CHAPTER 1 Introduction to business accounting and the role of professional skills pp. 1-29, Read pp lightly

Key questions 1.Why is it necessary to have an understanding of business before trying to learn about accounting? 2.What factors are causing the business environment to change? 3.What are three characteristics that someone might require to become a successful businessperson in a complex business environment? 4.What is a private enterprise, and what forms does it take?

Key questions (2) 5.What are the three most common forms of business organisations and their basic characteristics? 6.What types of regulations do businesses face? 7.What information does the accounting system provide to support management activities? 8.How does accounting provide support and information to people making decisions who are external to the business?

Key questions (3) 9 What roles do ethics and sustainability play in the business environment? 10 What skills do accountants of the 21st century require? 11 How can people learn to think critically? 12 How can critical thinking help people make better business decisions? 13 What are the logical stages in problem solving and decision making?

The changing business environment Accounting information is a powerful tool for making good business decisions. People inside a business use accounting information to help determine and manage costs, set selling prices and control the operations of the business. People outside the business use accounting information to help make investment and credit decisions about the business.

THE BUSINESS ENVIRONMENT Business Owners Suppliers Competitors Customers Lenders Government Employees

The changing business environment (2)

Private enterprise Business in most countries operate in an economic system based on private enterprise. In this system, individuals own businesses that produce and sell services and/or goods for a profit. These businesses generally fall into three categories, Service, Merchandising and Manufacturing.

Service business A service business perform services or activities that benefit individuals or business customers. Professional practices such as accounting, law and medicine are all service businesses. Examples include companies such as Qantas Airlines and LJ Hooker Real Estate.

Merchandising business A merchandising business purchases goods for resale to their customers. Some merchandising businesses are wholesalers, meaning they sell their goods to retailers or other commercial users. Examples include companies such as Woolworths, Toys ‘R’ Us and The Good Guys. These businesses have to account for inventory

Manufacturing business A manufacturing business makes products and then sells these products to their customers. Unlike merchandisers who purchase ready-to-sell merchandise, a manufacturer has no goods to sell until they are manufactured. Examples include companies such as Ford Australia, Black & Decker and BlueScope Steel Ltd. Accounting for these businesses is complex

Entrepreneurship and sources of capital All businesses require capital to begin to operate and then to grow. Entrepreneurs can raise capital in two ways: 1.Investing their own money into the business or finding other investors to do the same. 2.Borrowing money from a bank or other lending sources.

The forms that business’ take Sole proprietorship or sole trader – owned by one person who is the sole investor of capital. Partnership – owned by two or more individuals who each invest capital into the business. Company or corporation – a separate legal entity In New Zealand we differentiate between “issuing companies”and “non-issuing companies”. An issuing company is independent of its owners and run by a board of directors. Companies are the most common form of business in New Zealand

The forms that business’ take (2)

The regulatory environment of business Many different laws and authorities regulate the business environment, covering issues such as: consumer protection environmental protection employee safety employment practices taxes.

The regulatory environment of business (2) Companies must comply with different sets of regulations depending on the nature of their business. Regulations are imposed by local, state/territory and federal government. When a business conducts business internationally, it also must abide by the laws and regulations of the other countries in which it operates.

The regulatory environment of business (3)

The accounting system An accounting system allows users to identify, measure, record and summarise information about the activities of a business. Management accounting is using information in the accounting system to produce reports for internal users. Financial accounting is using information in the accounting system to produce reports for external users.

Accounting information and decision making

Management accounting information

Financial accounting information Financial accounting information is organised for use by interested people outside of the business. As opposed to management accounting information, financial accounting information follows specific guidelines, or rules, known as generally accepted accounting practices (GAAP). In the US these are known as generally accepted accounting principles

Basic financial statements Financial statements summarise and communicate financial information to external users. The accounting system produces three major financial statements: the income statement the balance sheet the cash flow statement as well as a supporting financial statement – the statement of changes in owner’s equity.

Income statement An income statement (or profit and loss statement) summarises the results of a businesses operating activities for a specific time period. It shows the profit for that period. Information appearing in an income statement includes revenues, expenses and net income (or net loss).

Balance sheet A balance sheet shows the financial position of a business on a given date. It is also called a statement of financial position. Information appearing in a balance sheet includes assets, liabilities and owner’s equity.

Statement of changes in owner’s equity This statement provides information about the amount shown in the owner’s equity section of the balance sheet. Information appearing in the statement of changes in owner’s equity includes beginning equity, net income, owner’s contributions and withdrawals, and the ending equity.

Cash flow statement The cash flow statement summarises cash receipts, cash payments and net change in cash for a specific time period. Information appearing in the cash flow statement includes cash flows from operating activities, cash flows from investing activities and cash flows from financing activities.

Ethics in business and accounting A business’ financial statements should convey information about the business to internal and external users in order to facilitate decision making. If this information does not convey a realistic picture, the decisions may have disastrous consequences. For this purpose, it is important that accountants maintain high ethical standards.