Accounting Information for Decision Making

1. Chapter1 AccountingInformation for Decision Making

2. The accounting process Accounting “links” decision makers with economic activities ¾ and with the results of their decisions. Accounting information Economic activities Actions (decisions) Decision makers

3. WHAT IS ACCOUNTING? Accounting is an information system that 1) identifies, 2) records, and 3) communicates the economic events of an organization to interested users

4. Accounting Reports SOFTBYTE Annual Report ILLUSTRATION 1-1 THE ACCOUNTING PROCESS Communication Identification Recording Prepare accounting reports Select economic events (transactions) Record, classify and summarize Analyze and interpret for users

5. BOOKKEEPING DISTINGUISHED FROM ACCOUNTING 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

6. Types of Accounting Information Financial Tax Managerial

7. 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. Information System • Information Users • Investors • Creditors • Managers • Owners • Customers • Employees • Regulators -SEC • Financial Information Provided • Profitability • Financial position • Cash flows • Decisions Supported • Performance evaluations • Stock investments • Tax strategies • Labor relations • Resource allocations • Lending decisions • Borrowing

9. Classify similar transactions into useful reports. • Summarize and communicate information to decision makers. Basic Functions of an Accounting System • Interpret and record business transactions.

10. Components of Internal Control Control Environment Risk Assessment Control Activities Information and Communication Monitoring

11. External Users of Accounting Information • Owners • Creditors • Potential investors • Labor unions • Governmental agencies • Suppliers • Customers • Trade associations • General public

12. How does the company compare in size and profitability with its competitors? Is the company earning satisfactory income? What do we do if they catch us? Will the company be able to pay its debts as they come due? ILLUSTRATION 1-3 QUESTIONS ASKED BY EXTERNAL USERS

13. (Specific) 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. (General) Objectives of External Financial Reporting

14. The primary financial statements. Balance Sheet Income Statement Statement of Cash Flows Objectives of External Financial Reporting

15. Characteristics of Externally Reported Information A Means to an End Usefulness Enhanced via Explanation Broader than Financial Statements Based on General-Purpose Assumption Historical in Nature Results from Inexact and Approximate Measures

16. 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. ILLUSTRATION 1-2 QUESTIONS ASKED BY INTERNAL USERS What is the cost of manufacturing each unit of product? Is cash sufficient to pay bills? Can we afford to give employee pay raises this year? Which product line is the most profitable?

18. Objectives of Management Accounting Information To help achieve goals and missions To help evaluate and reward decision makers

19. Characteristics of Management Accounting Information Timeliness Identify Decision Maker A Means to an End Measures of Efficiency and Effectiveness Oriented Toward Future

20. 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 BUILDING BLOCKS OF ACCOUNTING • Ethics - standards of conduct by which one’s actions are judged as right or wrong, honest or dishonest. 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.

22. 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 ACCOUNTING PROFESSION • Public accountants offer expert service to the general public through the services they perform. • Private accountants are employees of individual companies and are involved in a number of activities including cost and tax accounting, systems, and internal auditing. • Not for Profit accounting includes reporting and control for government units, foundations, hospitals, labor unions, colleges/universities, and charities.

24. End of Chapter 1