8.4 Accountability8.4 Accountability

•The most important use for The most important use for accounting data is to provide accounting data is to provide information for the financial information for the financial statementsstatements

Users of Financial Users of Financial StatementsStatements

1.1. Managers – They use financial Managers – They use financial statements more than anyone else in statements more than anyone else in order to improve results and order to improve results and efficiency and to eliminate efficiency and to eliminate weaknessesweaknesses

2.2. Owners – to evaluate performanceOwners – to evaluate performance

3.3. Creditors – to stay informed and Creditors – to stay informed and make sure businesses can pay their make sure businesses can pay their loansloans

Users of financial Users of financial statementsstatements

4. Shareholders – the law requires that 4. Shareholders – the law requires that corporations provide the shareholders corporations provide the shareholders with financial statements regularlywith financial statements regularly

5. Investors and brokers – Shares of 5. Investors and brokers – Shares of public corporations are traded by public corporations are traded by stockbrokers through stock stockbrokers through stock exchanges. People need to stay exchanges. People need to stay informed about how the companies informed about how the companies are doing.are doing.

AUDITAUDIT

•An audit is a critical review by a An audit is a critical review by a public accountant of the internal public accountant of the internal controls and accounting records of controls and accounting records of a company a company

GAAP – The consistency GAAP – The consistency principalprincipal

• Requires that a business must use Requires that a business must use the same accounting method and the same accounting method and procedures from period to periodprocedures from period to period

• If there is a change the financial If there is a change the financial records must indicate itrecords must indicate it

• Prevents people from manipulating Prevents people from manipulating figures on financial statementsfigures on financial statements

GAAP – The materiality GAAP – The materiality principleprinciple

• Requires accountants to include any Requires accountants to include any information that could be important in the information that could be important in the financial statementsfinancial statements

• You may only leave out information if You may only leave out information if neither the net income or the financial neither the net income or the financial position of the firm are impacted in any position of the firm are impacted in any significant waysignificant way• Ex. If you have finished and printed your Ex. If you have finished and printed your

financial statements and realize you financial statements and realize you made a $20 error, it is not materialmade a $20 error, it is not material

Gaap – the full Gaap – the full disclosure principledisclosure principle

• All information needed for a full All information needed for a full understanding of the company’s understanding of the company’s financial affairs must be included in the financial affairs must be included in the financial statementsfinancial statements

• If important items do not affect the If important items do not affect the ledger you must put them in ledger you must put them in accompanying notesaccompanying notes• Ex. Tax disputes, company takeoversEx. Tax disputes, company takeovers