Chapter 1

So You Want to Become a CPA

IN THIS CHAPTER

Considering the benefits of a CPA designation

Mulling over what a CPA does

Weighing the CPA credential with other designations

Acertified public accountant, or CPA, is a valuable credential in the world of accounting and finance. To gain the credential, a candidate must pass the CPA exam. Before you put in the work to prepare for the exam, though, make sure you understand the CPA designation.

In this chapter, you discover the added responsibilities that may come with a CPA designation. CPAs have a higher level of expertise and responsibility than non-CPA accounting professionals. As a result, many senior-level accounting positions require a CPA. Next, you go over the type of work that CPAs perform. The designation allows you to work in a variety of accounting positions. Finally, you look at a comparison of the CPA credential to other designations in the accounting profession.

Added Responsibilities with a CPA Designation

A CPA designation can allow you to advance your career beyond those people who simply earn an undergraduate degree. That's because the CPA exam tests you on a set of skills that are more specific than you find in an undergraduate business program. Also, the sheer amount of information tested makes passing the exam a real accomplishment. In this section, you see some of the additional responsibilities that come with a job that requires a CPA credential.

Many successful people in business, government, and the not-for-profit world started out as CPAs. That may be because CPAs understand how an entire entity works. An accountant has to understand each process within an organization, because they're responsible for posting the accounting transactions for those processes.

CPAs also generate the financial statements for the entity. To put together the statements, an accountant has to understand how the entire organization operates. It's the CPA who often must answer to stakeholders regarding the financial statements. Stakeholders include regulators, lenders, and investors, to name a few. Here are some typical issues that a stakeholder may bring up with a CPA:

• Balance sheet and debt: A potential lender to the company may want details on the amount of debt a business already owes to creditors. Some lenders compare the company's total debt to total assets. That ratio indicates the assets a company can sell to pay off debt, assuming that the company can't make payments of principal and interest.

  You can compare this situation to using a car as collateral for a loan. If the car buyer can't make the payments, the lender can sell the car to recover some (or all) of the amount loaned.

• Stockholders and earnings: A common-stock owner may look into the amount of earnings an entity generates. One measurement of earnings is earnings per share (EPS). EPS is defined as the company net profit divided by average common stock shares outstanding. This ratio explains the dollar amount of earnings that a business generates for each common stock share. Average common stock is defined as follows:

  Many investors feel that EPS is an indication of a common stock's value.

• Regulatory requirements: Regulators require many financial institutions to maintain a certain amount of equity, which is defined as assets minus liabilities. To a regulator, equity represents funds available for investors. If a financial institution violates a rule or regulation, the business can repay investors using its equity.

You can understand equity using this example. Assume that a company sells all of the assets for cash and uses the cash to pay all liabilities. Any amount of cash that is left over is equity.

Considering What a CPA Does

A big advantage of the CPA credential is that it increases the variety of tasks an accountant can perform. Like many professionals, a CPA may specialize in a field or branch out into other areas of the profession.

This section explains what a CPA does and specific types of positions that are staffed by CPAs. Many of the jobs are useful in a variety of industries. Retailers and manufacturers, for example, both need tax returns and financial statements prepared. Although specific industry knowledge is important, CPAs have a set of skills that are largely transferrable.

Many businesses will hire accountants without a CPA to operate in accounting positions with less responsibility. A staff accountant handling accounts receivable or accounts payable may not have a CPA designation. Other positions with more responsibility will require a CPA. The company controller and chief financial officer are typically CPAs.

Accounting work and controller positions

One big distinction between types of accounting work is accounting versus tax. Accounting is thought of as posting transactions and generating financial statements. Tax, on the other hand, refers to tax planning and filing tax returns. This section discusses accounting work.

A chief executive officer (CEO) is responsible for hiring senior management, and one of those positions is chief financial officer (CFO). The CFO has overall responsibility for all financial matters of an organization. Here are some specific tasks that a CFO must manage:

• Controllership:Controllership refers to maintaining control over the financial transactions of a company. The CFO needs to ensure that the accounting transactions are posted correctly. Controllership also refers to generating accurate and timely financial statements shortly after the end of each month and year.
• Treasury:Treasury refers to the cash needs of a company. Businesses use debt and equity in some combination to raise capital, which refers to the cash and other assets the company acquires to fund the business. The decision on how much debt or equity to raise is in the hands of the CFO. The CFO plans for short-term cash needs to operate the company each month. The CFO also plans for long-term financing needs, such as planning for an expensive purchase (building, equipment, machinery, and the like).
• Financial strategy: The CFO has overall responsibility for financial strategy. This includes analyzing company profit by department or product line. A CFO is expected to recommend how each department can make changes to improve profit. Because nearly every company has a limited amount of capital, the CFO needs to analyze how that capital should be used to maximize earnings. That may mean buying a new piece of equipment for Department A and closing the operations of Department B. A CFO works closely with the company's operations managers to make processes more efficient.

The CFO is both an accountant and a manager. Here are some of the positions the CFO will hire and manage:

• Controller and treasurer: The CFO hires a controller to manage the accounting transactions and financial-statement process. They also hire a treasurer to manage the treasury activities.
• Accounting manager: A CFO, using input from the controller, may hire one or more accounting managers. These managers are responsible for certain areas of the controllership process. One manager, for example, may handle the company's accounts receivable process. That manager processes sales, receivables, and bad-debt transactions. The position also includes reporting financial results to the controller and CFO.
• Staff accountant: Accounting managers, in turn, hire staff accountants. This type of position is responsible for the day-to-day transactions of a company. If the staff accountant works with accounts receivable, they review incoming customer payments and reduce accounts receivable. That same person analyzes credit sales and posts accounts receivable. A staff accountant position may be the first position you work in as a CPA.

Not all companies have all the accounting positions I explain here. A small company may have a CFO, controller, and a few staff accountants; no accounting managers are needed to manage the company's accounting work.

Auditing, reviews, and compilations

CPAs fill the role of a third-party auditor. An auditor is a CPA who is independent of the company under audit. Independence means that the only relationship that the CPA has with the business is the fee paid for the audit. An audit occurs when an auditor performs procedures on the company's financial statements. The auditor uses the procedures to gather evidence about the financial statements. After completing an audit, the CPA provides a written opinion on whether the financial statements are free of material misstatement.

When discussing an audit, the word "material" refers to a misstatement (mistake) that is large enough to impact the opinion of the financial statement reader. So how large? Well, materiality is a matter of judgment. A $200 misstatement may not get the reader's attention, but a $30,000 misstatement is reason to question the accuracy of the numbers.

Reviewing jobs in the field

CPA firms perform audits. These organizations are typically partnerships formed by CPAs. Here are some of the positions you find in a CPA firm:

• Partner: A partner has an investment in the partnership. The partner is responsible for the management of a particular group of...