Accounting - Information and decision making - Introduction
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The document provides an overview of accounting and its role in decision making. It discusses how accounting identifies, records, and communicates economic events and activities to various users. Accounting information helps users evaluate performance, make investment decisions, and assess profitability, financial position, and cash flows. The accounting process involves identifying transactions, recording them, and preparing reports that are communicated to both internal and external users.
Accounting - Information and decision making - Introduction
- 1. Accounting Information for Decision Making Chapter 1
- 2. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Accounting information The accounting process Decision makers Economic activities Actions (decisions) Accounting “links” decision makers with economic activities and with the results of their decisions.
- 3. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Accounting is an information system that 1) identifies, 2) records, and 3) communicates the economic events of an organization to interested users WHAT IS ACCOUNTING?WHAT IS ACCOUNTING?
- 4. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Identificatio n Select economic events (transactions) Recording Record, classify and summarize Accounting Reports SOFTBYTE Annual Report Prepare accounting reports Analyze and interpret for users Communicatio n ILLUSTRATIONILLUSTRATION 1-11-1 THE ACCOUNTING PROCESSTHE ACCOUNTING PROCESS
- 5. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Accounting 1 Includes bookkeeping 2 Also includes much more Bookkeeping 1 Involves only the recording of economic events 2 Is just one part of accounting BOOKKEEPING DISTINGUISHEDBOOKKEEPING DISTINGUISHED FROM ACCOUNTINGFROM ACCOUNTING
- 6. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Types of Accounting Information Financial Managerial Tax
- 7. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Accounting Systems An accounting system consists of the personnel, procedures, technology, and records used by an organization to develop accounting information and to communicate this information to decision makers.
- 8. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Information Users Investors Creditors Managers Owners Customers Employees Regulators -SEC Information Users Investors Creditors Managers Owners Customers Employees Regulators -SEC Decisions Supported Performance evaluations Stock investments Tax strategies Labor relations Resource allocations Lending decisions Borrowing Decisions Supported Performance evaluations Stock investments Tax strategies Labor relations Resource allocations Lending decisions Borrowing Information SystemInformation System Financial Information Provided Profitability Financial position Cash flows Financial Information Provided Profitability Financial position Cash flows
- 9. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Basic Functions of an Accounting System Summarize and communicate information to decision makers. Classify similar transactions into useful reports. Interpret and record business transactions.
- 10. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Components of Internal Control Control Environment Risk Assessment Control Activities Information and Communication Monitoring
- 11. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin External Users of Accounting Information •Owners •Creditors •Potential investors •Labor unions •Governmental agencies •Suppliers •Customers •Trade associations •General public
- 12. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin ILLUSTRATIONILLUSTRATION 1-31-3 QUESTIONS ASKED BY EXTERNAL USERSQUESTIONS ASKED BY EXTERNAL USERS Is the company earning satisfactory income? Will the company be able to pay its debts as they come due? How does the company compare in size and profitability with its competitors? What do we do if they catch us?
- 13. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Provide information about economic resources, claims to resources, and changes in resources and claims. Provide information useful in assessing amount, timing and uncertainty of future cash flows. Provide information useful in making investment and credit decisions. (Specific) (General) Objectives of External Financial Reporting
- 14. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Objectives of External Financial Reporting The primary financial statements. Income Statement Balance Sheet Statement of Cash Flows
- 15. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Characteristics of Externally Reported Information A Means to an End A Means to an End Broader than Financial Statements Broader than Financial Statements Historical in Nature Historical in Nature Results from Inexact and Approximate Measures Results from Inexact and Approximate Measures Based on General-Purpose Assumption Based on General-Purpose Assumption Usefulness Enhanced via Explanation Usefulness Enhanced via Explanation
- 16. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Users of Internal Accounting Information Board of directors Chief executive officer(CEO) Chief financial officer(CFO) Vice presidents Business unit managers Plant managers Store managers Line supervisors
- 17. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin ILLUSTRATIONILLUSTRATION 1-21-2 QUESTIONS ASKED BY INTERNAL USERSQUESTIONS ASKED BY INTERNAL USERS Is cash sufficient to pay bills? What is the cost of manufacturing each unit of product? Can we afford to give employee pay raises this year? Which product line is the most profitable?
- 18. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Objectives of Management Accounting Information To help achieve goals and missions To help achieve goals and missions To help evaluate and reward decision makers To help evaluate and reward decision makers
- 19. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Characteristics of Management Accounting Information TimelinessTimeliness Identify Decision Maker Identify Decision Maker Oriented Toward Future Oriented Toward Future Measures of Efficiency and Effectiveness Measures of Efficiency and Effectiveness A Means to an End A Means to an End
- 20. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Integrity of Accounting Information Institutional Features Generally Accepted Accounting Principles (GAAP) Financial Accounting Standards Board International Accounting Standards Board Securities and Exchange Commission Public Company Accounting Oversight Board Audits of Financial Statements Legislation
- 21. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Ethics - standards of conduct by which one’s actions are judged as right orwrong, honest ordishonest. Competence, Confidentiality, Integrity, Objectivity Generally Accepted Accounting Principles - primarily established by the Financial Accounting Standards Board and the Securities and Exchange Commission Assumptions 1 Monetary Unit - only transaction data that can be expressed in terms of money is included in the accounting records. 2 Economic Entity - includes any organization or unit in society. THE BUILDING BLOCKSTHE BUILDING BLOCKS OF ACCOUNTINGOF ACCOUNTING
- 22. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Integrity of Accounting Information Competence, Judgment and Ethical Behavior Certified Public Accountants (CPAs) Certificate in Management Accounting (CMA) Certificate in Internal Auditing (CIA)
- 23. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin THE ACCOUNTING PROFESSIONTHE ACCOUNTING PROFESSION Public accountants offerexpert service to the general public through the services they perform. Private accountants are employees of individual companies and are involved in a numberof activities including cost and tax accounting, systems, and internal auditing. Not forProfit accounting includes reporting and control forgovernment units, foundations, hospitals, labor unions, colleges/universities, and charities.
- 24. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin End of Chapter 1
Editor's Notes
- #2: Chapter 1: Accounting—Information for Decision Making
- #3: Not all transactions entered into by a business entity are capable of being recorded. The first task for accountants is to identify those economic events that can be recorded in the accounting system. Once the necessary economic information has been accumulated in a readable format, decision makers use this information to improve the decision-making process. Decisions made will impact future economic activities which will then find their way into the data accumulation process.
- #7: Broadly speaking, accounting information can be placed into one of three categories: Financial accounting information, primarily used by external parties; managerial accounting information, used by persons within the organization to help manage and control business processes; or tax information, used to help organizations complete obligations to report to the Internal Revenue Service and other regulatory agencies.
- #8: An accounting system consists of the personnel, procedures, technology, and records used by an organization to develop accounting information and to communicate this information to decision makers.
- #9: Investors, creditors, owners, customers, and regulatory agencies are external users of financial information. Managers of business operations are internal users of accounting information. Both external and internal users are interested in the profitability, financial position, and cash flows of the entity. Profitability is often measured on the Income Statement prepared for the company. The Statement of Financial Position, also know as the Balance Sheet, reports the financial position of the company at any point in time. The Statement of Cash Flows reports the cash inflows and outflows during a period of time. The examination of the financial statements of a company leads to decisions about the economic viability of the company. This assessment may impact the company’s ability to raise money in capital markets or negotiate with labor unions.
- #10: The first step in the accounting process is to identify and record business transactions. Often, the identification of economic events that can be recorded by accountants is a difficult process. After the economic information is gathered and recorded, similar transactions must be classified so they appear on the proper financial reports. Chapter 2 will spend a significant amount of time on mastering the preparation of the basic financial statements.Once the information has been properly grouped, the results may be communicated to users of the information. If the information is to have meaning, it must impact the decisions of an informed user.
- #11: Internal control is a process designed to provide reasonable assurance that the organization produces reliable financial reports, complies with applicable laws and regulations, and conducts its operations in an efficient and effective manner. The five components of internal control are the control environment, risk assessment, control activities, information and communication, and monitoring. An organization’s control environment is the foundation for all the other elements of internal control, setting the overall tone for the organization. Risk assessment involves identifying, analyzing, and managing those risks that pose a threat to the achievement of the organization’s objectives. Control activities are the policies and procedures that management puts in place to address the risks identified during the risk assessment process. Information and communication includes the information systems developed to capture and communicate operational, financial, and compliance-related information necessary to run the business. Monitoring enables the company to evaluate the effectiveness of its system of internal control over time.
- #12: Here is a comprehensive list of external users of financial accounting information.
- #14: The objectives of external financial reporting range from general to specific. The most general objective is to provide information useful in making investment and credit decisions. A more specific objective is to provide information that is useful in assessing the amount, timing and uncertainty of future cash flows. Without positive future cash flows a company cannot sustain operations. The most specific objective is to provide information about economic resources, claims against those resources, and changes in the balance of resources and claims.
- #15: There are three basic financial statements that we will study in this course. These three include the balance sheet, income statement, and statement of cash flows. The balance sheet is often referred to as the statement of financial position because it shows the resources of a business and the claims against those resources. The income statement is often referred to as the statement of operations. This financial statement measures the revenues earned by a company during a period of time and the expenses incurred to generate those revenues.The statement of cash flows provides information about how a company receives its cash and where it spends its cash during a period of time.
- #16: Accounting is the process of identifying, recording, and communicating information that is relevant, reliable, and comparable. The goal of the accounting process is to provide helpful information to users of financial information. Quality information may help users reach more informed decisions.
- #17: Managers of a business need information to help direct and control operations. The sales or marketing department needs information about customers and products. Officers of the company need information to develop strategic plans.
- #19: Unlike financial accounting information, managerial accounting information is developed to help managers achieve the goals and missions of an organization. The information can be used to evaluate the performance of managers responsible for decisions about directing and controlling resources.
- #20: Perhaps the most important characteristic of managerial accounting information is that it be timely. Most managers are willing to accept less precise information on a timely basis, rather than having to wait for information until it is too late to assist in the decision-making process. Most managerial information is directed toward future operations, rather than looking backward at historical information.
- #21: The Financial Accounting Standards Board is recognized as the group in the private sector that makes specific accounting principles. If an accountant departs from the principles established by the FASB, proper disclosure of the departure must be made. When an enterprise operates beyond the boarders of its own country, differences in financial reporting practices between countries can pose significant problems. Efforts are underway to harmonize accounting standards around the world and the International Accounting Standards Board is playing a leading role in this process. In the public sector, the Securities and Exchange Commission has the authority to establish accounting principles for companies reporting to the agency. Currently the Securities and Exchange Commission has accepted all pronouncements of the F A S B for use by reporting companies. The Public Company Accounting Oversight Board is a quasi-governmental body charged with oversight of the public accounting profession. Audits of financial statements by a certified public accountant provides outsiders with an opinion on whether the financial statements are misleading. Congress passed the Sarbanes-Oxley Act in 2002. Among the more important provisions of this legislation is the creation of the Public Company Accounting Oversight Board mentioned earlier. Another important provision of the Act is to ban auditors from providing many nonaudit services for their audit clients on the assumption that those services interfere with the objectivity required of auditors.
- #23: Ethical behavior is the cornerstone of the accounting profession. Recently there have been many corporate scandals involving individuals who acted in an unethical, and often times illegal, way. Ethics is the belief system that permits us to distinguish right from wrong and identify good and bad behavior.Professional organizations have promulgated codes of ethics that must be followed by members of that organization.
- #25: End of chapter 1.