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Accounting Information for Decision Making

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Title: 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
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
  • Decisions Supported
  • Performance evaluations
  • Stock investments
  • Tax strategies
  • Labor relations
  • Resource allocations
  • Lending decisions
  • Borrowing
  • Financial Information Provided
  • Profitability
  • Financial position
  • Cash flows

9
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
ILLUSTRATION 1-3 QUESTIONS ASKED BY EXTERNAL USERS
13
Objectives of External Financial Reporting
14
Objectives of External Financial Reporting
  • The primary financial statements.

15
Characteristics of Externally Reported Information
A Means to an End
Broader than Financial Statements
Usefulness Enhanced via Explanation
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
Oriented Toward Future
Measures of Efficiency and Effectiveness
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 ones
    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
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