Financial Accounting A Decision-Making Approach, 2nd Edition King, Lembke, and Smith John Wiley & Sons, Inc. Prepared by Dr. Denise English, Boise State University *

After reading Chapter 1, you should be able to: 1. Understand and apply the steps of the decision-making process. 2. Indicate the major differences between a market economy and a planned economy, and explain the role that information plays in both. 3. Explain the different forms of business organization found in the United States, and explain the major advantages and disadvantages of each. 4. Describe the nature of accounting information and explain how it differs from other types of information. 5. Describe how each part of the accounting process results in useful information for decision makers. CHAPTER ONE DECISION MAKING AND INFORMATION

Decision - A choice between two or more alternatives. We all are familiar with making decisions, but we seldom think much about the steps in the process of making these decisions. THE DECISION-MAKING PROCESS

Identify Goal Gather Information Identify and Evaluate Alternatives Decide 1. Identify the Goal 2. Gather Information 3. Identify and Evaluate Alternatives 4. Choose a Course of Action THE DECISION- MAKING PROCESS Steps to a Decision:

Decisions in a Market Economy Market Economy—individuals and businesses choose how to earn and spend money, what and how much to produce, and what price to charge for products and services. Planned Economy—a central organization decides the types, quantities, and prices of products produced (and thus what consumers can purchase).

Decisions in a Market Economy Capital Markets—financial resources are channeled away from those who do not plan to use those resources for current purchases of goods and services (investors) to those who need the cash now (entrepreneurs).

Decisions in a Market Economy Professional Management—hired by publicly or privately owned organizations, rather than by the government, to run the organization and protect and preserve the organization’s resources and use them as intended.

Organizations in the U.S. Economy Business entities—established to sell goods and/or services to customers as a means of earning a profit for the owners.

Organizations in the U.S. Economy Nonbusiness entities—established to provide a service, usually one that is viewed as advancing some social goal to some segment of society, wherein a profit from the entity’s operations is not expected by either the entity’s organizers or resource providers.

Forms of Business Organization Sole Proprietorship—an unincorporated business enterprise owned by a single individual. Partnership—an unincorporated association of 2 or more individuals conducting business for a profit. Corporation—a legal entity viewed under the law as an artificial person having many of the rights and obligations of a real person.

Advantages/ Disadvantages of Sole Proprietorship AdvantagesDisadvantages 1) Ease of formation1) Unlimited liability 2) Ease of dissolution2) Unsuited to multiple owners 3) Informality of structure3) Ownership transfers difficult 4) Relative lack of 4) Generally demands active regulation participation 5) Allows full control of5) Business tied to specific management individual

Advantages/ Disadvantages of Partnership AdvantagesDisadvantages 1) Ease of formation1) Unlimited liability 2) Ease of dissolution2) Unsuited to large # of owners 3) Informality of structure 3) Ownership transfers are difficult 4) Relative lack of regulation 4) Owners’ bound by each other’s 5) Allows for multiple owners actions 5) Often results in unwieldy management 6) Demands some level of participation 7) Partnership ends with death, incompetency, or withdrawal of partner

Advantages/ Disadvantages of Corporation AdvantagesDisadvantages 1) Limited liability 1) Individual owners may have of all owners little control over management 2) Allows for many 2) Relatively heavily regulated owners3) Relative difficulty of formation 3) Allows for passive 4) Relative difficulty of dissolution investment

Who dominates?

How much capital is needed? Thus, how many owners are necessary? If incorporating, who will “manage the store”? What rules apply to corporate accounting? What kind of information will be important? Starting a business?

Decision oriented – A future, rather than past perspective is most useful. Quantitative and financial in nature – Other nonquantitative information is important too, such as customer preferences for our products. Relates to a specific entity – What about performance relative to our competition? The nature of accounting information

“Accounting is the process of identifying, measuring, classifying and accumulating, summarizing, and communicating information about economic entities that is primarily quantitative and is useful to decision makers.” Accounting defined

What happens during a day in the life of a business? How is that information captured, summarized, and reported? Who cares about that information? The Need for Accounting

Identification—what’s relevant? Measurement—which yardstick? Classification and accumulation—how do you organize the results of thousands of events? Summarization—how much information is enough, but not too much? Communication—how often, when, and to whom? Information and the Accounting Process

Annual reports available via the internet for publicly owned companies (e. g., Request via phone from the company’s shareholder (or investor) relations department. Free reporting services such as The Public Register’s Annual Report Service at SEC’s EDGAR (Electronic Data Gathering, Analysis, and Retrieval System) at Obtaining Accounting Information

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