1. PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.1 ACCOUNTING Financial and Organisational Decision Making Chapter 1 The accounting environment Slides written and designed by Tony Van Eekelen

2. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.2 Learning Objectives In this chapter you will be introduced to –the nature of accounting –the different roles and uses of accounting information –who regulates accounting and why –the role of accounting in economic decision making –the users of accounting information

3. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.3 Learning Objectives –the types of entities that use accounting information –how the international environment affects accounting –how pervasive accounting is in society

4. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.4 Accounting defined Recording, classifying and reporting –bookkeeping Modern definition –interpretation and analysis of accounting reports –the design and operations of computer-based systems –the planning and control of business activities –the understanding of complex accounting regulations

5. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.5 Accounting defined - continued American Accounting Association –the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information

6. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.6 Users Owners or shareholders of a business entity People who have lent money to the entity Employees Government regulatory agencies –ATO Social and political interest groups

7. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.7 Key financial statements Profit and Loss Statement Balance Sheet Cash Flow Statement

8. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.8 Profit and Loss Statement Reports –revenues –expenses –and profit that have been made during a given period. Indicates the financial performance of the entity

9. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.9 Balance Sheet Reports –assets controlled by the entity –debts –and the owners claim on the entity Indicates the financial position of the entity

10. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.10 Reading the financial statements Assets –in order of liquidity –items which generate revenue for the entity Liabilities –debts incurred by the entity –first claim on assets Owners equity –net assets = assets less liabilities

11. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.11 Reading the financial statements Balance sheet –Assets = Liabilities + Owners equity Profit and Loss Statement –Revenue Less Expenses

12. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.12 What are accounting entities? Separate from owners Users of accounting information have an interest Many forms –individuals, company, a professional practice, –club, government department, small business enterprise

13. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.13 Sole proprietorships Owned by one person Owners contribution = capital Unincorporated Owner liable for entitys debts

14. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.14 Partnerships Unincorporated Max - 20 partners Personally liable for any debts Partnership agreement –salaries, profit sharing, contributions, interest… –Partnership Act

15. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.15 Shareholders in companies Incorporated as companies Limited by share capital - limited liability Companies are separate legal entities Proprietary Limited - Pty Ltd –privately owned –1 to 50 shareholders –transfer of ownership restricted

16. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.16 Public Companies No maximum number of shareholders Most listed on stock exchange Directors appointment on behalf of shareholders - stewardship Annual general meeting –election of directors –auditor appointed –determination of dividend

17. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.17 Public Companies Annual reports –true and fair –and not disguised to mislead the shareholders Decisions? –dividends? –directors appointment?

18. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.18 Public Sector Proprietorships Public sector –Federal and state governments –councils and all associated structures Unique reasons for reports –owners - taxpayers –not necessarily a profit motive Past reports were cash based Due to accountability need for more sophisticated reports

19. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.19 The environment of accounting Society Regulatory environment Economic decision making environment International environment Figure 1.1

20. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.20 The regulatory environment Form the rules and principles that govern the structure, content, audit and disclosure of financial information Three main sources –Company legislation –Stock Exchange listing requirements –Accounting standards

21. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.21 Requirements of companies legislation Corporations Law –passed by Federal Parliament –formation, conduct, administration and winding up of companies Directors must present audited profit and loss and balance sheet at AGM Disclosure requirements in Schedule 5

22. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.22 Stock exchange listing requirements Australian Stock Exchange - ASX –non-profit, private sector body Strict and comprehensive listing requirements Main emphasis is on financial disclosure

23. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.23 Accounting Standards Detailed rules relating to an entitys accounting records Australian Accounting Standards Board – AASB Public Sector Accounting Standards Board –PSASB AASB issues Approved Australian Accounting Standards

24. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.24 Accounting Standards Accounting standards apply to publicly listed companies, public sector entities and not-for-profit entities Standards deal with disclosure and measurement in the financial statements

25. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.25 The economic decision making environment

26. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.26 The economic decision making environment Investors –shareholders/owners –return = dividends + capital gain –risk vs. return problem Lenders –creditors short term long term

27. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.27 The economic decision making environment Other external users –taxation –ratepayers –social interest groups –employees –government bodies economic analysis

28. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.28 The international accounting environment Due to globalisation the need for an understanding of other nations accounting regulations and requirements Four factors for differences –state of economic development –state of business complexity –share of political persuasion –reliance on particular system of law

29. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.29 The international accounting environment Four (4) models –British-American Model –Continental Model –South American Model –Mixed Economy Model

30. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.30 Accounting and Society The regulatory environment and society –accounting is the road map of the corporation –accounting can analyse the management's performance –provides information for decision making

31. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.31 Accounting and Society Social equity function –employee/employer wage relations –public interest –financial distress indicators –user pays services –redistribution of wealth

32. Chapter 1: The accounting environment PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.32 Decision Making and Society The efficient use of scarce resources Accounting information discloses use Provides allocative efficiency International Environment and Society Influence on foreign investment