Financial & Managerial Accounting The Basis for Business Decisions In presentations for each chapter in this text we will provide you with sound. There will be sound on every slide you view. Please make sure your computer speakers are setup properly when viewing the material. Good luck and we hope you enjoy this new format. THIRTEENTH EDITION Williams Haka Bettner

ACCOUNTING: INFORMATION FOR DECISION MAKING Chapter 1 ACCOUNTING: INFORMATION FOR DECISION MAKING As with most texts, the first chapter will be devoted to an introduction to terms and techniques we will be using in the remaining chapters. For some, this may be your first business courses and the terms will be new. We will be discussing many of the key concepts introduced here in the remaining chapters of the text. 2

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. Our first task as accountants is to identify those economic events that may be recorded in the accounting system. Once we have accumulated the necessary economic information in a readable format, decision makers use the information to improve the decision-making process. Decisions made will impact future economic activities which will find there way into the data accumulation process. Actions (decisions) Decision makers 3

Types of Accounting Information Financial Tax Managerial Broadly speaking accounting information can be placed into one of three categories. The first in financial accounting information that is primarily used by external parties. Managerial accounting information is used by persons within the organization to help manage and control business processes. Tax information is used to help organizations complete obligations to report to the Internal Revenue Service and other regulatory agencies. 3

Financial Information Provided Information System Information Users Investors Creditors Managers Owners Customers Employees Regulators -SEC -IRS -EPA 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 a 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 prepare 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 the capital markets or negotiate with labor unions. 3

Basic Functions of an Accounting System Interpret and record business transactions. Payment Car 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.

Basic Functions of an Accounting System Interpret and record business transactions. Classify similar transactions into useful reports. Summarize and communicate information to decision makers. After the economic information is gathered and recorded, we must classify similar transaction so they appear on the proper financial reports. We will spend a significant amount of time mastering the preparation of the basic financial statements. Once the information as been properly group, 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.

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

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 Financial Reporting The objectives of financial reporting go from the general objective to the specific. The most general objective is to provide information useful in making investment and credit decisions. A more specific objections 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 it to provide information about economic resources, claims against those resources, and changes in the balance of resources and claims. 3

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 a the statement of operations. This financial statement measures the revenues earning by a company during a period of time and the expenses incurred to generate those revenues. The statement of cash flows provides information about where the company got its cash and where it spend its cash during a period of time.

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

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 the business need information to help direct and control operations of a business. The sales or marketing department need information about customers and products. Officers of the company need information to develop strategic plans. 3

Here is a typical organization chart for a company Here is a typical organization chart for a company. You can clearly see that the CEO reports to the board of directors and owners of the company. Senior managers report to the CEO. 3

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 the organization. The information can be used to evaluate the performance of managers who are responsible for decisions about directing and controlling resources. 3

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 is be timely. Most managers are will to accept less precise information on a timely basis, rather than having to wait for information until it is to late to assist in the decision-making process. Most managerial information to directed toward future operations rather than looking backward at historical information. Measures of Efficiency and Effectiveness Oriented Toward Future 3

Integrity of Accounting Information Institutional Features Generally Accepted Accounting Principles (GAAP) Financial Accounting Standards Board Securities and Exchange Commission Internal Control Structure Audits 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 F A S B, proper disclosure of the departure must be made. 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. 3

Integrity of Accounting Information Professional Organizations American Institute of Certified Public Accountants Institute of Management Accountants Institute of Internal Auditors American Accounting Association One of the most influential professional organizations in accounting is the American Institute of Certified Public Accountants or A I C P A. It represents the interests of CPAs. The Institute of Management Accountants, or I M A, and the Institute of Internal Auditors, or I I A, represent the interests of accountants and auditors working with an organization. The American Accounting Association is composed of members from academics. Your accounting instructor is probably a member of the American Accounting Association. 3

Integrity of Accounting Information Competence, Judgment and Ethical Behavior Certified Public Accountants (CPAs) Certificate in Management Accounting (CMA) Certificate in Internal Auditing (CIA) Code of Professional Conduct CPA Ethical behavior is the cornerstone of the accounting profession. Recently, we have seen 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. It is something that we develop over our lifetimes and serves to help us identify good and bad behavior. Professional organizations have promulgated codes of ethics that must be followed by members of that organization. 3

Integrity of Accounting Information Careers in Accounting Public Accounting Management Accounting Governmental Accounting Accounting Education Careers in accounting can following many paths. There is great demand for financial accountants in the preparation of financial statements, dealing with regulatory agencies like the Internal Revenue Service, and consulting. 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

End of Chapter 1 This completes our discussion of chapter one. We have introduced many new concepts and procedures. Your homework assignments will help reinforce most of what we have cover in our presentation. If you have difficulty with your homework assignments, you may want to review this presentation again. Good luck. 4