From David H. Marshal and Wayne W. McManus.  Accounting. What numbers mean.

Managerial Accounting/Cost Accounting

Managerial accounting is concerned with the use of economic and financial information to plan and control many of the activities of the entity, and to support the management decision-making process. Cost accountingis a subset of managerial accounting that relates to the determination and accumulation of product, process, or service costs. Managerial accounting and cost accounting have primarily an internal orientation, as opposed to the primarily external orientation of financial accounting. Much of the same data used in or generated by the financial accounting process is used in managerial and cost accounting, but the data are more likely to be used in a future-oriented way, such as in the preparation of budgets.

Managerial accountants and cost accountants are professionals who have usually earned a Bachelor of Science degree with a major in accounting. Their work frequently involves close coordination with the production, marketing, and finance functions of the entity. The Certified Management Accountant (CMA) professional desig­nation is earned by a management accountant/cost accountant who passes a broad four-part examination administered over a two-day period, and who meets certain experience requirements.

Auditing—Public Accounting

Many entities have their financial statements reviewed by an inde­pendent third party. In most cases an audit is required by securities laws if the stock or bonds of a company are owned and publicly traded by investors. Public accounting firms and individual CPAs provide this auditing service, which constitutes an important part of the accounting profession.

The result of an audit is the independent auditor's report. The report usually has three relatively brief paragraphs. The first para­graph identifies the financial statements that were audited, explains that the statements are the responsibility of the company's manage­ment, and states that the auditor's responsibility is to express an opinion about the financial statements. The second paragraph ex plains that the audit was conducted "in accordance with and describes briefly what those standards require and what work is involved in performing an a d The third paragraph contains the auditor's opinion, which is usual that the named statements "present fairly in all material respect: the financial position of the entity, and the results of its operation and cash flows for the identified periods "in conformity with general accepted accounting principles." This is an unqualified, or "clean opinion. Occasionally the opinion will be qualified with respect fair presentation, departure from generally accepted accounting principles, the auditor's inability to perform certain auditing procedure or the firm's ability to continue as a going concern (i.e., as a viable economic entity). An unqualified opinion is not a clean bill of heal about either the current financial condition of, or the future prospects for, the entity. Readers must reach their own judgments about the; and other matters after studying the annual report, which includes the financial statements and the explanatory notes to the financial statements.

Auditors who work in public accounting are professional accountants who have usually earned at least a Bachelor of Science degree with a major in accounting. The auditor may work for a public accounting firm (a few firms have several thousand partners and professional staff) or as an individual practitioner. Most auditors seek and earn the CPA designation; the firm partner or individual practitioner who actually signs the audit opinion must be a licensed CPA in the state in which she/he practices. To be licensed, the CP must satisfy the character, education, and experience requirement of the state.

To see an example of the independent auditors' report, refer і page 43 of the 1994 annual report of Armstrong World Industries Inc., which is reproduced in the Appendix.

 

Internal Auditing

Organizations with many plant locations or activities involving mar financial transactions employ professional accountants to do internal; auditing. In many cases, the internal auditor performs functions much like those of the external auditor/public accountant, but perhaps с a smaller scale. For example, internal auditors may be responsible for reviewing the financial statements of a single plant, or for analyzing the operating efficiency of an entity's activities. The qualifications of an internal auditor are similar to those of any other profession; accountant. In addition to having the CPA and/or the CMA designation, the internal auditor may also have passed the examination to become a Certified Internal Auditor (CIA).

Governmental and Not-for-Profit Accounting

Governmental units at the municipal, state, and federal level and not-for-profit entities such as colleges and universities, hospitals, and voluntary health and welfare organizations require the same accounting functions to be performed as do other accounting entities. Religious organizations, labor unions, trade associations, performing arts organizations, political parties, libraries, museums, country clubs, and many other not-for-profit organizations employ accoun­tants with similar educational qualifications as those employed in business and public accounting.

Income Tax Accounting

The growing complexity of federal, state, municipal, and foreign income tax laws has led to a demand for professional accountants who are specialists in various aspects of taxation. Tax practitioners often develop specialties in the taxation of individuals, partnerships, corporations, trusts and estates, or international tax law issues. These accountants work for corporations, public accounting firms, govern­mental units, and other entities. Many tax accountants have bache­lor's degrees and are CPAs; some are attorneys as well.

HOW HAS ACCOUNTING DEVELOPED?

Accounting has developed over time in response to the needs of users of financial statements for financial information to support decisions and informed judgments like those mentioned in Exhibit 1-1 and others that you were challenged to identify. Even though an aura of exactness is conveyed by the numbers in financial state­ments, a great deal of judgment and approximation is involved in determining the numbers to be reported. There isn't any "code of accounting rules" to be followed indiscriminately. Even though broad generally accepted principles of accounting do exist, different accountants may reach different but often equally legitimate conclu­sions about how to account for a particular transaction or event. A brief review of the history of the development of accounting princi­ples may make this often confusing state of affairs a little easier to understand.