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Financial & Managerial Accounting

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1 Financial & Managerial Accounting
The Basis for Business Decisions FOURTEENTH EDITION Financial and Managerial Accounting The Basis for Business Decisions 14th Edition Williams Haka Bettner Carcello Williams Haka Bettner Carcello

2 Accounting Information for Decision Making
Chapter 1 Accounting Information for Decision Making Chapter 1: Accounting—Information for Decision Making 2

3 Learning Objective To discuss accounting as the language of business and the role of accounting information in making economic decisions. Learning objective number 1 is to discuss accounting as the language of business and the role of accounting information in making economic decisions. LO1

4 The accounting process
Accounting “links” decision makers with economic activities ¾ and with the results of their decisions. Accounting information Economic activities 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. Actions (decisions) Decision makers 3

5 Types of Accounting Information
Financial Tax Managerial 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. 3

6 Learning Objective To discuss the significance of accounting systems in generating reliable accounting information, and understand the five components of internal control per COSO’s Internal Control—Integrated Framework. Learning objective number 2 is to discuss the significance of accounting systems in generating reliable accounting information, and understand the five components of internal control per COSO’s Internal Control—Integrated Framework. LO2

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. 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 Financial Information Provided
Information System Information Users Investors Creditors Managers Owners Customers Employees Regulators SEC -IRS -FTC Financial Information Provided Profitability Financial position Cash flows Decisions Supported Performance evaluations Stock investments Tax strategies Labor relations Resource allocations Lending decisions Borrowing 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. 3

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

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

11 Learning Objective To explain the importance of financial accounting information for external parties—primarily investors and creditors—in terms of the objectives and the characteristics of that information. Learning objective number 3 is to explain the importance of financial accounting information for external parties—primarily investors and creditors—in terms of the objectives and the characteristics of that information. LO3

12 External Users of Accounting Information
Owners Creditors Potential investors Labor unions Governmental agencies Suppliers Customers Trade associations General public Here is a comprehensive list of external users of financial accounting information. 3

13 Provide information useful in making investment and credit decisions.
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 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. 3

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

15 Characteristics of Externally Reported Information
A Means to an End Usefulness Enhanced via Explanation Broader than Financial Statements Based on General-Purpose Assumption 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. Historical in Nature Results from Inexact and Approximate Measures 3

16 Learning Objective To explain the importance of financial accounting information for internal parties—primarily management—in terms of the objectives and the characteristics of that information. Learning objective number 4 is to explain the importance of financial accounting information for internal parties—primarily management—in terms of the objectives and the characteristics of that information. LO4

17 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 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. 3

18 Typical Simple Organization Chart
Plant Accountants Managers Business Unit Managers V.P. Human Resources V.P. Information Services Chief Financial Officer (CFO) Chief Executive Officer (CEO) Board of Directors Owners V.P Ethics Controller Treasurer Here is a typical organizational chart for a company. The CEO reports to the board of directors and owners of the company. Senior managers report to the CEO. 3

19 Objectives of Management Accounting Information
To help achieve goals and missions To help evaluate and reward decision makers 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. 3

20 Characteristics of Management Accounting Information
Timeliness Identify Decision Maker A Means to an End 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. Measures of Efficiency and Effectiveness Oriented Toward Future 3

21 Learning Objective To discuss elements of the system of external and internal financial reporting that create integrity in the reported information. Learning objective number 5 is to discuss elements of the system of external and internal financial reporting that create integrity in the reported information. LO5

22 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 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 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. 3

23 Learning Objective To identify and discuss several professional organizations that play important roles in preparing and communicating accounting information. Learning objective number 6 is to identify and discuss several professional organizations that play important roles in preparing and communicating accounting information. LO6

24 Integrity of Accounting Information
Professional Organizations American Institute of Certified Public Accountants Institute of Management Accountants Institute of Internal Auditors American Accounting Association Committee of Sponsoring Organizations of the Treadway Commission (COSO) One of the most influential professional organizations in accounting is the American Institute of Certified Public Accountants or AICPA. It represents the interests of Certified Public Accountants (or CPAs). The Institute of Management Accountants, or IMA, and the Institute of Internal Auditors, or IIA, represent the interests of accountants and auditors working with an organization. The American Accounting Association is composed of members from academics. Your accounting instructor may be a member of the American Accounting Association. The Committee of Sponsoring Organizations of the Treadway Commission is a voluntary private sector organization dedicated to improving the quality of financial reporting through business ethics, effective internal controls, and corporate governance. 3

25 Learning Objective To discuss the importance of personal competence, professional judgment, and ethical behavior on the part of accounting professionals. Learning objective number 7 is to discuss the importance of personal competence, professional judgment, and ethical behavior on the part of accounting professionals. LO7

26 Integrity of Accounting Information
Competence, Judgment and Ethical Behavior Certified Public Accountants (CPAs) Certificate in Management Accounting (CMA) Certificate in Internal Auditing (CIA) 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. 3

27 To discuss various career opportunities in accounting.
Learning Objective To discuss various career opportunities in accounting. Learning objective number 8 is to discuss various career opportunities in accounting. LO8

28 Careers in Accounting Public Accounting Management Accounting
Governmental Accounting Accounting Education Careers in accounting can follow many paths. Financial accountants prepare financial statements, deal with regulatory agencies like the Internal Revenue Service, and do consulting work. There is a great demand for financial accountants. Management accountants help track product costs, prepare budgets, and serve as a consultant to managers. The field of taxation includes everything from the preparation of tax returns to consulting with clients about estate and gift planning. 3

29 End of Chapter 1 End of chapter 1. 4


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