Managerial Accounting Week One Notes David B. Hamm, MBA, CPA May, 2002

AICPA Classic Definition of Accounting (1941, restated 1953) “Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.

AICPA Definition of Accounting, 1970 “..to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.”

OVC Student Definition of Accounting “Accounting is a set of demented formulas by which instructors find strong voids in a Business major’s mind for academic probation purposes.” --Tim Kelley, 1987

Class definition of Accounting Accounting is the process of: Identifying, Measuring, & Communicating Economic information about an entity For making Decisions & Informed judgments

Users of Accounting Information  Management  Investors  Creditors  Employees / Unions  Government Agencies / Regulatory bodies

Classifications of Accounting  Financial accounting  Managerial accounting / cost accounting  Auditing (public / internal)  Governmental accounting  Income Tax accounting

Professional Certifications  CPA—Certified Public Accountant  CMA—Certified Management Accountant  CIA—Certified Internal Auditor  PA or LPA—Licensed public accountant (old designation still in some states)  EA—Enrolled Agent (IRS designation)

Accounting Standards (U.S.) Financial Accounting Standards Board (FASB)—key accounting body in U.S. Has issued over 130 Statements of Financial Accounting Standards (SFAS’s) Relates to external financial reporting— audited financial statements Not intended to directly measure the value of a business enterprise Accounting standards are still evolving

Other major accounting bodies AICPA—American Institute of CPA’s IMA—Institute of Management Accountants AAA—American Accounting Association (academic body) NSA--National Society of Accountants (primarily small private practice)

DBH Handouts (Part I) Fundamentals of Double Entry Accounting Transactions to Financial Statements Key Financial Statements Financial Statement Relationships

Ethics & the Accounting Profession AICPA, IMA, other codes of professional conduct Key elements of ethical behavior: Integrity Objectivity Independence Competence

DBH Handouts (Part 1) Fundamentals of Double-entry Accounting Transactions to Financial Statements Financial Statements (major types) Financial Statement Relationships Pause for handouts

Current Assets Definition—cash and other assets expected to be used up or otherwise converted to cash through normal operating activities within one accounting cycle (typically one year)

Current Assets (in order of liquidity) Cash Marketable Securities Accounts Receivable, current Notes Receivable Inventories Prepaid Expenses

Cash & Marketable Securities Cash on hand and in demand deposit accounts Reconcile to bank statements, etc. Marketable securities generally recorded at original cost or market value, whichever is lower (conservatism) until sold or redeemed

Accounts Receivable Reported at “Net Realizable Value”— how much can we expect to realize from A/R collection Allowance for Doubtful Accounts (bad debts)—estimated by a % of sales, aging of account balances, past historical activity

Inventories Cost of items held for sale or to be used in manufacturing items for sale Again, measured on balance sheet at original cost or market value, whichever is lower (conservatism) Cost flow issues—what about common inventories purchased at different prices during a period (next slide)

Inventory Cost Flows Specific identification Average cost (weighted average) FIFO—First in, first out—ending inventories reflect most recent costs LIFO—Last in, first out—cost of goods sold reflect most recent costs—popular during periods of rising inflation

Prepaid Expenses Result of accrual accounting—matching costs with period actually incurred vs. when actually paid Value of costs already paid that have a benefit (“deferred costs”) in a subsequent period Examples: Rent, insurance premiums