1
Introduction to Business
Chapter 14 Using Financial Information and Accounting
14.1 Accounting: More than Numbers
Accounting involves collecting, recording, classifying, summarizing, reporting, and analyzing a
firm’s financial activities according to a standard set of procedures. The financial reports
resulting from the accounting process give managers, employees, investors, customers,
suppliers, creditors, and government agencies a way to analyze a company’s past, current, and
future performance. Financial accounting is concerned with the preparation of financial reports
using generally accepted accounting principles. Managerial accounting provides financial
information that management can use to make decisions about the firm’s operations.
The Accounting System
(Attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license.)
14.1 Review Questions
1. Why is financial information important?
2. What is the importance of understanding basic accounting concepts?
3. What is accounting?
4. What does accounting provide a framework for?
5. What do accounting systems convert?
6. What kind of documents contain financial statements?
7. What are some different types of financial statements?
8. What are the two types of financial reports?
9. Which type of report does managerial accounting provide financial information for?
10. What kind of financial reports does financial accounting deals with?
11. How does the United States ensure accuracy and consistency in the reporting of
financial information?
12. What is the Financial Accounting Standards Board (FASB)
For more free, peer-reviewed, openly licensed resources visit OpenStax.org.
, 2
13. Why does FASB work with the International Accounting Standards Board (IASB)
14. What is an annual report, and what is its chief element?
15. What are the three primary financial statements included in the annual report?
14.2 Accounting Profession
Public accountants work for independent firms that provide accounting services—such as
financial report preparation and auditing, tax return preparation, and management consulting
—to other organizations on a fee basis. Private accountants are employed to serve one
particular organization and may prepare financial statements, tax returns, and management
reports.
The bankruptcies of companies such as Enron and WorldCom, plus widespread abuses of
accounting practices, raised critical issues of auditor independence and the integrity and
reliability of financial reports. To set better standards for accounting, auditing, and financial
reporting and prevent future accounting irregularities, Congress passed the Sarbanes-Oxley Act
in 2002. This Act created an independent board to oversee the accounting profession, set
stricter auditing and financial disclosure standards, and placed increased accountability on a
company’s senior executives and management. In addition, the law restricts auditors from
providing certain types of consulting services to clients. Other organizations such as the SEC,
the New York Stock Exchange, and accounting industry professional associations issued new
regulations and guidelines related to compliance with the Act.
14.2 Review Questions
1. What are two classifications of accountants?
2. Who do public accounts sever and what services do they offer?
3. Define auditing.
4. What does it take to become a certified public accountant (CPA)?
5. Who do private accountants serve and what services do they offer?
6. What kind of certification is available to private accountants?
7. What steps can be taken to prevent accounting regularities
8. What are similarities between companies involved in scandals?
9. What did the Sarbanes-Oxley Act define and what did it clarify?
10. What board is given authority over the Sarbanes-Oxley Act and what powers do they
have?
11. What are key provisions of the Sarbanes-Oxley Act?
12. What has been companies’ response to the Sarbanes-Oxley Act?
For more free, peer-reviewed, openly licensed resources visit OpenStax.org.
Introduction to Business
Chapter 14 Using Financial Information and Accounting
14.1 Accounting: More than Numbers
Accounting involves collecting, recording, classifying, summarizing, reporting, and analyzing a
firm’s financial activities according to a standard set of procedures. The financial reports
resulting from the accounting process give managers, employees, investors, customers,
suppliers, creditors, and government agencies a way to analyze a company’s past, current, and
future performance. Financial accounting is concerned with the preparation of financial reports
using generally accepted accounting principles. Managerial accounting provides financial
information that management can use to make decisions about the firm’s operations.
The Accounting System
(Attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license.)
14.1 Review Questions
1. Why is financial information important?
2. What is the importance of understanding basic accounting concepts?
3. What is accounting?
4. What does accounting provide a framework for?
5. What do accounting systems convert?
6. What kind of documents contain financial statements?
7. What are some different types of financial statements?
8. What are the two types of financial reports?
9. Which type of report does managerial accounting provide financial information for?
10. What kind of financial reports does financial accounting deals with?
11. How does the United States ensure accuracy and consistency in the reporting of
financial information?
12. What is the Financial Accounting Standards Board (FASB)
For more free, peer-reviewed, openly licensed resources visit OpenStax.org.
, 2
13. Why does FASB work with the International Accounting Standards Board (IASB)
14. What is an annual report, and what is its chief element?
15. What are the three primary financial statements included in the annual report?
14.2 Accounting Profession
Public accountants work for independent firms that provide accounting services—such as
financial report preparation and auditing, tax return preparation, and management consulting
—to other organizations on a fee basis. Private accountants are employed to serve one
particular organization and may prepare financial statements, tax returns, and management
reports.
The bankruptcies of companies such as Enron and WorldCom, plus widespread abuses of
accounting practices, raised critical issues of auditor independence and the integrity and
reliability of financial reports. To set better standards for accounting, auditing, and financial
reporting and prevent future accounting irregularities, Congress passed the Sarbanes-Oxley Act
in 2002. This Act created an independent board to oversee the accounting profession, set
stricter auditing and financial disclosure standards, and placed increased accountability on a
company’s senior executives and management. In addition, the law restricts auditors from
providing certain types of consulting services to clients. Other organizations such as the SEC,
the New York Stock Exchange, and accounting industry professional associations issued new
regulations and guidelines related to compliance with the Act.
14.2 Review Questions
1. What are two classifications of accountants?
2. Who do public accounts sever and what services do they offer?
3. Define auditing.
4. What does it take to become a certified public accountant (CPA)?
5. Who do private accountants serve and what services do they offer?
6. What kind of certification is available to private accountants?
7. What steps can be taken to prevent accounting regularities
8. What are similarities between companies involved in scandals?
9. What did the Sarbanes-Oxley Act define and what did it clarify?
10. What board is given authority over the Sarbanes-Oxley Act and what powers do they
have?
11. What are key provisions of the Sarbanes-Oxley Act?
12. What has been companies’ response to the Sarbanes-Oxley Act?
For more free, peer-reviewed, openly licensed resources visit OpenStax.org.
