1-1 powerpointpresentation by douglas cloud professor emeritus of accounting pepperdine university...
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PowerPointPowerPoint Presentation by Presentation by Douglas CloudDouglas Cloud
Professor Emeritus of AccountingProfessor Emeritus of AccountingPepperdine UniversityPepperdine University
© Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson,
the Star Logo, and South-Western are trademarks used herein under license.
Task Force Image Gallery clip art included in this electronic presentation is used with the
permission of NVTech Inc.
Task Force Image Gallery clip art included in this electronic presentation is used with the
permission of NVTech Inc.
F1311Accounting Accounting and and OrganizationsOrganizations
Financial Accounting
Ingram and Albright
6th edition
Information for DecisionsInformation for Decisions
1-2
ObjectivesObjectivesObjectivesObjectives
Once you have completed this chapter, you should be able to—
Once you have completed this chapter, you should be able to—
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1. Identify how accounting information helps decision makers.
ObjectivesObjectivesObjectivesObjectives
ContinuedContinuedContinuedContinued
2. Compare major types of organizations and explain their purpose.
3. Describe how businesses create value.4. Explain how accounting helps investors and
other decision makers understand businesses.
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5. Identify business ownership structures and their advantages and disadvantages.
ObjectivesObjectivesObjectivesObjectives
6. Identify uses of accounting information for making decisions about corporations.
7. Explain the purpose and importance of accounting regulations.
8. Explain why ethics are important for businesses and accounting.
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11ObjectiveObjectiveObjectiveObjective
Identify how accounting information helps decision makers.
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Accounting information helps decision makers determine where they
have been, where they are, and where they are going.
Accounting information helps decision makers determine where they
have been, where they are, and where they are going.
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Maria and Stan decide to start a business selling purchased bakery
cookies to local grocery stores. They determine they can sell $12,000 of merchandise (cookies) each month.
Maria and Stan decide to start a business selling purchased bakery
cookies to local grocery stores. They determine they can sell $12,000 of merchandise (cookies) each month.
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They calculate their monthly cost.
Merchandise $ 8,000Wages 1,000Rent 600Supplies 300Utilities 200 Total $10,100
Merchandise $ 8,000Wages 1,000Rent 600Supplies 300Utilities 200 Total $10,100
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Profit $1,900Profit $1,900
They determine how much they expect to make from the business each month.
Merchandise sold $ 8,000Wages 1,000Rent 600Supplies 300Utilities 200 Total $10,100
Merchandise sold $ 8,000Wages 1,000Rent 600Supplies 300Utilities 200 Total $10,100
Costs
Sales of merchandise
$12,000
Sales of merchandise
$12,000
Sales
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Risk is uncertainty about an outcome, such as the amount of profit a business will earn.
Risk is uncertainty about an outcome, such as the amount of profit a business will earn.
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The purpose of accounting is to help people make decisions
about economic activities.
The purpose of accounting is to help people make decisions
about economic activities.
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Accounting can help with these decisions by providing
information about the results that owners and other decision makers should expect to occur.
Accounting can help with these decisions by providing
information about the results that owners and other decision makers should expect to occur.
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Stakeholders include—1. those who have an economic
interest in an organization and
2. those who are affected by its activities.
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An organization is a group of people who work together to—1. develop,2. produce, and3. distribute goods or service.
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22Compare major types of organizations and explain their purpose.
ObjectiveObjectiveObjectiveObjective
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The transformation, if it meets a need of society,
creates value because people are better off after the
transformation than before.
The transformation, if it meets a need of society,
creates value because people are better off after the
transformation than before.
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Exercise 1-4Exercise 1-4Exercise 1-4Exercise 1-4
Click the button to skip this exercise.
a. What type of organization provides goods or services without the intent of making a profit? Examples include the IRS and the United Way.
1. Merchandising (or retail) companies2. Manufacturing companies3. Service companies4. Governmental and nonprofit
Press “Enter” or click left mouse button for answer.
If you experience trouble making the button work, type 23 and press “Enter.”
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Exercise 1-4Exercise 1-4Exercise 1-4Exercise 1-4
1. Merchandising (or retail) companies2. Manufacturing companies3. Service companies4. Governmental and nonprofit
b. What type of organization produces goods that are sold to consumers or to merchandising companies? Examples include Ford Motor Company and PepsiCo.
Press “Enter” or click left mouse button for answer.
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Exercise 1-4Exercise 1-4Exercise 1-4Exercise 1-4
1. Merchandising (or retail) companies2. Manufacturing companies3. Service companies4. Governmental and nonprofit
c. What type of organization sells goods to consumers that are produced by other companies? Examples include Wal-Mart and Sears.
Press “Enter” or click left mouse button for answer.
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Exercise 1-4Exercise 1-4Exercise 1-4Exercise 1-4
1. Merchandising (or retail) companies2. Manufacturing companies3. Service companies4. Governmental and nonprofit
d. What type of organization sells services rather than goods? Examples include H&R Block and Delta Air Lines.
Press “Enter” or click left mouse button for answer.
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Creating Value Creating Value Creating Value Creating Value
A market is any location or process that permits resources
to be bought and sold.
A market is any location or process that permits resources
to be bought and sold.
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Creating Value Creating Value Creating Value Creating Value
Accounting measures the increase in value created by a transformation as the
difference between the total price of goods and service sold and the total
costs of resources consumed in developing, producing, and selling the
goods and services.
Accounting measures the increase in value created by a transformation as the
difference between the total price of goods and service sold and the total
costs of resources consumed in developing, producing, and selling the
goods and services.
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Creating Value Creating Value Creating Value Creating Value
Sales Price of Box of Cookies
Total Cost of Resources
Consumed to Produce and Make a Box of Cookies
Available
Value Added
$3.50 $3.00 $0.50– =
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Profit is the difference between the price a seller receives for goods or
services and the total cost of all resources consumed in developing,
producing, and selling these goods or services during a particular period.
Profit is the difference between the price a seller receives for goods or
services and the total cost of all resources consumed in developing,
producing, and selling these goods or services during a particular period.
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Favorite Cookie CompanyProfit Earnedfor January
Resources created from selling cookies $11,400Resources consumed:
Cost of merchandise sold $7,600Wages 1,000Rent 600Supplies 300Utilities 200 Total cost of resources consumed 9,700
Profit earned $ 1,700
Exhibit 6Exhibit 6Exhibit 6Exhibit 6
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Exercise 1-5Exercise 1-5Exercise 1-5Exercise 1-5
Click the button to skip this exercise.
Eduardo has started a small business making sundials. The following transactions occurred for the business during a recent period. How much profit did the company earn for the period?
Press “Enter” or click left mouse button for answer.
Sales to customers $1,050Rent for the period 425Supplies used during the period 250Wages for the period 175
If you experience trouble making the button work, type 31 and press “Enter.”
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Exercise 1-5Exercise 1-5Exercise 1-5Exercise 1-5
Resources created from selling sundials $1,050Resources consumed:
Rent $425Supplies 250Wages 175 Total cost of resources consumed 850
Profit earned $ 200
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44Explain how accounting helps investors and other decision makers understand businesses.
ObjectiveObjectiveObjectiveObjective
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Owners invest in a business to receive a return on their investments from
profits earned by that business.
Owners invest in a business to receive a return on their investments from
profits earned by that business.
ROI = Profit
Amount Invested
Investment by OwnersInvestment by OwnersInvestment by OwnersInvestment by Owners
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ROI = Profit
Amount Invested
Return on investment (ROI) is the amount of
profit earned by a business that could be
paid to owners.
Return on investment (ROI) is the amount of
profit earned by a business that could be
paid to owners.
Investment by OwnersInvestment by OwnersInvestment by OwnersInvestment by Owners
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If Maria and Stan invested $10,000 to start Favorite Cookie Company and
earned a $1,700 profit, what would be the return on investment?
If Maria and Stan invested $10,000 to start Favorite Cookie Company and
earned a $1,700 profit, what would be the return on investment?
ROI = Profit
Amount Invested
$1,700 $10,000
17% =
Investment by OwnersInvestment by OwnersInvestment by OwnersInvestment by Owners
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Exercise 1-12Exercise 1-12Exercise 1-12Exercise 1-12
Click the button to skip this exercise.
On January 1, 2007, Alicia invested $4,000 in a savings account. At the end of January, the account balance had
increased to $4,020. The balance at the end of February was $4,040.10. The balance at the end of March was $4,060.30.
The increases occurred because of interest earned on the account. What was Alicia’s return on investment, in dollars
and cents, for each of the three months?
If you experience trouble making the button work, type 39 and press “Enter.”
Press “Enter” or click left mouse button for answer.
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Exercise 1-12Exercise 1-12Exercise 1-12Exercise 1-12
February ($4,040.10 – $4,020) 20.10March ($4,060.30 – $4,040.10) 20.20
January ($4,020 – $4,000) $20.00
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Exercise 1-12Exercise 1-12Exercise 1-12Exercise 1-12
What was the total return for the three months taken together?
Press “Enter” or click left mouse button for answer.
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Exercise 1-12Exercise 1-12Exercise 1-12Exercise 1-12
January ($4,020 – $4,000) $20.00February ($4,040.10 – $4,020) 20.10March ($4,060.30 – $4,040.10) 20.20 Total return for three months $60.30
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An effective business is one that is successful in providing goods and services demanded by customers.
An effective business is one that is successful in providing goods and services demanded by customers.
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An efficient business is one that keeps the cost of
resources consumed in providing goods and
services low relative to the selling prices of these goods and services.
An efficient business is one that keeps the cost of
resources consumed in providing goods and
services low relative to the selling prices of these goods and services.
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55Identify business ownership structures and their advantages and disadvantages.
ObjectiveObjectiveObjectiveObjective
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Business OwnershipBusiness OwnershipBusiness OwnershipBusiness Ownership
A corporation is a legal entity with—1. the right to enter into contracts,2. the right to own, buy, and sell
property,3. and the right to sell stock.
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Proprietorships and partnerships are business organizations that do not have legal identities distinct from their owners. How do they differ?
Business OwnershipBusiness OwnershipBusiness OwnershipBusiness Ownership
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Proprietorships have only one owner.
Proprietorships have only one owner.
Business OwnershipBusiness OwnershipBusiness OwnershipBusiness Ownership
Partnerships have more than one owner.
Partnerships have more than one owner.
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Total Companies
Data source: U.S. Census Bureau Web site http://www.census.gov
6%
73%
21%
Proprietorship
Corporation
Partnership
Business OwnershipBusiness OwnershipBusiness OwnershipBusiness Ownership
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Total Sales
Data source: U.S. Census Bureau Web site http://www.census.gov
4%
5%
91%
ProprietorshipCorporationPartnership
Business OwnershipBusiness OwnershipBusiness OwnershipBusiness Ownership
1-47
Management of CorporationsManagement of CorporationsManagement of CorporationsManagement of Corporations
Board of Directors, Chief Executive
Officer, President, Other Top Management
Board of Directors, Chief Executive
Officer, President, Other Top Management
The The CompanyCompany
The The CompanyCompany
Exhibit 7Exhibit 7Exhibit 7Exhibit 7
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Management of CorporationsManagement of CorporationsManagement of CorporationsManagement of Corporations
ResearchResearchResearchResearch
DesignDesignDesignDesign
FinancingFinancingFinancingFinancing
Legal Legal ServicesServices
Legal Legal ServicesServices
InformationInformationSystemsSystems
InformationInformationSystemsSystems
AccountingAccountingAccountingAccounting
HumanHumanResourcesResources
HumanHumanResourcesResources
PurchasingPurchasingPurchasingPurchasing
The The CompanyCompany
The The CompanyCompany
Support Functions Exhibit 7Exhibit 7Exhibit 7Exhibit 7
1-49
Management of CorporationsManagement of CorporationsManagement of CorporationsManagement of Corporations
Primary Functions
ProductionProductionProductionProduction
DistributionDistributionDistributionDistribution MarketingMarketingMarketingMarketing
ServicingServicingServicingServicing
The The CompanyCompany
The The CompanyCompany
Exhibit 7Exhibit 7Exhibit 7Exhibit 7
1-50
Advantages of CorporationsAdvantages of CorporationsAdvantages of CorporationsAdvantages of Corporations Corporations have continuous lives
apart from those of their owners.
ContinuedContinuedContinuedContinued
Shareholders normally are not liable personally for the debts of a corporation (limited liability).
Shareholders of most corporations do not manage the company. Instead, professional managers are hired to run the company.
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Advantages of CorporationsAdvantages of CorporationsAdvantages of CorporationsAdvantages of Corporations Shareholders cannot enter into contracts or
agreements that are binding on a corporation unless they are managers or directors.
By selling shares to many investors, a corporation can obtain a large amount of financial resources.
1-52
A partnership can be organized as a limited liability partnership (LLP). The
LLP restricts the personal liability of each partner for obligations created by
the company.
A partnership can be organized as a limited liability partnership (LLP). The
LLP restricts the personal liability of each partner for obligations created by
the company.
LEARNING NOTELEARNING NOTELEARNING NOTELEARNING NOTE
1-53
Disadvantages of CorporationsDisadvantages of CorporationsDisadvantages of CorporationsDisadvantages of Corporations
Most corporations must pay taxes on their income.
ContinuedContinuedContinuedContinued
Corporations are regulated by various state and federal government agencies.
Compliance with disclosure regulations is costly and some of the required disclosures may be helpful to competitors.
Owners of corporations usually do not have access to information about the day-to-day activities of their company.
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Disadvantages of CorporationsDisadvantages of CorporationsDisadvantages of CorporationsDisadvantages of Corporations
The size of larger corporations make them difficult to manage.
With the exception of Subchapter S corporations, the profits of corporations are taxed separately from taxes paid by the owners of the corporation.
Managers’ personal interests sometimes conflicts with the interest of stockholders. This problem produces a condition known as moral hazard.
1-55
A creditor is someone who loans financial
resources to an organization.
A creditor is someone who loans financial
resources to an organization.
1-56
Sources of Financing for Sources of Financing for Selected CorporationsSelected Corporations
Sources of Financing for Sources of Financing for Selected CorporationsSelected Corporations
0%10%20%30%40%50%60%70%80%90%
100%
P & G Wal-Mart
Coca-Cola
Micro-Soft
CreditorsOwners
Exhibit 8Exhibit 8Exhibit 8Exhibit 8
1-57
Obtaining Financial ResourcesObtaining Financial ResourcesObtaining Financial ResourcesObtaining Financial Resources
Proprietorship
or
Partnership
or
Corporation
Owners
+
FinancialInstitutions
Individuals
Creditors
Financial Resources
Exhibit 9Exhibit 9Exhibit 9Exhibit 9
1-58
Exercise 1-17Exercise 1-17Exercise 1-17Exercise 1-17
Click the button to skip this exercise.
Identify each of the following as describing corporations (C), proprietorships (PR), and/or partnerships (PN).
Some items have more than one answer.
Press “Enter” or click the left mouse button for answer.
a. Distinct legal entity separate from its owners.b. More than one owner.c. Ownership by stockholders.d. Controlled by a board of directors.e. Legal identity changes when a company is sold.
CC, PN
CC
PR, PN
If you experience trouble making the button work, type 60 and press “Enter.”
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Exercise 1-17Exercise 1-17Exercise 1-17Exercise 1-17
f. Limited liability.g. Mutual agency.h. Access to large amounts of cash.i. Direct taxation of profits.j. Moral hazard usually not a major problem.
CPN
CC
PR, PN
Identify each of the following as describing corporations (C), proprietorships (PR), and/or partnerships (PN).
Some items have more than one answer.
Press “Enter” or click the left mouse button for answer.
1-60
66Identify uses of accounting information for making decisions about corporations.
ObjectiveObjectiveObjectiveObjective
1-61
Contracts are legal agreements for the
exchange of resources and services.
Contracts are legal agreements for the
exchange of resources and services.
Contract terms establish the rights and
responsibilities of the contracting parties.
Contract terms establish the rights and
responsibilities of the contracting parties.
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Examples of Exchanges Examples of Exchanges Requiring InformationRequiring Information
Examples of Exchanges Examples of Exchanges Requiring InformationRequiring Information
The Organization
Obtain Money
Acquire Resources
Produce and Sell Goods and Services
Obtain Money
Acquire Resources
Produce and Sell Goods and Services
MoneyMoney
MoneyMoney
MoneyMoney
ProductsProducts
MoneyMoney
InvestorsInvestors
Managers & Employees
Managers & Employees
SuppliersSuppliers
CustomersCustomers
Government Agencies
Government Agencies
Exhibit 10Exhibit 10Exhibit 10Exhibit 10
1-63
Examples of Exchanges Examples of Exchanges Requiring InformationRequiring Information
Examples of Exchanges Examples of Exchanges Requiring InformationRequiring Information
The Organization
Obtain Money
Acquire Resources
Produce and Sell Goods and Services
Obtain Money
Acquire Resources
Produce and Sell Goods and Services
InvestorsInvestors
Managers & Employees
Managers & Employees
SuppliersSuppliers
CustomersCustomers
Government Agencies
Government Agencies
MoneyMoney
ServicesServices
MaterialsMaterials
MoneyMoney
ServicesServices
Exhibit 10Exhibit 10Exhibit 10Exhibit 10
1-64
Investors and CreditorsInvestors and CreditorsInvestors and CreditorsInvestors and Creditors
Accounting information helps investors evaluate the risk and return
they can expect from their
investments.
Accounting information helps investors evaluate the risk and return
they can expect from their
investments.
It also helps them determine whether
managers of companies they
invest in are meeting the terms of
their contracts.
It also helps them determine whether
managers of companies they
invest in are meeting the terms of
their contracts.
1-65
ManagersManagersManagersManagers
Accounting information is useful
for identifying the types and locations of an organization’s
resources.
Accounting information is useful
for identifying the types and locations of an organization’s
resources.
1-66
EmployeesEmployeesEmployeesEmployees
Accounting information
helps managers assess
employee performance
Accounting information
helps managers assess
employee performance
Accounting information helps
employees assess the risk and return of their employment
contracts.
Accounting information helps
employees assess the risk and return of their employment
contracts.
1-67
SuppliersSuppliersSuppliersSuppliers
Accounting information helps
companies evaluate the abilities of their suppliers to meet
their resource needs.
Accounting information helps
companies evaluate the abilities of their suppliers to meet
their resource needs.
Suppliers often use accounting information about their customers to
evaluate the risk of a buyer not being able to
pay for goods and services acquired.
Suppliers often use accounting information about their customers to
evaluate the risk of a buyer not being able to
pay for goods and services acquired.
1-68
CustomersCustomersCustomersCustomers
Accounting information is used to
assess the risks of buying from specific
companies and selling to specific customers.
Accounting information is used to
assess the risks of buying from specific
companies and selling to specific customers.
1-69
Government agencies collect
information about organizations as a basis for economic
forecasts and planning.
Government agencies collect
information about organizations as a basis for economic
forecasts and planning.
Government AgenciesGovernment AgenciesGovernment AgenciesGovernment Agencies
Government agencies use accounting
information to make taxation and
regulatory decisions.
Government agencies use accounting
information to make taxation and
regulatory decisions.
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77Explain the purpose and importance of accounting regulations.
ObjectiveObjectiveObjectiveObjective
1-71
Financial accounting is the process of preparing, reporting,
and interpreting accounting information that is provided to
external decision makers.
Financial accounting is the process of preparing, reporting,
and interpreting accounting information that is provided to
external decision makers.
1-72
Generally accepted accounting procedures (GAAP) are standards
developed by professional accounting organizations to identify appropriate accounting and reporting procedures.
Generally accepted accounting procedures (GAAP) are standards
developed by professional accounting organizations to identify appropriate accounting and reporting procedures.
1-73
An audit is a detailed examination of an
organization’s financial reports.
An audit is a detailed examination of an
organization’s financial reports.
The independent auditors who examine the information to confirm that it is prepared in compliance with GAAP
are certified public accountants.
The independent auditors who examine the information to confirm that it is prepared in compliance with GAAP
are certified public accountants.
1-74
The Securities and Exchange Commission
is a governmental agency that examines corporate
financial reports to verify their conformance with
GAAP and SEC requirements.
The Securities and Exchange Commission
is a governmental agency that examines corporate
financial reports to verify their conformance with
GAAP and SEC requirements.
1-75
88Explain why ethics are important for business and accounting.
ObjectiveObjectiveObjectiveObjective
1-76
Ethical behavior is particularly important for accounting because the reliability of accounting
information depends on the honesty of those who
prepare, report, and audit this information.
Ethical behavior is particularly important for accounting because the reliability of accounting
information depends on the honesty of those who
prepare, report, and audit this information.
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