Financial & Managerial Accounting The Basis for Business Decisions Fifteenth Edition Lecturer: Yiqi Mao Contact information: zyyy_xs@163.com zyyy2016 myq@hdu.edu.cn 17705819098 No.9 Building Room 206 The Basis for Business Decisions, Fifteenth Edition

Assessment Final mark consists of: Assignment 30% Attendance 10% Final Examination 60%

Nine core units of Accounting Profession Introductory Accounting Accounting Information Systems & Financial Modelling Financial Accounting Management Accounting Advanced Financial Accounting Auditing and assurance Business Law Corporations Law and Trust Taxation Law

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

Learning objectives: After studying this chapter, you should be able to: Role of accounting information Significance of accounting systems & Five components of internal control Elements of the system of external and internal financial reporting Professional accounting organizations in preparing accounting information Characteristics of accounting professionals Various career opportunities in accounting

Role of accounting information Language of business Not an end, but rather a means to an end Useful in making economic decisions (textbook exhibit1-1)

The Accounting Process Reported Results of Actions (decisions) 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. Reported Results of Actions (decisions) Decision Makers Actions (decisions)

Types of Accounting Information Financial Tax Management Broadly speaking, accounting information can be placed into one of three categories: financial, management, and tax. Financial accounting refers to information describing the financial resources, obligations, and activities of an economic entity (either an organization or an individual). Financial accounting information is designed primarily to assist investors and creditors in deciding where to place their scarce investment resources. Management (or managerial) accounting involves the development and interpretation of accounting information intended specifically to assist management in operating the business. A company’s managers and employees constantly need information to run and control daily business operations. Much management accounting information is financial in nature but is organized in a manner relating directly to the decision at hand. Tax accounting is a specialized field within accounting and focuses on the preparation of income tax returns and tax planning strategies.

Accounting system It consists of the personnel, procedures, technology, and records used by an organazation to develop accounting information and to communicate this information to decision makers. Factors affect the structure of accounting information

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.

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

Control environment It is the foundation of all other elements Factors that are affect control environment Fraudulent financial reporting results from ineffective control environment

Risk assessment Involves identifying, analyzing, and managing those risks that pose a threat to the achievement of the organization’s objectives.

Control activities Polices and procedures to address the risks identified during the risk assessment process.

Information and communication Develop information systems 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. Is generally accomplished through ongoing management and supervisory activities, as well as by periodic separate evaluations of the internal control system.

External Users of Accounting Information Owners Creditors Potential investors Labor unions Governmental agencies Suppliers Customers Trade associations General public External users of accounting information are individuals and other enterprises that have a current or potential financial interest in the reporting enterprise, but that are not involved in the day-to-day operations of that enterprise. External users of financial information may include the following: owners, creditors, potential investors, labor unions, governmental agencies, suppliers, customers, trade associations, and the general public.

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

Characteristics of Externally Reported Information A Means to an End Usefulness Enhanced via Explanation Broader than Financial Statements Based on General-Purpose Assumption Financial information that is reported to investors, creditors, and others external to the reporting enterprise has certain qualities that must be understood for the information to have maximum usefulness. First, financial information is a means to an end, not an end in and of itself. Second, financial reporting is broader than financial statements. Third, externally reported financial information is generally historical in nature. Fourth, externally reported financial information may have a look of great precision, but in fact much of it is based on estimates, judgments, and assumptions that must be made about both the past and the future. Fifth, we assume that, by providing information that meets the needs of investors and creditors, we also meet the information needs of other external parties. So, we opt for preparing what is referred to general-purpose information that we believe is useful to multiple user groups. And, sixth, the accounting profession believes that the value of externally reported financial information is enhanced by including explanations from management. Historical in Nature Results from Inexact and Approximate Measures

Financial Reporting - A Means It is not an end, but rather a means to an end The ultimate outcome of providing financial information is to improve the quality of decision making by external parties.

Financial reporting VS Financial statements FR is broader than FS FS is subset of FR

Historical in nature Externally reported financial information is generally historical in nature. It looks back in time and reports the results of events and transactions that already have occurred. Fair value VS Historial cost

Inexact and Approximate Measures Much of externally reported information is based on estimates, judgments, and assumptions that must be made about both the past and the future.

General-purpose Assumption Externally reported information is useful to multiple user groups.

Usefulness enhanced via explanation The value of externally reported information is enhanced by including explanations from management.

Integrity of Accounting Information Refers to the following qualities: Complete Unbroken Unimpaired Sound Honest Sincere

Institutional Features & Professional Organizations Securities and Exchange Commission (SEC) Financial Accounting Standards Board (FASB) International Accounting Standards Board (IASB) Public Company Accounting Oversight Board (PCAOB) American Institute of CPAs (AICPA) Institute of Management Accountants (IMA) Institute of Internal Auditors (IIA) American Accounting Association (AAA) Committee of Sponsoring Organizations of the Treadway Commission (COSO)

Competence, Judgment and Ethical Behavior Certified Public Accountant (CPA) Certified Management Accountant (CMA) Certified Internal Auditor (CIA) If the public is to have confidence in the judgment of professional accountants, these accountants must first demonstrate that they possess the characteristic of competence. Both the accounting profession and state governments have taken steps to assure the public of the technical competence of certified public accountants (CPAs). CPAs are licensed by the states, in much the same manner as states license physicians and attorneys. The licensing requirements vary somewhat from state to state, but in general, an individual must be of good character, have completed 150 semester hours of college work with a major in accounting, pass a rigorous examination, and have accounting experience. In addition, most states require at least 40 hours a year in continuing professional education throughout a CPA’s career. While management accountants are not required to be licensed as CPAs, they may voluntarily earn the Certified Management Accountant or the Certified Internal Auditor as evidence of their professional competence. 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. Ethical behavior is the cornerstone of the accounting profession.

Careers in Accounting Public Accounting Management Accounting Governmental Accounting Accounting Education Careers in accounting can follow many paths. Certified public accountants (CPAs) offer a variety of accounting services to the public. The work consists primarily of auditing financial statements, income tax work, and management advisory services. To become a CPA, a person must meet several criteria, including an extensive university education requirement, passing the CPA examination, and meeting a practice experience requirement. The management accountant works for one enterprise and develops and interprets accounting information designed specifically to meet the various needs of management. Governmental agencies use accounting information in allocating their resources and in controlling their operations. Therefore, the need for management accountants in governmental agencies is similar to that in business organizations. Some accountants, including your instructor and the authors of this textbook, have chosen to pursue careers in accounting education. A position as an accounting faculty member offers opportunities for teaching, research, consulting, and an unusual degree of freedom in developing individual skills.

Ethics, Fraud & Corporate Governance Corporate governance entails corporate structures and processes for overseeing the company’s affairs to ensure that the company is being managed with the best interests of shareholders in mind. Earlier this decade was a time of unprecedented business failures amid allegations of fraudulent financial reporting that include corporations that have now become household names—Enron, WorldCom, HealthSouth, Adelphia Communications, Tyco and Qwest, among others. These problems are not exclusively a problem with financial reporting in the United States, as evidenced by fraud allegations at Parmalat, a large Italian company. Corporate governance entails corporate structures and processes for overseeing the company’s affairs, including oversight by the board of directors of the actions of top management to ensure that the company is being managed with the best interests of shareholders in mind. Dennis Kozlowski, the former CEO of Tyco, was sentenced to 8 1/3 to 25 years in prison for his conviction for conspiracy, securities fraud, and falsifying records.