Forensic accounting for dummies pdf

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    Trademarks: Wiley, the Wiley Publishing logo, For Dummies, the Dummies Man logo more than 22 years of experience providing forensic accounting, litigation. Editorial Reviews. From the Back Cover. Learn to: Grasp the concepts and fundamentals of Forensic Accounting For Dummies - Kindle edition by Frimette . READ ONLINE BOOK Forensic Accounting For Dummies => http:// switunludisftalk.tk?book=

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    Forensic Accounting For Dummies Pdf

    Read Forensic Accounting For Dummies PDF Ebook by Frimette Kass- switunludisftalk.tkhed by For Dummies, ePUB/PDF A guide to forensic accounting investigation / Thomas W. Golden, Steven L. switunludisftalk.tk Accounting FORDUMmIES‰4THEDITION Accounting Accounting FOR DUMmIES ‰ 4TH EDITION Accounting FOR DUMmIES ‰ 4TH DOWNLOAD PDF to test for fraud — even if the CPA has fraud training and forensic credentials.

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    In ethnography, the researcher gathers what is available, what is normal, what it is that people do, what they say, and how they work. Ethnography is suitable if the needs are to describe how a cultural group works and to explore their beliefs, language, behaviours and also issues faced by the group, such as power, resistance, and dominance.

    Qualitative Inquiry and Research Design, 94 Then identify and locate a culture-sharing group to study. This group is one whose members have been together for an extended period of time, so that their shared language, patterns of behaviour and attitudes have merged into discernible patterns. This group can also be a group that has been marginalized by society. Qualitative Inquiry and Research Design, 94 Select cultural themes, issues or theories to study about the group.

    These themes, issues, and theories provide an orienting framework for the study of the culture-sharing group. As discussed by Hammersley and Atkinson , Wolcott , b, , and Fetterman The ethnographer begins the study by examining people in interaction in ordinary settings and discerns pervasive patterns such as life cycles, events, and cultural themes. Qualitative Inquiry and Research Design, For studying cultural concepts, determine which type of ethnography to use.

    Perhaps how the group works need to be described, or a critical ethnography can expose issues such as power, hegemony, and advocacy for certain groups Qualitative Inquiry and Research Design, 95 Should collect information in the context or setting where the group works or lives. This is called fieldwork. Types of information typically needed in ethnography are collected by going to the research site, respecting the daily lives of individuals at the site and collecting a wide variety of materials.

    Field issues of respect, reciprocity, deciding who owns the data and others are central to Ethnography Qualitative Inquiry and Research Design, 95 From the many sources collected, the ethnographer analyzes the data for a description of the culture-sharing group, themes that emerge from the group and an overall interpretation Wolcott, b. The researcher begins to compile a detailed description of the culture-sharing group, by focusing on a single event, on several activities, or on the group over a prolonged period of time.

    Forge a working set of rules or generalizations as to how the culture-sharing group works as the final product of this analysis. The final product is a holistic cultural portrait of the group that incorporates the views of the participants emic as well as the views of the researcher etic. It might also advocate for the needs of the group or suggest changes in society.

    It is conducted in the settings in which real people actually live, rather than in laboratories where the researcher controls the elements of the behaviors to be observed or measured. It is personalized. It is conducted by researchers who are in the day-to-day, face-to-face contact with the people they are studying and who are thus both participants in and observers of the lives under study.

    It is multifactorial. It is conducted through the use of two or more data collection techniques - which may be qualitative or quantitative in nature - in order to get a conclusion. It requires a long-term commitment i. The exact time frame can vary from several weeks to a year or more. It is inductive. It is conducted in such a way to use an accumulation of descriptive detail to build toward general patterns or explanatory theories rather than structured to test hypotheses derived from existing theories or models.

    It is dialogic. It is holistic. It is conducted so as to yield the fullest possible portrait of the group under study. It can also be used in other methodological frameworks, for instance, an action research program of study where one of the goals is to change and improve the situation.

    These can include participant observation, field notes, interviews, and surveys. Interviews are often taped and later transcribed, allowing the interview to proceed unimpaired of note-taking, but with all information available later for full analysis. Secondary research and document analysis are also used to provide insight into the research topic. In the past, kinship charts were commonly used to "discover logical patterns and social structure in non-Western societies".

    In order to make the data collection and interpretation transparent, researchers creating ethnographies often attempt to be "reflexive". Reflexivity refers to the researcher's aim "to explore the ways in which [the] researcher's involvement with a particular study influences, acts upon and informs such research".

    This factor has provided a basis to criticize ethnography. Traditionally, the ethnographer focuses attention on a community, selecting knowledgeable informants who know the activities of the community well. Participation, rather than just observation, is one of the keys to this process. The information for financial statements comes from the bookkeeping system of the entity.

    So, in Chapter 3, I offer a brief overview of bookkeeping and accounting systems. You could jump over this chapter, if you must. But I recommend at least a quick read. Part II: In Chapter 7, I explain that businesses are not in a straitjacket when it comes to deciding which accounting methods to use for recording their revenue and expenses.

    They can select from two or more equally acceptable methods for recording certain revenues and expenses. The choice of accounting methods affects the values recorded for assets and liabilities.

    Part III: Accounting in Managing a Business To start a business and begin operations, its founders must first decide on which legal structure to use. Chapter 8 explains the legal entities for carrying on business activities. Each has certain advantages and disadvantages, and each is treated differently under the income tax law. Chapter 9 explains an extraordinarily important topic: A hands-on profit model is essential for decision-making analysis. A manager depends on the profit model to determine the effects of changes in sales prices, sales volume, product costs, and the other fundamental factors that drive profit.

    In Chapter 10, I discuss accounting-based planning and control techniques, through the lens of budgeting. Managers in manufacturing businesses should be wary of how product costs are determined, as Chapter 11 explains.

    The chapter also explains other economic and accounting cost concepts relevant to business managers. Next I discuss how investors and lenders read financial statements see Chapter Business managers need more information than is included in an external financial report to investors and lenders.

    In Chapter 14, I survey the additional information that managers need. I close this part of the book with a chapter that explains audits of financial statements by CPAs and the very serious problems of accounting and financial reporting fraud see Chapter If there were no Enrons in the world, things would be a lot simpler.

    I hate to say it, but the next Enron is just waiting to happen. Part V: Chapter 16 reviews ten important ways business managers should use accounting information. Chapter 17 gives business investors handy tips for getting the most out of reading a financial report — tips on how to be efficient in reading a financial report and the key factors to focus on.

    Glossary The accounting terminology in financial statements is a mixed bag. Sometimes it must seem like accountants are speaking a foreign language.

    I must admit that accountants use jargon more than they should.

    In some situations accountants resort to arcane terminology to be technically correct, much like lawyers use arcane terminology in filing lawsuits and drawing up contracts. Where I use jargon in the book, I pause and clarify what the terms mean in plain English. Also, I present a helpful glossary at the end of the book that can assist you on your accounting safari.

    This glossary provides quick access to succinct definitions of key accounting and financial terms, with relevant commentary and an occasional editorial remark. This is better than your average glossary. Introduction Icons Used in This Book This icon points out especially important ideas and accounting concepts that are particularly deserving of your attention.

    The material marked by this icon describes concepts that are the undergirding and building blocks of accounting — concepts that you should be very clear about and that clarify your understanding of accounting principles in general. I use this icon sparingly; it refers to very specialized accounting stuff that is heavy going, which only a CPA could get really excited about.

    However, you may find these topics important enough to return to when you have the time. Feel free to skip over these points the first time through and stay with the main discussion.

    This icon calls your attention to useful advice on practical financial topics. It saves you the cost of downloading a yellow highlighter pen. This icon is like a caution sign that warns you about speed bumps and potholes on the accounting highway. Taking special note of this material can steer you around a financial road hazard and keep you from blowing a fiscal tire.

    In short — watch out! You might start with Chapters 4, 5, and 6 which explain the three primary financial statements of businesses, and finish with Chapter 13 on reading a financial report. You might jump right into Chapters 9 and 10, which explain the analysis of profit behavior and budgeting cash flows.

    The book is not like a five-course dinner in which you have to eat in the order the food is served to you. In this part, you find out why. Accounting is equally vital in managing the business affairs of not-forprofit and governmental entities.

    From its accounting records, a business prepares its financial statements, its tax returns, and the reports to its managers. In financial reports to investors and lenders, a business must obey authoritative accounting and financial reporting standards.

    If not, its financial reports would be misleading and possibly fraudulent, which could have dire consequences. Bookkeeping — the record-keeping part of accounting — must be done well to ensure that the financial information of a business is timely, complete, accurate, and reliable — especially the numbers reported in its financial statements and tax returns. Wrong numbers in financial reports and tax returns can cause all sorts of trouble. Chapter 1 Accounting: A ccounting is all about financial information — capturing it, recording it, configuring it, analyzing it, and reporting it to persons who use it.

    But I talk a lot about how accountants communicate information in financial statements, and I explain the valuation methods accountants use — ranging from measuring profit and loss to putting values on assets and liabilities of businesses.

    As you go through life, you come face to face with accounting information more than you would ever imagine. Accounting information is presented on the assumption that you have a basic familiarity with the vocabulary of accounting and the accounting methods used to generate the information. In short, most of the accounting information you encounter is not transparent.

    The main reason for studying accounting is to learn its vocabulary and valuation methods, so you can make more intelligent use of the information.

    Opening the Books on Accounting People who use accounting information should know the basic rules of play and how the financial score is kept, much like spectators at a football or baseball game. The purpose of this book is to make you a knowledgeable spectator of the accounting game. Let me point out another reason you should know accounting basics — I call it the defensive reason.

    A lot of people out there in the cold, cruel financial world may take advantage of you, not necessarily by illegal means but by withholding key information and by diverting your attention from unfavorable aspects of certain financial decisions. These unscrupulous characters treat you as a lamb waiting to be fleeced. 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.

    Financial statements are sent to people who have a stake in the outcomes of the activities. If you own stock in General Electric, for example, or you have money in a mutual fund, you receive regular financial reports.

    If you invest your hard-earned money in a private business or a real estate venture, or you save money in a credit union, you receive regular financial reports. In summary, one important reason for studying accounting is to make sense of the financial statements in the financial reports you get. I guarantee that Warren Buffett knows accounting and how to read financial statements. Affecting both insiders and outsiders People who need to know accounting fall into two broad groups: Business managers are insiders; they have the authority and responsibility to run a business.

    They need a good understanding of accounting terms and the methods used to measure profit and put values on assets and liabilities. Chapter 1: The Language of Business, Investing, Finance, and Taxes Accounting information is indispensable for planning and controlling the financial performance and condition of the business. Likewise, administrators of nonprofit and governmental entities need to understand the accounting terminology and measurement methods in their financial statements.

    The rest of us are outsiders. We are not privy to the day-to-day details of a business or organization. Therefore, we need to have a good grip on the financial statements included in the financial reports. For all practical purposes, financial reports are the only source of financial information we get directly from a business or other organization.

    By the way, the employees of a business — even though they obviously have a stake in the success of the business — do not necessarily receive its financial reports. Only the investors in the business and its lenders are entitled to receive the financial reports.

    Of course, a business could provide this information to those of its employees who are not shareowners, but generally speaking most businesses do not. The financial reports of public businesses are in the public domain, so their employees can easily secure a copy. However, financial reports are not automatically mailed to all employees of a public business.

    In our personal financial lives, a little accounting knowledge is a big help for understanding investing in general, how investment performance is measured, and many other important financial topics. 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. Overcoming the stereotypes of accountants I recently saw a cartoon in which the young son of clowns is standing in a circus tent and is dressed as a clown, but he is holding a business briefcase.

    He is telling his clown parents that he is running away to join a CPA firm. Why is this funny? As a CPA and accounting professor for more than 40 years, I have met and known a large number of accountants. Most accountants are not as gregarious as used-car sales people though some are. Accountants certainly are more detail-oriented than your average person. Accountants use very little math no calculus and only simple algebra.

    Accountants are very good at one thing: They want to see both sides of financial transactions: If you walked down a busy street in Chicago, New York, or Los Angeles, I doubt that you could pick out the accountants. I have no idea whether accountants have higher or lower divorce rates than others, whether they go to church more frequently, whether most are Republicans or Democrats, or if they generally sleep well at night. I do think that accountants are more honest in paying their income taxes than other people, although I have no proof of this.

    Forensic Accounting For Dummies Solutions Manual

    Well, a great deal of the information you use in making personal finance and investing decisions is accounting information. You have a stake in the financial performance of the business you work for, the government entities you pay taxes to, the churches and charitable organizations you donate money to, the retirement plan you participate in, the businesses you download from, and the healthcare providers you depend on.

    The financial performance and viability of these entities has a direct bearing on your personal financial life and well-being. For example, as an employee your job security and your next raise depend on the business making a profit.

    If the business suffers a loss, you may be laid off or asked to take a reduction in pay or benefits. Business managers get paid to make profit happen. If the business fails to meet its profit objectives or suffers a loss, its managers may be replaced or at least not get their bonuses. As an author, I hope my publisher continues to make profit so I can keep receiving my royalty checks. I hope the stores I trade with make profit and continue in business.

    The federal government and many states depend on businesses making profit to collect income taxes from them.

    When you sign a mortgage on your home, you should understand the accounting method the lender uses to calculate the interest amount charged on your loan each period. Individual investors need to understand accounting basics in order to figure their return on invested capital. And it goes without saying that every organization, profit-motivated or not, needs to know how it stands financially.

    All economic activity requires information. The more developed the economic system, the more the system depends on information. Much of the information comes from the accounting systems used by the businesses, institutions, individuals, and other players in the economic system.

    Some of the earliest records of history are the accounts of wealth and trading activity. The need for accounting information was a main incentive in the development of the numbering system we use today. The history of accounting is quite interesting but beyond the scope of this book.

    Taking a Peek into the Back Office Every business and not-for-profit entity needs a reliable bookkeeping system see Chapter 3. Keep in mind that accounting is a much broader term than bookkeeping. For one thing, accounting encompasses the problems in measuring the financial effects of economic activity. Furthermore, accounting includes the function of financial reporting of values and performance measures to those that need the information. Business managers and investors, and many other people, depend on financial reports for information about the performance and condition of the entity.

    The Language of Business, Investing, Finance, and Taxes Bookkeeping refers to the process of accumulating, organizing, storing, and accessing the financial information base of an entity, which is needed for two basic purposes: Of course the financial information base should be complete, accurate, and timely. Every recordkeeping system needs quality controls built into it, which are called internal controls or internal accounting controls. Accountants design the internal controls for the bookkeeping system, which serve to minimize errors in recording the large number of activities that an entity engages in over the period.

    The internal controls that accountants design are also relied on to detect and deter theft, embezzlement, fraud, and dishonest behavior of all kinds. In accounting, internal controls are the ounce of prevention that is worth a pound of cure. I explain internal controls in Chapter 3. Here, I want to stress the importance of the bookkeeping system in operating a business or any other entity. These back-office functions are essential for keeping operations running smoothly, efficiently, and without delays and errors.

    This is a tall order, to say the least. Opening the Books on Accounting Typically, the accounting department is responsible for the following: The total wages and salaries earned by every employee every pay period, which are called gross wages or gross earnings, have to be calculated. Based on detailed private information in personnel files and earnings-to-date information, the correct amounts of income tax, social security tax, and several other deductions from gross wages have to be determined.

    Stubs, which report various information to employees each pay period, have to be attached to payroll checks. The total amounts of withheld income tax and social security taxes, plus the employment taxes imposed on the employer, have to be paid to federal and state government agencies on time.

    Retirement, vacation, sick pay, and other benefits earned by the employees have to be updated every pay period. In short, payroll is a complex and critical function that the accounting department performs. Many businesses outsource payroll functions to companies that specialize in this area. All cash received from sales and from all other sources has to be carefully identified and recorded, not only in the cash account but also in the appropriate account for the source of the cash received.

    The accounting department makes sure that the cash is deposited in the appropriate checking accounts of the business and that an adequate amount of coin and currency is kept on hand for making change for customers.

    Accountants balance the checkbook of the business and control who has access to incoming cash receipts. In larger organizations, the treasurer may be responsible for some of these cash flow and cashhandling functions.

    In addition to payroll checks, a business writes many other checks during the course of a year — to pay for a wide variety of downloads, to pay property taxes, to pay on loans, and to distribute some of its profit to the owners of the business, for example.

    The accounting department prepares all these checks for the signatures of the business officers who are authorized to sign checks.

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    The accounting department keeps all the supporting business documents and files to know when the checks should be paid, makes sure that the amount to be paid is correct, and forwards the checks for signature. Accounting departments usually are responsible for keeping track of all download orders that have been placed for inventory products to be sold by the business and all other assets and services that the business downloads — from postage stamps to forklifts.

    A typical business makes many downloads during the course of a year, many of them on credit, which means that the items bought are received today but paid for later. So this area of responsibility includes keeping files on all liabilities that arise from downloads on credit so that cash payments can be processed on time. The accounting department Chapter 1: The Language of Business, Investing, Finance, and Taxes also keeps detailed records on all products held for sale by the business and, when the products are sold, records the cost of the goods sold.

    A typical business owns many different substantial long-term assets called property, plant, and equipment — including office furniture and equipment, retail display cabinets, computers, machinery and tools, vehicles autos and trucks , buildings, and land. Except for relatively small-cost items, such as screwdrivers and pencil sharpeners, a business maintains detailed records of its property, both for controlling the use of the assets and for determining personal property and real estate taxes.

    The accounting department keeps these property records. The accounting department may be assigned other functions as well, but this list gives you a pretty clear idea of the back-office functions that the accounting department performs. Quite literally, a business could not operate if the accounting department did not do these functions efficiently and on time.

    And to repeat one point: To do these back-office functions well the accounting department must design a good bookkeeping system and make sure that it is accurate, complete, and timely. Focusing on Transactions Accounting focuses on transactions. A good bookkeeping system captures and records every transaction that takes place without missing a beat. Transactions are economic exchanges between a business or other entity and the parties with which the entity interacts and makes deals.

    Transactions are the lifeblood of every business, the heartbeat of activity that keeps it going. Understanding accounting, to a large extent, means understanding how accountants record the financial effects of transactions. The immediate and future financial effects of some transactions can be difficult to determine.

    A business carries on economic exchanges with six basic types of persons or entities: Figure illustrates the interactions between the business and the other parties in its economic exchanges. Even a relatively small business generates a surprisingly large number of transactions, and all transactions have to be recorded. Certain other events that have a financial impact on the business have to be recorded as well. Events such as the following have an economic impact on a business and are recorded: The liability to pay the damages is recorded.

    The waterlogged assets may have to be written down, meaning that the recorded values of the assets are reduced to zero if they no longer have any value to the business. For example, products that were being held for sale to customers until they floated down the river must be removed from the inventory asset account.

    As I explain in more detail in Chapter 3, at the end of the year the accountant makes a special survey to make sure that all events and developments during the year that should be recorded have been recorded, so that the financial statements and tax returns for the year are complete and correct. Transactions between a business and the parties it deals with.

    Financial Statements I devote a good deal of space in this book to discussing financial statements. In Chapter 2, I explain the fundamental information components of financial statements, and then Part II gets into the nitty-gritty details. 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.

    Outside investors in a business see only summary-level financial statements. For example, investors see the total amount of sales revenue for the period but not how much was sold to each and every customer. This is called the statement of financial condition or, more commonly, the balance sheet.

    The date of preparation is given in the header, or title, above this financial statement. A balance sheet shows two sides of the business, which I suppose you could think of as the financial yin and yang of the business: On one side of the balance sheet the assets of the business are listed, which are the economic resources owned and being used in the business. The asset values reported in the balance sheet are the amounts recorded when the assets were originally acquired — although I should mention that an asset is written down below its historical cost when the asset has suffered a loss in value.

    And to complicate matters, some assets are written up to their current fair values. Some assets have been on the books only a few weeks or a few months, so their reported historical values are current. The values for other assets, on the other hand, are their costs when they were acquired many years ago.

    On the other side of the balance sheet is a breakdown of where the assets came from, or their sources. Assets are not like manna from the heavens. Assets come from two basically different sources: First, the creditors: Businesses borrow money in the form of interest-bearing loans that have to be paid back at a later date, and they download things on credit that are paid for later. So, part of total assets can be traced to creditors, which are the liabilities of a business.

    Second are the owners: Every business needs to have owners invest capital usually money in the business. Also, businesses retain part or all of the annual profits they make, and profit increases the total assets of the business.

    Otherwise its books would be out of balance, which means there are bookkeeping errors. Owners bear the risk that the business may be unable to make a profit. The financial condition of the business in this example is summarized in the following accounting equation in millions: Double-entry bookkeeping is based on the accounting equation — the fact that the total of assets on the one side is counterbalanced by the total of liabilities, invested capital, and retained profit on the other side.

    I discuss double-entry bookkeeping in Chapter 3. Basically, double-entry bookkeeping simply means that both sides of transactions are recorded. This is the economic nature of transactions.

    Double-entry means two-sided, not that the transactions are recorded twice. Reporting profit and loss, and cash flows 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 through the turnstiles over the season is the flow.

    Accountants prepare two types of financial flow reports for a business: Deducting expenses from revenue and income leads down to the wellknown bottom line, which is the final net profit or loss for the period and is called net income or net loss or some variation of these terms.

    Opening the Books on Accounting Alternative titles for this financial statement are the statement of operations and the statement of earnings. The accounting profession has adopted a three-way classification of cash flows for external financial reporting: Respecting the importance of this trio I explain more about the three primary financial statements balance sheet, income statement, and statement of cash flows in Chapter 2.

    These individuals have invested capital in the business, or the business owes them money; therefore, they have a financial interest in how well the business is doing. They are absolutely essential in helping managers control the performance of a business, identify problems as they come up, and plan the future course of a business. Managers also need other information that is not reported in the three basic financial statements.

    The president and chief executive officer of a business plus other top-level officers are responsible for seeing that the financial statements are prepared according to applicable financial reporting standards and according to established accounting principles and methods.

    For this reason, business managers should understand their responsibility for the financial statements and the accounting methods used to prepare the statements. This situation is a little scary; a manager who Chapter 1: Business managers at all levels need to understand financial statements and the accounting methods used to prepare them.

    Also, lenders to a business, investors in a business, business lawyers, government regulators of business, entrepreneurs, anyone thinking of becoming an entrepreneur and starting a business, and, yes, even economists should know the basics of financial statement accounting. The bottom line is found in the income statement, not the balance sheet! They work for businesses, government agencies, nonprofit organizations, and other organizations and associations.

    Accountants take these snide references in stride and with good humor. Actually, accountants rank among the most respected professionals in many polls. Certified public accountant CPA In the accounting profession, the mark of distinction is to be a CPA, which stands for certified public accountant. The term public means that the person has had some practical experience working for a CPA firm; it does not indicate whether that person is presently in public practice as an individual CPA or as an employee or partner in a CPA firm that offers services to the public at large rather than working for one organization.

    Opening the Books on Accounting To become a CPA, you go to college, graduate with an accounting major in a five-year program in most states , and pass the national, computer-based CPA exam. You also must satisfy professional employment experience; this requirement varies from state to state but generally is one or two years. After satisfying the education, exam, and experience requirements, you get a CPA certificate to hang on your wall.

    More important, you get a permit from your state to practice as a CPA and offer your services to the public. States require continuing education hours to maintain an active CPA permit.

    The controller: The chief accountant in an organization The top-level accounting officer in a business organization is usually called the controller. The controller designs the entire accounting system of the business and keeps it up-to-date with changes in the tax laws and changes in the accounting rules that govern reporting financial statements to outside lenders and owners. Controllers are responsible for hiring, training, evaluating, promoting, and sometimes firing the persons who hold the various bookkeeping and accounting positions in an organization — which range from payroll functions to the several different types of tax returns that have to be filed on time with different government agencies.

    The controller is the lead person in the financial planning and budgeting process of the business organization. Furthermore, the controller designs the accounting reports that all the managers in the organization receive — from the sales and marketing managers to the downloading and procurement managers. All the tough accounting questions and problems get referred to the controller.

    Smaller businesses may employ only one accountant. Smaller businesses often call in a CPA for advice and help. The Language of Business, Investing, Finance, and Taxes State incorporation laws typically require that someone in the business be designated the treasurer, who has fiduciary responsibilities.

    Also, these laws usually require that someone be designated the secretary. The organizational charts of larger businesses usually put their controller under their vice president for finance, or chief financial officer CFO.

    The accounting functions in a business are integrated with and work in close coordination with its financial, treasury, and secretary functions. A springboard to other careers Many CPAs move on to other careers.

    A recent article in the Journal of Accountancy featured former CPAs who moved on to other interesting careers. After a few years in public accounting, I went back to school, got my Ph. These days, the starting salaries for new assistant professors of accounting are well into six digits!

    In this chapter, you get some juicy details. Then, in Part II, you really get the goods. Think back to when you learned to ride a bicycle. Chapter 1 is like getting on the bike and learning to keep your balance.

    In this chapter, you put on your training wheels and start riding. The financial effects of making profit are not as simple as you may think. Profitmaking activities cause changes in the financial condition of a business — but maybe not the changes you suppose. Making profit leaves many footprints on the financial condition of a business. Also in this chapter, I briefly discuss financial accounting and reporting standards. Businesses comply with established rules for recording revenue, income, expenses, and losses; for putting values on assets and liabilities; and for presenting and disclosing information in their financial reports.

    The basic idea is that all businesses should follow uniform methods for measuring and reporting profit performance, and reporting financial condition and cash flows. Consistency in accounting from business to business is the goal. I explain who makes the rules, and I discuss two important recent developments: Opening the Books on Accounting Introducing the Information Content of Financial Statements This chapter focuses on the basic information components of each financial statement reported by a business.

    In this first step, I do not address the classification, or grouping, of these information packets within each financial statement. The first step is to get a good idea of the information content reported in financial statements. Setting up the business example To better illustrate the three primary financial statements, I need a realistic business example.

    The information content of its financial statements depends on the line of business a company is in — in other words, which types of products and services it sells. The financial statements of a movie theater chain are different from those of a bank, which are different from those of an airline, which are different from an automobile manufacturer. Here, I use a fairly common type of business example. Here are the particulars of the business I use for the example: Chapter 2: Dollar amounts in the three financials are rounded off to the nearest thousand, which is not uncommon.

    Dollar amounts can be reported out to the last dollar, or even the last penny for that matter. But too many digits in a dollar amount are hard to absorb, so many businesses round off the dollar amounts in their financial statements. These financial statements are stepping-stone illustrations that are concerned mainly with the basic information components in each statement. Full-blown, classified financial statements are presented in Part II of the book. The financial statements in this chapter do not include all the information you see in actual financial statements.

    Also, I use descriptive labels for each item rather than the terse and technical titles you see in actual financial statements. And I strip out subtotals that you see in actual financial statements because they are not necessary at this point. Oops, I forgot to mention a couple of things about financial statements. I should give you quick heads-up on these points. Financial statements are rather stiff and formal. Financial statements would get a G in the movies rating system.

    Seldom do you see any graphics or artwork in a financial statement itself, although you do see a fair amount of photos and graphics elsewhere in the financial reports of public companies. However, I might mention that in his annual letter to the stockholders of Berkshire Hathaway, Warren Buffett includes some wonderful humor to make his points. The income statement The income statement is the all-important financial statement that summarizes the profit-making activities of a business over a period of time.

    Figure shows the basic information content for an external income statement: The income statement in Figure shows six lines of information: Virtually all income statements disclose at least the four expenses shown in Figure The first two expenses cost of goods sold and selling, general, and administrative expenses take a big bite out of sales revenue. The other two expenses interest and income tax are relatively small as a percent of annual sales revenue but important enough in their own right to be reported separately.

    As an author, I hope my publisher continues to make profit so I can keep receiving my royalty checks. I hope the stores I trade with make profit and continue in business. The federal government and many states depend on businesses making profit to collect income taxes from them.

    When you sign a mortgage on your home, you should understand the accounting method the lender uses to calculate the interest amount charged on your loan each period.

    Individual investors need to understand accounting basics in order to figure their return on invested capital. And it goes without saying that every organization, profit-motivated or not, needs to know how it stands financially. All economic activity requires information. The more developed the economic system, the more the system depends on information.

    Much of the information comes from the accounting systems used by the businesses, institutions, individuals, and other players in the economic system. Some of the earliest records of history are the accounts of wealth and trading activity. The need for accounting information was a main incentive in the development of the numbering system we use today. The history of accounting is quite interesting but beyond the scope of this book. Taking a Peek into the Back Office Every business and not-for-profit entity needs a reliable bookkeeping system see Chapter 3.

    Keep in mind that accounting is a much broader term than bookkeeping. For one thing, accounting encompasses the problems in measuring the financial effects of economic activity.

    Furthermore, accounting includes the function of financial reporting of values and performance measures to those that need the information. Business managers and investors, and many other people, depend on financial reports for information about the performance and condition of the entity.

    Of course the financial information base should be complete, accurate, and timely. Every recordkeeping system needs quality controls built into it, which are called internal controls or internal accounting controls. Accountants design the internal controls for the bookkeeping system, which serve to minimize errors in recording the large number of activities that an entity engages in over the period.

    The internal controls that accountants design are also relied on to detect and deter theft, embezzlement, fraud, and dishonest behavior of all kinds. In accounting, internal controls are the ounce of prevention that is worth a pound of cure.

    I explain internal controls in Chapter 3. Here, I want to stress the importance of the bookkeeping system in operating a business or any other entity.

    These back-office functions are essential for keeping operations running smoothly, efficiently, and without delays and errors. This is a tall order, to say the least. Based on detailed private information in personnel files and earnings-to-date information, the correct amounts of income tax, social security tax, and several other deductions from gross wages have to be determined.

    Stubs, which report various information to employees each pay period, have to be attached to payroll checks. The total amounts of withheld income tax and social security taxes, plus the employment taxes imposed on the employer, have to be paid to federal and state government agencies on time. Retirement, vacation, sick pay, and other benefits earned by the employees have to be updated every pay period. In short, payroll is a complex and critical function that the accounting department performs.

    Many businesses outsource payroll functions to companies that specialize in this area. The accounting department makes sure that the cash is deposited in the appropriate checking accounts of the business and that an adequate amount of coin and currency is kept on hand for making change for customers. Accountants balance the checkbook of the business and control who has access to incoming cash receipts.

    In larger organizations, the treasurer may be responsible for some of these cash flow and cashhandling functions. The accounting department prepares all these checks for the signatures of the business officers who are authorized to sign checks. The accounting department keeps all the supporting business documents and files to know when the checks should be paid, makes sure that the amount to be paid is correct, and forwards the checks for signature.

    Accounting For Dummies

    A typical business makes many downloads during the course of a year, many of them on credit, which means that the items bought are received today but paid for later. So this area of responsibility includes keeping files on all liabilities that arise from downloads on credit so that cash payments can be processed on time. The accounting department Chapter 1: Accounting: The Language of Business, Investing, Finance, and Taxes also keeps detailed records on all products held for sale by the business and, when the products are sold, records the cost of the goods sold.

    Except for relatively small-cost items, such as screwdrivers and pencil sharpeners, a business maintains detailed records of its property, both for controlling the use of the assets and for determining personal property and real estate taxes.

    The accounting department keeps these property records. The accounting department may be assigned other functions as well, but this list gives you a pretty clear idea of the back-office functions that the accounting department performs.

    Quite literally, a business could not operate if the accounting department did not do these functions efficiently and on time. And to repeat one point: To do these back-office functions well the accounting department must design a good bookkeeping system and make sure that it is accurate, complete, and timely. Focusing on Transactions Accounting focuses on transactions.

    A good bookkeeping system captures and records every transaction that takes place without missing a beat. Transactions are economic exchanges between a business or other entity and the parties with which the entity interacts and makes deals.

    Transactions are the lifeblood of every business, the heartbeat of activity that keeps it going. Understanding accounting, to a large extent, means understanding how accountants record the financial effects of transactions.

    The immediate and future financial effects of some transactions can be difficult to determine. Figure illustrates the interactions between the business and the other parties in its economic exchanges. Even a relatively small business generates a surprisingly large number of transactions, and all transactions have to be recorded.

    Certain other events that have a financial impact on the business have to be recorded as well. The liability to pay the damages is recorded.

    The waterlogged assets may have to be written down, meaning that the recorded values of the assets are reduced to zero if they no longer have any value to the business. For example, products that were being held for sale to customers until they floated down the river must be removed from the inventory asset account. As I explain in more detail in Chapter 3, at the end of the year the accountant makes a special survey to make sure that all events and developments during the year that should be recorded have been recorded, so that the financial statements and tax returns for the year are complete and correct.

    In Chapter 2, I explain the fundamental information components of financial statements, and then Part II gets into the nitty-gritty details. 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. Outside investors in a business see only summary-level financial statements. For example, investors see the total amount of sales revenue for the period but not how much was sold to each and every customer. This is called the statement of financial condition or, more commonly, the balance sheet. The date of preparation is given in the header, or title, above this financial statement.

    The asset values reported in the balance sheet are the amounts recorded when the assets were originally acquired — although I should mention that an asset is written down below its historical cost when the asset has suffered a loss in value. And to complicate matters, some assets are written up to their current fair values.

    Some assets have been on the books only a few weeks or a few months, so their reported historical values are current. The values for other assets, on the other hand, are their costs when they were acquired many years ago. Assets are not like manna from the heavens. Assets come from two basically different sources: creditors and owners. First, the creditors: Businesses borrow money in the form of interest-bearing loans that have to be paid back at a later date, and they download things on credit that are paid for later.

    So, part of total assets can be traced to creditors, which are the liabilities of a business.

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