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Masterat on line: Analiz financiar i evaluare

Limba englez de afaceri - Titular de curs: Prof.dr. Georgeta Ghiga

Lecture 1
Business, Accounting and Ethics
What goes on in business and other organizations?
How are their activities carried out?
What part does accounting play?
The main purpose of accounting to provide financial information to decision makers
Accounting provides information to:
all-profit oriented businesses
nonprofit organizations (churches, hospitals, museums, schools, various government
people who use information about nonprofit organizations (managers, people who donate
to them or pay taxes to them, who use their services or who work with them)
The financial information provided by accounting help them make better decisions.
Accounting = service activity
Accounting provides information for internal & external needs.
Internal needs
What goes on in organizations?
Functions of various departments
Organizations need money for:
acquiring buildings, equipment, vehicles, financial holdings
The finance function task:
to plan how to obtain money from various sources
profit-oriented organizations

payments from customers

loans from banks

new investments from owners

government organizations acquire cash by:

collecting taxes & fees

non-profit organizations acquire cash from:

contributions by donors
evaluates alternative sources of funds
evaluates alternative investment opportunities (which to take, which to reject)

Masterat on line: Analiz financiar i evaluare

Limba englez de afaceri - Titular de curs: Prof.dr. Georgeta Ghiga
Human Resources
locating, screening, hiring, training, compensating, promoting, counselling employees
to deal with retirement and firing issues
Reasearch & Development
to find new ways to meet the needs of their customers and other categories of people
related to their company
research into new technologies, products and services (essential)
the development process uses the new knowledge to design or modify specific products
or services
to manufacture goods
planning & coordinating specific activities
designing the production process
acquiring materials
selection of labour
materials handling systems

provides customers information about goods and services and encourages their purchase

sales efforts (contacting customers directly, advertising, set prices that are low enough to
encourage sales and high enough to earn profit)
identifying new products to meet customers' needs
developing suitable systems of distribution
(the marketing mix the four P's of marketing: product, promotion, price, place)

Executive Management

long-term strategies
decision making

The internal role of accounting

What type of accounting information is used by each of these departments?
Finance cash flows
for projecting future cash flows
for evaluating past decisions
Human resources payroll costs
Research and development managers the costs they already have incurred to decide
whether they can continue their projects
Marketing managers reports about the company's sales; marketing costs

Masterat on line: Analiz financiar i evaluare

Limba englez de afaceri - Titular de curs: Prof.dr. Georgeta Ghiga
The production division to determine whether its operating costs are occurring as expected
operates within a set of internal controls designed by the accounting department
to promote efficiency
to prevent unauthorized use of the company's resources
These controls specify procedures that must be followed before certain actions can take place.
(Example: requirement for a manager's approval before any materials are moved to the
production line)
Executive management depends heavily on accounting information financial statements
Accounting activities are not important by themselves.
provide information that is useful to other parts of the organization
The external role of accounting
Accounting information used for reporting to various external decision makers
information about the company's performance and financial strength to
help them determine whether to hold their investments
a. Both internal and external decision makers:
What resources does the organization own?
What debts does it owe?
How much income is it earning?
Are the expenses appropriate for the amount of sales?
Are customers' accounts being collected promptly?
b. Lenders (creditors) to decide whether the company has enough financial strength and profits
to pay its debts
Has the organization promptly paid its debts in the past?
Does it have the ability to pay its current debts?
Does it have good prospects for future earnings?
Should it be granted additional credit now?
c. Voters, legislators, and officials concerned about a government agency's receipts and
d. Contributors to a nonprofits organization to understand what happens to their donations
e. A company's employees whether an organization represents a stable source of employment
to understand their employer's financial health and performance
Classification of accountants
according to the kinds of organizations in which they work
private accountants work for a single employer (often a business)
(A large business might employ a hundred or more private accountants, but most companies have
prepare the financial statements
public accountants provide their services to many different clients
their services are available to the public
some are self-employed; many others work for public accounting firms

Masterat on line: Analiz financiar i evaluare

Limba englez de afaceri - Titular de curs: Prof.dr. Georgeta Ghiga
audit the finacial statements
Government accountants work for government agencies
Some involved with business regulation
Others investigate violations of laws
Accounting a profession requiring special abilities and responsibilities
Professional status certificates
Professional Certification
a licensed CPA Certified Public Accountant
must meet education and experience requirements
must pass the CPA examination
United States
to be at least 21 years of age
to hold a college degree with a major in accounting
to have good ethical character
The CPA examination covers topics in:
financial and managerial accounting
income taxes
business law

uniform two-day examination is given in all states May and November

the exam is prepared and graded by the American Institute of Certified Public
Accountants (AICPA), the largest and most influential national professional
organization of CPAs.
1969 the AICPA's governing council:
CPAs need at least five years of college education (150 semester hours)
1983 this position supported by the National Association of State Boards of Accountancy
1988 the members of the AICPA voted to require all CPAs admitted to the institute after 2000
to have 150 semester hours of college education.
Other Professional Certificates:
Certificate in Management Accounting (CMA)
Certified Internal Auditor (CIA)
must meet examination, education, and experience requirements similar to those applied to CPAs
Unlike the CPA license, the CMA and CIA certificates are not issued by the government
and do not give their holders any legal authority.
CMA is awarded by the Institute of Management Accountants

Masterat on line: Analiz financiar i evaluare

Limba englez de afaceri - Titular de curs: Prof.dr. Georgeta Ghiga
CIA is granted by the Institute of Internal Auditors
Accountants practice in three fieldsfinancial, managerial, and tax accounting. The actual work
done depends on the field and whether the person is employed in private, public, or
government accounting

Types of Accounting
three broad fields:
Financial Accounting
Managerial Accounting
Tax Accounting
Financial Accounting
provides information to decision makers (those not involved in the day-to-day
external decision makers (investors, creditors, others)
primarily through financial statements
The Financial Statements
the condition of the organization + the events that happened during the year
prepared by the company's private accountants
many companies issue their financial statements only after an audit. An audit = thorough
check of an organization's accounting systems and records; it is performed to add credibility
To perform an audit:
auditors examine the financial statements + the accounting system
objective: to decide whether the statements reflect the company's financial position + operating
results in agreement with GAAP (generally accepted accounting principles)
GAAP = rules adopted by the accounting profession as guides for measuring and reporting the
financial condition and activities of a business
audit = completed report professional opinion about the financial statements
statements + the auditors' report

Managerial Accounting
provides information to an organization's managers
Managerial accounting reports the same information used in financial accounting
information that is not reported outside the company
General Accounting
recording transactions
processing the recorded data

Masterat on line: Analiz financiar i evaluare

Limba englez de afaceri - Titular de curs: Prof.dr. Georgeta Ghiga
preparing reports for managers
preparing the financial statements that executive management presents to external users
An organization's own accountants
design the accounting information system (often with help from public accountants)
The general accounting staff
chief accountant (controller)
(accounting information is used to control the organization's operations)
Cost Accounting
to plan and control operations
Cost accounting = process of accumulating the information managers need about operating
evaluate each manager's performance
Costs: products, services, or specific activities

Budgeting = process of developing formal plans for an organization's future activities

primary goal of budgeting how management activities affect the entire organization
the budget has been put into effect a basis for evaluating actual performance
Internal Auditing
independent auditing credibility to financial statements
(internal auditing credibility to reports produced and used within an organization)
Internal auditors
examine record-keeping processes
assess whether managers are following established operating procedures
evaluate the efficiency of operating procedures
Almost all large companies and government agencies employ internal auditors
Public accountants management advisory services to their clients
Independent auditors intimate knowledge of a client's accounting and operating procedures
(when they conduct their examinations)
Auditors an excellent position to offer suggestions for improving the company's procedures;
suggestions = useful by-product of the audit

Masterat on line: Analiz financiar i evaluare

Limba englez de afaceri - Titular de curs: Prof.dr. Georgeta Ghiga
public accountants help companies design and install new accounting and internal control
offering advice on selecting new computer systems
budgeting procedures
employee benefit plans
Tax Accounting
Many taxes raised by governments = based on the income earned by taxpayers
Taxpayers: individuals + corporate businesses
The amount of taxes is based on what the laws define to be income.
Tax accounting activities:
help taxpayers comply with laws by preparing their tax returns
help taxpayers plan future transactions to minimize the amount of taxes to be paid
Large companies their own private accountants responsible for preparing tax
returns + tax planning
may consult with public accountants special tax expertise
Small companies rely on public accountants for their tax work.
employs accountants for the tax process
collecting taxes
enforcing tax laws
review tax returns filed by taxpayers

offer assistance to taxpayers

help write regulations
investigate possible violations of tax laws


Reasons for the importance of ethics in accounting.
ethics and ethical behavior important features of any society
Disappointing stories about:
attempts to defraud the elderly and other vulnerable people
misconduct by public figures
bribery of government officials
the use of insider information for personal gain in the stock market
Effect: difficult for people to trust each other
Lack of trust our commercial and personal lives complicated, inefficient, unpleasant
How do ethics affect business and accounting?
The purpose of accounting is to provide useful information that can be trusted
it is essential that accountants be ethical
development of special ethics for accountants

Masterat on line: Analiz financiar i evaluare

Limba englez de afaceri - Titular de curs: Prof.dr. Georgeta Ghiga
The Meaning of Ethics
Ethics are:
"principles that determine the rightness or wrongness of particular acts or activities"
"accepted standards of good behavior ... in a profession or trade."
Ethics and laws often coincide:
many unethical actions (such as theft and physical violence) are also illegal
Other actions may not be against the law but are generally recognized as unethical (the crime of
perjury - not telling the truth - occurs only if the liar has been put under an oath)
However, not telling the truth is nearly always unethical.
Differences between laws and ethics we cannot count on laws to keep people ethical
In some cases:
difficulty in deciding whether an action is right or wrong
What to do?
The most ethical choice to take a course of action that avoids any doubt about the
ethical correctness of the action

Financial statement readers would not trust a CPA's report on the statements if the CPA's
financial success depended on the success of the reporting company.
Should this prevent an auditor from investing in a client if the investment is only a small part of
the auditor's personal wealth?
How much would be too much?
Ethics rules for auditors:
forbid any direct investment in their clients' securities, regardless of the amount
auditors cannot accept contingent fees that depend on amounts reported in a client's
financial statements
to prevent conflicts of interest
the possibility that the CPA might appear to lack independence
many controversial issues have ethical implications
ethical issues = an unavoidable part of life
A commitment to being ethical requires:
to think carefully before we act
to be certain that we are making ethical choices

Success in making those choices affects:

how we feel about ourselves and how others feel about us
the quality of our entire society
individual experience that each of us enjoys

Masterat on line: Analiz financiar i evaluare

Limba englez de afaceri - Titular de curs: Prof.dr. Georgeta Ghiga
How do ethics relate to business, and more specifically, how do they relate to accounting?

Ethics in Business
Business activity central to everyone's life
useful accounting information is important for business
Recent history shows:
Great concern about what people see as low ethical standards in business
A survey of more than 1,100 executives, deans of business schools, and members of Congress,
showed that:
94% of the respondents agreed with the statement that "the business community is troubled by
ethical problems."
However the vast majority of the respondents believed high ethical standards are followed
by companies that are successful over the long run.
This second finding:
1. confirms an old saying: "Good ethics is good business."
ethical business practices build trust loyalty + productive relationships with customers,
suppliers, and employees
good ethics good reputation success
2. many companies have adopted their own codes of ethics
establish standards for:
internal activities
relationships with customers, suppliers, regulators, the public, and even competitors
(guides for employees to follow)
These codes = public statements of the companies' commitment to ethical business practices

Ethics in Accounting
accountants are expected to provide useful information for decision maker
these decisions can have a profound effect on others (individuals, businesses, other
accountants often face ethical issues as they consider what information should be provided to decision makers
Accountants' choices can affect:
the amount of money a company pays in taxes or distributes to its stockholders
the price that a buyer pays for a business
the amount of compensation paid to a company's managers

Masterat on line: Analiz financiar i evaluare

Limba englez de afaceri - Titular de curs: Prof.dr. Georgeta Ghiga
Internal information can affect:
judgments about the success of a company's specific products or divisions
(If inadequate, accounting information would cause a successful division to be closed, its
employees, customers, and suppliers would be significantly harmed.)
The need for guidance for accountants
Ethics codes have been adopted and enforced by professional accounting organizations.
The American Institute of Certified Public Accountants
The Institute of Management Accountants
to keep their codes up to date
continually monitor their effectiveness and applicability to new ways of operating
Accountants and managers often face situations with ethical implications:
1. Many companies pay their managers bonuses based on amount of income reported.
There are accounting alternatives that accelerate the reporting of income. ( benefit for
managers) However, those alternatives reduce the money available to invest for the benefit of the
2. The confidential nature of the information that accountants deal with in their work.
Auditors have access to salary records and plans for the future. (Their clients could be damaged
if the auditors released this information to others.)
To prevent this, auditors' ethics require them to keep information confidential.
In addition, internal accountants are not supposed to use confidential information for personal
Need for ethical guidance and commitment
their clients
the public
provides a basis for knowing which actions to take
tells clients what they can rightfully expect from their accountants
gives the public a basis for having confidence in financial statements
provides the courage to do what needs to be done.
The Ethical Challenge
You will encounter many other situations in which ethical issues are raised
you have to explore these issues
remember that accounting must be done ethically if it is to be an effective tool in the
service of society


Masterat on line: Analiz financiar i evaluare

Limba englez de afaceri - Titular de curs: Prof.dr. Georgeta Ghiga
Of all the principles of accounting, the need for ethics is certainly the most important
In your own approach to life
in control of your ethical standards and the ethical decisions that you make
free to shape our personal morals

It can be said that civilized society "floats on a sea of ethics"

It is your choice how you elect to navigate this sea.
Do not be misled into thinking that your choice does not matter.
Eventually, your choice affects everyone, and that is the ethical challenge each of us