© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Principles of Accounting (Accounting 1 for BBA - Undergraduate) SBS Victor Yerris, PhD Tel: OCTOBER 2012

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Week 1 (Accounting: Information for Decision Making)

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Financial & Managerial Accounting The Basis for Business Decisions Williams, Haka, Bettner & Carcello FOURTEENTH EDITION

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Accounting Information for Decision Making Chapter 1

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO1 To discuss accounting as the language of business and the role of accounting information in making economic decisions.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Accounting information The accounting process Decision makers Economic activities Actions (decisions) Accounting “links” decision makers with economic activities  and with the results of their decisions.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Types of Accounting Information Financial Managerial Tax

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO2 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.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Information Users  Investors  Creditors  Managers  Owners  Customers  Employees  Regulators -SEC -IRS -FTC Information Users  Investors  Creditors  Managers  Owners  Customers  Employees  Regulators -SEC -IRS -FTC Decisions Supported  Performance evaluations  Stock investments  Tax strategies  Labor relations  Resource allocations  Lending decisions  Borrowing Decisions Supported  Performance evaluations  Stock investments  Tax strategies  Labor relations  Resource allocations  Lending decisions  Borrowing Information System Financial Information Provided  Profitability  Financial position  Cash flows Financial Information Provided  Profitability  Financial position  Cash flows

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Basic Functions of an Accounting System  Summarize and communicate information to decision makers.  Classify similar transactions into useful reports.  Interpret and record business transactions.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Components of Internal Control Control Environment Risk Assessment Control Activities Information and Communication Monitoring

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO3 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.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin External Users of Accounting Information Owners Creditors Potential investors Labor unions Governmental agencies Suppliers Customers Trade associations General public

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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 McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Objectives of External Financial Reporting The primary financial statements. Income Statement Balance Sheet Statement of Cash Flows

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Characteristics of Externally Reported Information A Means to an End Broader than Financial Statements Historical in Nature Results from Inexact and Approximate Measures Based on General-Purpose Assumption Usefulness Enhanced via Explanation

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO4 To explain the importance of financial accounting information for internal parties—primarily management—in terms of the objectives and the characteristics of that information.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Typical Simple Organization Chart Plant Accountants Plant Managers Plant Accountants Plant 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 ControllerTreasurer

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Objectives of Management Accounting Information To help achieve goals and missions To help evaluate and reward decision makers

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Characteristics of Management Accounting Information Timeliness Identify Decision Maker Oriented Toward Future Measures of Efficiency and Effectiveness A Means to an End

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO5 To discuss elements of the system of external and internal financial reporting that create integrity in the reported information.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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 McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Sarbanes-Oxley Act of 2002 The US Senate passed and implemented SOX following a public outcry over corporate scandals of the early 2000s (Enron &WorldCom) Establishes the PCAOB (Public Company Accounting Oversight Board) to supervise accounting firms. Requires  Greater independence of auditors and clients (Prohibited public accounting firms from engaging in non-audit services to a client it is also auditing.  Greater independence of corporate boards (Members of the board’s audit committee must be independent).  Independent audits of internal controls  Increased disclosures of off-balance sheet arrangements and obligations (Required the reporting of off-balance sheet activities).  More types of disclosures SEC enforces SOX and rules of the PCAOB

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO6 To identify and discuss several professional organizations that play important roles in preparing and communicating accounting information.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Integrity of Accounting Information Professional Organizations  American Institute of Certified Public Accountants (CPA)  Swiss Institute of Certified Accountants and Tax Consultants (CPA)  Institute of Management Accountants (IMA)  Institute of Internal Auditors (IIA)  American Accounting Association  Committee of Sponsoring Organizations of the Treadway Commission (COSO)

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO7 To discuss the importance of personal competence, professional judgment, and ethical behavior on the part of accounting professionals.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Integrity of Accounting Information Competence, Judgment and Ethical Behavior  Certified Public Accountants (CPAs)  Certificate in Management Accounting (CMA)  Certificate in Internal Auditing (CIA)

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO8 To discuss various career opportunities in accounting.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Careers in Accounting  Public Accounting  Management Accounting  Governmental Accounting  Accounting Education

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin End of Chapter 1