporation41Copyright © Houghton Mifflin Company. All rights reserved.Separate EntitiesAll three forms of businesses are economically separate entities from their ownersFinancial records and reports refer to the financial affairs of the business onlyOnly the corporation is a legally separate entity from its owners42Copyright © Houghton Mifflin Company. All rights reserved.Sole ProprietorshipsBusiness owned by one person The owner Receives all profits or lossesIs liable for all obligations of the businessNot incorporatedLife of business ends when the ownerDecides to stop operating businessDiesIs incapacitated43Copyright © Houghton Mifflin Company. All rights reserved.PartnershipsBusiness owned by more than one person The partners share all profits or losses according to an agreed upon formulaAt least one partner is liable for all obligations of the businessNot incorporatedLife of business ends when Ownership changesA partner leaves the business or diesA new partner is admitted44Copyright © Houghton Mifflin Company. All rights reserved.The Corporation as a Separate EntityLegally and economically separate from its ownersBusiness unit chartered by the state and legally separate from owners (incorporated)Owners (stockholders) do not directly control operationsElected board of directors run the corporationOwners’ risk of loss limited to amount paid for shares of stock – owners are not liable for the obligations of the business45Copyright © Houghton Mifflin Company. All rights reserved.Sole Proprietorships and Partnerships versus CorporationsSole Proprietorships and PartnershipsCorporationsSeparate economic entity Not separate legal entity Owner(s) directly control operationsNo economic separation between owner(s) and the business – owners liable for obligations of the businessOwnership cannot be transferredLife of business is limitedSeparate economic entity Separate legal entity Owner do not directly control operations – elected board of directors runs corporationOwner’s risk of loss (liability) limited to amount paid for shares of stockOwnership can be transferredLife of business is unlimited46Copyright © Houghton Mifflin Company. All rights reserved.DiscussionHow do a sole proprietorship, partnership, and corporation differ?Sole proprietorshipOne ownerOOwner legally obligated to pay company liabilities PartnershipMMultiple owners (partners)PPartners legally obligated to pay company liabilities CorporationOOwned by stockholdersSStockholders not legally obligated to pay company liabilities47Copyright © Houghton Mifflin Company. All rights reserved.Financial Position and the Accounting EquationObjective 5Define financial position, state the accounting equation, and show how they are affected by simple transactions48Copyright © Houghton Mifflin Company. All rights reserved.Financial PositionThe economic resources that belong to a companyand the claims against those resourcesat a point in timeEconomic Resources = Equities49Copyright © Houghton Mifflin Company. All rights reserved.Developing the Accounting EquationEconomic Resources = EquitiesTwo types of equitiesCreditor’s equities and owner's equities, therefore,Economic Resources = Creditor’s Equities + Owner’s EquitiesIn accounting terminology Economic resources are called assetsCreditor’s equities are called liabilities Assets Liabilities50Copyright © Houghton Mifflin Company. All rights reserved.Accounting EquationAssets = Liabilities + Owner’s EquityTwo sides of equation are always in balanceAssetsEconomic resources owned by a company that are expected to benefit future operationsLiabilitiesObligations of a business to pay cash, transfer assets, or provide services to other entities in the futureRepresent claims of creditors to the assets of the businessOwner’s EquityRepresents the claims by owners to the assets of the business51Copyright © Houghton Mifflin Company. All rights reserved.Owner’s EquityEquals the residual interest in a company’s assets after deducting all liabilitiesAlso called residual equity or net assetsDefined by rearranging the accounting equationAssets = Liabilities + Owner’s EquityOwner’s Equity = Assets – Liabilities52Copyright © Houghton Mifflin Company. All rights reserved.Transactions That Affect Owner’s EquityOwner’s investmentsAssets the owner puts into the businessOwner’s withdrawalsAssets the owner takes out of the businessRevenuesIncreases in owner’s equity that result from operating a businessExpensesDecreases in owner’s equity that result from operating a business53Copyright © Houghton Mifflin Company. All rights reserved.Illustrative Transactions for Shannon RealtyEffects of Transactions on the Accounting Equation54Copyright © Houghton Mifflin Company. All rights reserved.CashJohn Shannon, Capital 1.+$50,000 +$50,000A = $50,000 L + OE = $50,000Owner’s InvestmentsDeposited $50,000 in a bank account in the name of Shannon RealtyNotice that the accounting equationAssets = Liabilities + Owner's Equity, orA = L + OE,is always in balance55Copyright © Houghton Mifflin Company. All rights reserved.CashJohn Shannon, CapitalBuildingLand 1. $50,000 $50,000 2. -35,000 + $10,000 +$25,000A = $50,000 L + OE = $50,000bal. $15,000 $10,000 $25,000 $50,000Purchase of Assets with CashPurchased a lot for $10,000 and a small building on a lot for $25,000This transaction only affects one side of the accounting equation – AssetsWhenever a transaction affects only one side of the accounting equation, the total on each side of the equal sign remains unchanged56Copyright © Houghton Mifflin Company. All rights reserved.CashJohn Shannon, CapitalSuppliesBuildingLandA/P 1. $50,000 $50,000 2. -35,000 $10,000 $25,000 3. +$500 +$500A = $50,500 L + OE = $50,500bal. $15,000 $500 $10,000 $25,000 $500 $50,000Purchase of Assets by Incurring a LiabilityPurchased office supplies for $500 on credit57Copyright © Houghton Mifflin Company. All rights reserved.CashJohn Shannon, CapitalSuppliesBuildingLandA/P 1. $50,000 $50,000 2. -35,000 $10,000 $25,000 3. $500 $500 4. -200 -200A = $50,300 L + OE = $50,300bal. $14,800 $500 $10,000 $25,000 $300 $50,000Payment of a LiabilityPaid $200 of the $500 owed for supplies58Copyright © Houghton Mifflin Company. All rights reserved.CashJohn Shannon, CapitalSuppliesBuildingLandA/P 1. $50,000 $50,000 2. -35,000 $10,000 $25,000 3. $500 $500 4. -200 -200 5. +1,500 +1,500A = $51,800 L + OE = $51,800bal. $16,300 $500 $10,000 $25,000 $300 $51,500RevenuesEarned and received a commission of $1,500 in cash59Copyright © Houghton Mifflin Company. All rights reserved.CashJohn Shannon, CapitalSuppliesA/RBuildingLandA/P 1. $50,000 $50,000 2. -35,000 $10,000 $25,000 3. $500 $500 4. -200 -200 5. 1,500 1,500 6. +$2,000 +2,000A = $53,800 L + OE = $53,800bal. $16,300 $2,000 $500 $10,000 $25,000 $300 $53,500RevenuesEarned a commission of $2,000 to be received at a later date60Copyright © Houghton Mifflin Company. All rights reserved.CashJohn Shannon, CapitalSuppliesA/RBuildingLandA/P 1. $50,000 $50,000 2. -35,000 $10,000 $25,000 3. $500 $500 4. -200 -200 5. 1,500 1,500 6. $2,000 2,000 7. +1,000 -1,000A = $53,800 L + OE = $53,800bal. $17,300 $1,000 $500 $10,000 $25,000 $300 $53,500Collection of Accounts ReceivableReceived $1,000 from client for commission earned earlier in the month61Copyright © Houghton Mifflin Company. All rights reserved.ExpensesCashJohn Shannon, CapitalSuppliesA/RBuildingLandA/P 1. $50,000 $50,000 2. -35,000 $10,000 $25,000 3. $500 $500 4. -200 -200 5. 1,500 1,500 6. $2,000 2,000 7. 1,000 -1,000 8. -1,000 -1,000A = $52,800 L + OE = $52,800bal. $16,300 $1,000 $500 $10,000 $25,000 $300 $52,500Paid $1,000 to rent equipment for office62Copyright © Houghton Mifflin Company. All rights reserved.ExpensesCashJohn Shannon, CapitalSuppliesA/RBuildingLandA/P 1. $50,000 $50,000 2. -35,000 $10,000 $25,000 3. $500 $500 4. -200 -200 5. 1,500 1,500 6. $2,000 2,000 7. 1,000 -1,000 8. -1,000 -1,000 9. -400 -400A = $52,400 L + OE = $52,400bal. $15,900 $1,000 $500 $10,000 $25,000 $300 $52,100Paid $400 in wages to part-time helper63Copyright © Houghton Mifflin Company. All rights reserved.ExpensesCashJohn Shannon, CapitalSuppliesA/RBuildingLandA/P 1. $50,000 $50,000 2. -35,000 $10,000 $25,000 3. $500 $500 4. -200 -200 5. 1,500 1,500 6. $2,000 2,000 7. 1,000 -1,000 8. -1,000 -1,000 9. -400 -40010. +300 -300A = $52,400 L + OE = $52,400bal. $15,900 $1,000 $500 $10,000 $25,000 $600 $51,800Recorded utilities expense of $500 incurred in December but not yet paid64Copyright © Houghton Mifflin Company. All rights reserved.Owner’s WithdrawalsCashJohn Shannon, CapitalSuppliesA/RBuildingLandA/P 1. $50,000 $50,000 2. -35,000 $10,000 $25,000 3. $500 $500 4. -200 -200 5. 1,500 1,500 6. $2,000 2,000 7. 1,000 -1,000 8. -1,000 -1,000 9. -400 -40010. 300 -30011. -600 -600bal. $15,300 $1,000 $500 $10,000 $25,000 $600 $51,200A = $51,800 L + OE = $51,800Withdrew $600 in cash from Shannon Realty and deposited it in a personal account65Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat does the accounting equation represent?and the claims against those resourcesat a point in timeThe economic resources owned by a companyAssets= Liabilities + Owner’s Equity66Copyright © Houghton Mifflin Company. All rights reserved.Communications Through Financial StatementsObjective 6Identify the four financial statements67Copyright © Houghton Mifflin Company. All rights reserved.Communications Through Financial StatementsFour Major Financial StatementsIncome StatementStatement of Owner’s EquityBalance SheetStatement of Cash Flows68Copyright © Houghton Mifflin Company. All rights reserved.Income StatementSummarizes revenues earned and expenses incurred over a period of timeDated “For the Month Ended ”Purpose to measure a company’s performance over a period of timeShows whether or not a company achieved its profitability goal69Copyright © Houghton Mifflin Company. All rights reserved.Income Statement (cont’d)Considered by many to be most important financial statement Also called the capital statementFirst financial statement to be prepared in a sequence Net income figure used to prepare statement of owner’s equity70Copyright © Houghton Mifflin Company. All rights reserved.Income StatementNet income figure used to prepare statement of owner’s equityDate reflects revenues and expenses incurred over a period of time71Copyright © Houghton Mifflin Company. All rights reserved.Statement of Owner’s EquityShows changes in owner’s equity over a period of timeDated “For the Month Ended ”Uses net income figure from income statementEnd of period balance in Capital account used to prepare balance sheet72Copyright © Houghton Mifflin Company. All rights reserved.Statement of Owner’s EquityDate reflects changes in John Shannon, Capital, over a period of timeNet income figure from income statementEnding balance of John Shannon, Capital, used to prepare the balance sheet73Copyright © Houghton Mifflin Company. All rights reserved.Balance SheetShows the financial position of a company on a certain dateDated as of a certain dateAlso called the statement of financial positionPresents view of business as holder of assets that are equal to the claims against those assetsClaims consist of liabilities and owner’s equity74Copyright © Houghton Mifflin Company. All rights reserved.Balance SheetDate reflects account balances as of a certain dateBalance in Cash account used in statement of cash flowsJohn Shannon, Capital, from statement of owner’s equity75Copyright © Houghton Mifflin Company. All rights reserved.Statement of Cash FlowsShows cash flows into and out of a business over a period of timeDated “For the Month Ended ”Focuses on whether the business met its liquidity goalExplains how the Cash account changed during the period76Copyright © Houghton Mifflin Company. All rights reserved.Statement of Cash FlowsBegins with net income from income statementCash at end of month same as Cash account balance on balance sheetDate reflects cash flows over a period of time77Copyright © Houghton Mifflin Company. All rights reserved.DiscussionThe balance sheet is often referred to as the statement of financial position. What does financial position mean?Financial position is the resources, or assets, owned by a business as of a certain date These resources are offset by claims against them and stockholders’ equity, as shown on the balance sheet78Copyright © Houghton Mifflin Company. All rights reserved.Generally Accepted Accounting PrinciplesObjective 7State the relationship of generally accepted accounting principles (GAAP) to financial statements and the independent CPA’s report, and identify the organizations that influence GAAP79Copyright © Houghton Mifflin Company. All rights reserved.Generally Accepted Accounting Principles (GAAP)The conventions, rules, and procedures necessary to define accounting practice at a particular timeDeveloped to provide guidelines for financial accountingAre altered as better methods evolve or circumstances change80Copyright © Houghton Mifflin Company. All rights reserved.Examination of a company's financial statementsPrepared by independent certified public accountant (CPA)CPA should have no compromising ties with company Ascertains that financial statements prepared in accordance with GAAPImplies that investors and creditors can rely on financial statementsSummary of financial affairs of a businessPrepared by management of companyManagement has an interest in company performance; not independentShould be prepared in accordance with GAAPFinancial Statements, GAAP, and the Independent CPA’s Report (Audit)Financial StatementsAudit81Copyright © Houghton Mifflin Company. All rights reserved.Organizations That Influence Current PracticeFinancial Accounting Standards Board (FASB)Most important body for developing and issuing rules on accounting practiceIssues Statements of Financial Accounting Standards (SFAS) American Institute of Certified Public Accountants (AICPA)Professional association of certified public accountantsInfluences accounting practice through activities of senior technical committees82Copyright © Houghton Mifflin Company. All rights reserved.Organizations That Influence Current Practice (cont’d)Securities and Exchange Commission (SEC)Federal agency set up to protect the public by regulating the issuing, buying, and selling of stocks and bondsHas legal power to set and enforce accounting policies for companies whose securities are offered for sale to the general public Government Accounting Standards Board (GASB)Established under same governing body as Financial Accounting Standards Board (FASB)Responsible for issuing accounting standards for state and local governments83Copyright © Houghton Mifflin Company. All rights reserved.Organizations That Influence Current Practice (cont’d)International Accounting Standards Board (IASB)An independent board, cooperating with national accounting standard setters, to develop high quality, understandable, and enforceable global accounting standards Has published over 30 standards in a series of pronouncements called International Financial Reporting Standards (IFRS) Internal Revenue Service (IRS)Branch of the Department of Treasury Administers the Internal Revenue Code enacted by CongressInterprets and enforces U.S. tax laws governing the assessment and collection of revenues from income taxes84Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat are GAAP?Generally accepted accounting principles The conventions, rules, and procedures necessary to define accounting practice at a particular timeWhat organization has the greatest influence on GAAP?Financial Accounting Standards Board (FASB)85Copyright © Houghton Mifflin Company. All rights reserved.Professional Ethics and the Accounting ProfessionObjective 8Define ethics and describe the ethical responsibilities of accountants86Copyright © Houghton Mifflin Company. All rights reserved.Ethics is the code of conduct that applies to everyday lifeAddresses whether actions are right or wrongEthical actions are the product of individual decisionsCertain actions may be unethical but not illegal87Copyright © Houghton Mifflin Company. All rights reserved.Professional Ethics is the code of conduct that applies to the practice of a professionAccountants have a responsibility to their employers, clients, and society to uphold highest ethical standardsAICPA and each state have adopted codes of professional conduct for certified public accountants88Copyright © Houghton Mifflin Company. All rights reserved.Ethical PrinciplesIntegrityRequires honesty, frankness, and placing service and public trust before personal gainObjectivityRequires impartiality and intellectual honestyIndependenceRequires that an accountant avoid all relationships that impair, or appear to impair, his or her objectivity89Copyright © Houghton Mifflin Company. All rights reserved.Ethical Principles (cont’d)Due careAccountants required to carry out professional responsibilities competently and diligently90Copyright © Houghton Mifflin Company. All rights reserved.Institute of Management Accountants (IMA)Code of Professional Conduct for Management AccountantsEmphasizes:CompetenceConfidentialityIntegrityIndependenceObjectivity91Copyright © Houghton Mifflin Company. All rights reserved.DiscussionTo whom do accountants have an ethical responsibility?Employers Clients Society What does due care mean?The act of carrying out professional responsibilities with competence and diligence92Copyright © Houghton Mifflin Company. All rights reserved.Time for ReviewDefine accounting, identify business goals and activities, and describe the role of accounting in making informed decisionsIdentify the many users of accounting information in societyExplain the importance of business transactions, money measure, and separate entity to accounting measurementIdentify the three basic forms of business organization93Copyright © Houghton Mifflin Company. All rights reserved.Define financial position, state the accounting equation, and show how they are affected by simple transactionsIdentify the four financial statementsState the relationship of generally accepted accounting principles (GAAP) to financial statements and the independent CPA’s report, and identify the organizations that influence GAAPDefine ethics and describe the ethical responsibilities of accountantsand Finally 94Copyright © Houghton Mifflin Company. All rights reserved.