Question

Question 1:

Proficient-level:

There are several important functions performed in an organization, among which accounting is one of them. Define the accounting function and discuss how it differs from double-entry bookkeeping.

What types of information are critical to the performance of the accounting function in an organization?

Distinguished-level:

What are the three groups of functions performed by accountants?

Discuss the activities that are part of each group.

Question 2:

Proficient-level:

There are many opportunities available for careers in the accounting profession. Select five from the many presented in the Accounting Principles: A Business Perspective, Financial Accounting text and fully describe the nature of the work performed.

Distinguished-level:

For each of the selected opportunities, state the education and certification requirements necessary to be considered for employment.

Question 3:

Proficient-level:

The field of accounting can be divided into two distinct, but sometimes overlapping categories. Describe the similarities and differences between the two categories and provide examples of the users of each type of data that are the result of the work in each category.

Distinguished-level:

Describe the four major types of internal management decisions that utilize management accounting information.

Question 4:

Proficient-level:

In the development of financial accounting standards there are six organizations that are influential in the establishment of GAAP. Identify each and define who is included in their membership.

Distinguished-level:

Each organization has contributed in a different way. Describe how each of the six organizations is involved in work on the GAAP.

Question 5:

Proficient-level:

Describe the role that ethics plays in the field of accounting.

How can a business organization that has an accounting function better protect itself from potential scandals and law suits?

Distinguished-level:

What is a code of conduct and how can its adoption further ethical decision-making in an organization?

Answer 1

Answer 1(a): Accounting is a system meant for measuring business activities, processing of information into reports and making the findings available to decision-makers.

In Simple words, it is recording of business transactions to show the results of the organization in the form of Report and financial statement.

FUNCTIONS OF ACCOUNTING

Recording: It records business transactions in terms of money. An accountant is a person who does the basic job of maintaining accounts as he is the man who is engaged in book keeping. Since the managers would always want to know the financial performance of the business. An accountant prepares profit and loss account which reports the profits/losses of the business during the accounting period, Balance

Sheet, which is a statement of assets and liabilities of the business at a point of time, is also proposed by all accountants. Since both statements are called financial statements, the person who prepares them is called a financial accountant.

Classifying: It also facilitates classification of all business transactions recorded in Journals. The classification is done in the books called Ledger.

Summarizing: It summarizes the classified information in the form of Financial Statement which is further helpful for External as well as the internal users. External Users are Creditors, Suppliers, Investors & Tax departments etc and Internal Users are management and performance evaluation

Interpreting: It implies analyzing of financial data embodies in final accounts. An accountant has a suggestive but very specific job to do in this regard by indicating ways to minimize the tax liability through his knowledge of concessions and incentives available under the existing taxation framework of the country.

Difference between Book Keeping and Accounting

Definition

Bookkeeping is mainly related to identifying, measuring, and recording, financial transactions

Accounting is the process of summarizing, interpreting, and communicating financial transactions which were classified in the ledger account

Decision Making

Management can't take a decision based on the data provided by bookkeeping

Depending on the data provided by the accountants, the management can take critical business decisions

Objective

The objective of bookkeeping is to keep the records of all financial transactions proper and systematic

The objective of accounting is to gauge the financial situation and further communicate the information to the relevant authorities

Preparation of Financial Statements

Financial statements are not prepared as a part of this process

Financial statements are prepared during the accounting process

Skills Required

Bookkeeping doesn't require any special skill sets

Accounting requires special skills due to its analytical and complex nature

Analysis

The process of bookkeeping does not require any analysis

Accounting uses bookkeeping information to analyze and interpret the data and then compiles it into reports

Types

Basically there are two types of bookkeeping - Single entry and double entry bookkeeping

The accounting department does preparations of a company's budgets and plans loan proposals

Double Entry Accounting System

1. Based on principle of duel aspect of each transaction.

1. For correct presentation both of them should be recorded.

1. Requires maintenance of records of assets, liabilities, revenues and expenditure.

1. Impact of each transaction can be seen or measured.

1. Total assets are equal to total equities.

Answer 1(b): The limitations of accounting are as follows:-

1. Financial accounting permits alternative treatments. No doubt accounting is based on concepts and it follows "generally accepted accounting principles", but there exist more than one principle for the treatment of any one item. This permits alternative treatments within the framework of generally accepted accounting principles. For example, the closing stock of a business may be valued by any one of the following methods: FIFO (First-in-first-out); LIFO (Last-in-first-out); Average price, Standard price etc. Application of different methods will give different results but the methods are generally accepted. So, the results are not comparable.
2. Financial accounting is Influenced by personal judgments. In spite of the fact that convention of objectivity is respected in accounting but to record certain events estimates have to be made which requires personal judgment. It is very difficult to expect accuracy in future estimates and Objectivity suffers. For example, in order to determine the amount of depreciation to be charged every year for the use of fixed asset it is required to estimate

(a) future life of the asset, and

(b) scrap value of the asset.

Thus in accounting we do not determine but measure the income. In other words, the income disclosed by accounting is not authoritative but approximation.

1. Financial accounting ignores important non-monetary information. Financial accounting takes into consideration only those transactions and events which can be described in money. The transactions and events, however important, if non-monetary in nature are ignored i.e., not recorded. For example, extent of competition faced by the business, technical innovations possessed by the business, loyalty and efficiency of the employees etc. are the important matters in which management of the business is highly interested but accounting is not tailored to take note of such matters. Thus any user of financial information is, naturally, deprived of vital information which is of non-monetary character.
2. Financial accounting does not provide timely information. Financial accounting is designed to supply information in the form of statements (Balance Sheet and Profit and Loss Account) for a period, normally, one year. So the information is, at best, of historical interest and only postmortem analysis of the past can be conducted. The business requires timely information at frequent intervals to enable the management to plan and take corrective action. For example, if a business has budgeted that during the current year sales should be $. 12,000 then it requires information – whether the sales in the first month of the year amounted to $ 10,000 or less or more.
3. Financial accounting does not provide detailed analysis. The information supplied by the financial accounting is in reality aggregate of the financial transactions during the course of the year. Of course, it enables to study the overall results of the business activity during the accounting period. For proper running of the business the information is required regarding the cost, revenue and profit of each product but financial accounting does not provide such detailed information product-wise. For example, if a business has earned a total profit of, say, Rs. 5,00,000 during the accounting year and it sells three products namely petrol, diesel and mobile oil and wants to know profit earned by each product. Financial accounting is not likely to help him.
4. Financial accounting does not disclose the present value of the business. In financial accounting the position of the business as on a particular date is shown by a statement known as balance sheet. In balance sheet the assets are shown on the basis of going concern concept. Thus it is presumed that business has relatively longer life and will continue to exist indefinitely, hence the asset values are going concern values. The realized value of each asset if sold today can't be known by studying the balance sheet.

Answer 1(c): FUNCTIONS OF ACCOUNTANTS

An accountant is a person who does the basic job of maintaining accounts as he is the man who is engaged in book keeping. Since the managers would always want to know the financial Performance of the business. An accountant prepares profit and loss account which reports

the profits/losses of the business during the accounting period, Balance Sheet, which is a Statement of assets and liabilities of the business at a point of time, is also proposed by all accountants. Since both statements are called financial statements, the person who prepares them is called a financial accountant.

Accounting information serves many purposes. A part from revealing the level of performance, it throws light on the causes of weakness and deviation from plans (in any). In this way an accountant becomes an important functionary who plays a vital role in the process of management control, which is a process of diagnosing and solving a problem. Seen from this point of view, an accountant can be referred to as a management accountant.

Tax planning is an important area as far as the fiscal management of a company is concerned. An accountant has a suggestive but very specific job to do in this regard by indicating ways to minimize the tax liability through his knowledge of concessions and incentives available under the existing taxation framework of the country.

An accountant can influence a company even by not being an employee. He can act as a man who verifies and certifies the authenticity of accounts of a company by auditing the accounts. It is a strictly professional job and is done by persons who are formally trained and qualified for the purpose. They have an educational status and a prescribed code of conduct like the Chartered Accountants in India and Certified Public Accountants in USA.

Information management is another area which keeps an accountant busy. He is the one who classifies the financial information into information for internal use (management accounting function); and information or external use (financial accounting function). Irrespective of the size and degree of automation of a business, information management is a key area and many organizations are known to have perished because they failed to recognize this as an important function of an accountant because information system is imperative for effective cost Control, to forecast cash needs and to plan for future growth of the organization.