1. 1 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola CHAPTER 1 Accounting—Present and Past (Introduction)

2. 2 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Overview Why study accounting? What is accounting? Who uses accounting? What do accountants do? How has accounting developed? Accounting standards Ethics and the accounting profession The conceptual framework Objective of financial reporting for businesses

3. 3 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Why study accounting? Accounting is the language of business. Anyone involved in the economic activities of our society needs to know enough of this language to be able to make decisions and informed judgements about those activities. “If you want to be rich long-term, it could be the most important subject.” - Robert Kiyosaki author of Rich Dad, Poor Dad

4. 4 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola What is accounting? identifying measuring communicating economic information about an entity for decisions and informed judgements. Accounting is the process of:

5. 5 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Users and uses of accounting information

6. 6 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola What do accountants do? Financial accounting generally refers to the process that results in the preparation and reporting of financial statements for an entity. Financial accounting is primarily externally oriented and concerned with the historical results of an entity’s performance. Financial Accounting

7. 7 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola What do accountants do? Financial statements reflect what has happened in the past. These past results can also be used to predict future results. The 3 main Financial Statements we will focus on (in Chapters 4 to 9) are: The Income Statement; The Balance Sheet; and The Cash Flow Statement. Financial Accounting

8. 8 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola What do accountants do? Management accounting is concerned with the use of economic and financial information to plan and control many of the activities of the entity and to support the management decision- making process. Cost accounting relates to the determination and accumulation of product, process or service costs. Management / Cost Accounting

9. 9 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola What is auditing? An audit is a review by an independent third party. Public accounting firms and individual Certified Practising Accountants (CPAs) and Chartered Accountants (CAs) provide auditing services and issue an independent auditor’s report. The audit report states whether the financial statements are prepared in conformity with Australian Accounting Standards and the Corporations Act. An auditor’s report can be unqualified or qualified. Auditing / Public Accounting

10. 10 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola What do accountants do? Internal auditors are professional accountants who perform functions much like those of an external auditor. However, internal auditors are employed in industry rather than public accounting, and often their functions are more specific and detailed. Internal Auditing

11. 11 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola What do accountants do? Governmental units (e.g., local, state, and federal levels) Not-for-profit entities (e.g., schools, hospitals, and religious organisations) May be involved in accountability for budgets of billions of dollars and so these entities require the same accounting functions to be performed as do other accounting entities. Governmental Not-for-Profit Accounting

12. 12 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola What do accountants do? Tax practitioners deal with Federal, State and Foreign income tax laws. They often develop specialties in the taxation of individuals, partnerships, corporations, trusts and estates, or international tax law issues. Income Tax Accounting

13. 13 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Ethics and the accounting profession Integrity Independence Competence Objectivity Obligation to serve employer, client and public Joint Code of Professional Conduct CPA Australia ICAA

14. 14 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola How has accounting developed? 3000 B.C. 3000BC Mesopotamians record tax receipts on clay tablets. 1494 AD - Luca Pacioli published the first textbook describing a comprehensive double-entry bookkeeping system. 1494 AD

15. 15 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola How has accounting developed? 3000 B.C. 14941800s The industrial revolution of the 19 th century generated the need for large amounts of capital to finance the large scale enterprises that replaced the reliance on individual craftsmen. This need resulted in the corporate form of organisation and the need to provide investors with reports showing the financial position and the results of operations.

16. 16 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola How has accounting developed? 3000 B.C. 14941800’s1900s1928 Accounting professionals in Australia organised themselves in the early 1900s and worked hard to establish certification laws, standardised audit procedures and other attributes of a profession using the model from the Institute of Chartered Accountants in England and Wales. 1928 – The Institute of Chartered Accountants in Australia (ICAA) was constituted by Royal Charter.

17. 17 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola How has accounting developed? 3000 B.C. 14941800s1900s194619521928 1946 – The ICAA issued the first attempt at codified standards: it released a series of five recommendations of accounting principles. 1952 – The Australian Society of Accountants (ACA) was established. Forerunner to CPA Australia.

18. 18 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola How Has Accounting Developed? 3000 B.C. 14941800s1900s19461952196619841928 1966 – The Australian Accounting Research Foundation (AARF) was established by the two professional accounting bodies, to conduct research and issue accounting standards (however, these lacked legal status). 1984 – The Accounting Standards Review Board (ASRB) was established. Accounting standards now given legal backing.

19. 19 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola How has accounting developed? 3000 B.C. 14941800s1900s1946195219661994 1991 19841928 1991 – The Australian Accounting Standards Board (AASB) replaced ASRB. Accountable to Australian Securities Commission, later to become Australian Securities and Investment Commission (ASIC). 1994 – The Urgent Issues Group (UIG) was established – an interpretive committee for issues arising from existing accounting standards and SACs.

20. 20 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola How has accounting developed? Late 1990s – Corporate Law Economic Reform Program (CLERP) and creation of Financial Reporting Council (FRC) with members appointed by the Treasurer to oversee AASB. 3000 B.C. 14941800s1900s194619521966 2000 1994 1991 19841928 2000 – Creation of new AASB with merging of Public Sector Accounting Standards Board (PSASB) and old AASB. This new body is the official regulator, whose standards become law after acceptance by the Federal Parliament.

21. 21 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola How has accounting developed? From 1 January 2005 – Australia has adopted the International Financial Reporting Standards (part of a global movement known as international harmonisation). 3000 B.C. 14941800s1900s194619521966 2005 2000 1994 1991 19841928

22. 22 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola How has accounting developed? By 2006 – AASB had issued more than 50 accounting standards and more than 50 interpretations. 3000 B.C. 14941800s1900s194619521966 2006 2000 1994 1991 19841928

23. 23 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Accounting standards aka rules Accounting is not a science. It is concerned with communication. Responds to society’s needs Change over time/ subject to ‘fashion’ Change with changes in economic conditions Depend on professional judgement Best answer at present to a problem- no universal agreement Interpreted variously.

24. 24 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Accounting standards Financial Accounting and Reporting AASB – responsible for setting standards In consultation with: ICAA and CPA Australia ASIC ASX Institute of Directors Group 100 academics others.

25. 25 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Accounting standards Financial Accounting and Reporting GAAPs GENERALLY ACCEPTED ACCOUNTING PRINCIPLES Principles that have developed over time, in response to the changing needs of society, to guide financial accounting and reporting. They are not codified in a set of rules that can be blindly followed.

26. 26 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Accounting standards Other types of accounting: Management/Cost Accounting Companies self- regulate Auditing/Public Accounting Auditing Standards Board Government and Not-for-Profit AASB Income Tax Accounting Income Tax Assessment Act and regulations

27. 27 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Accounting standards The International Accounting Standards Board (IASB) is based in London and seeks methods of providing comparability between financial statements prepared according to the differing accounting standards of its member nations. International Accounting Standards

28. 28 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Australia adopted these international standards (known as IFRS) from 1 January 2005. Included in our law as AIFRS. Over 90 countries have also done so. International Accounting Standards Accounting standards

29. 29 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola The conceptual framework (CF) Statements of Accounting Concepts (SACs) are guidelines that describe the concepts and relationships that underlie the financial accounting standards. Those still existing today: SAC1Definition of the Reporting Entity; SAC2Objective of General Purpose Financial Reporting. AASB Frame work supports these SACs

30. 30 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Objective of financial reporting-SAC 2: Useful info for decisions Financial position What does the firm own? How much does the firm owe? Information about: Earnings and Cash Flow Profitability Dividends Cash to pay debt

31. 31 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Objective of financial reporting FINANCIAL ACCOUNTING AND REPORTING STANDARDS Modified to mirror developments in the business world Modified to reflect current views and theories of financial reporting