1. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 1-1 ACCOUNTING: INFORMATION FOR DECISION MAKING Chapter 1

2. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 1-2  Understanding and using accounting information is an important ingredient of any business undertaking.  Information that is provided to external parties who have an interest in a company is sometimes referred to as financial accounting information.  Information used internally by management and others is commonly referred to as managerial accounting information.  Having different purposes and serve different audiences,

3. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 1-3 ACCOUNTING INFORMATION  The primary objective of accounting is to provide information that is useful for decision making purposes.  it is sometimes referred to as the language of business  Costs, prices, sales volume, profits, and return on investment.

4. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 1-4 Accounting information The accounting process Decision makers Economic activities Actions (decisions) Accounting “links” decision makers with economic activities ¾ and with the results of their decisions.

5. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 1-5  The accounting process produces accounting information used by decision makers in making economic decisions and taking specific actions. These decisions and actions result in economic activities that continue the cycle.

6. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 1-6 Types of Accounting Information  FINANCIAL  MANAGERIAL  TAX

7. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 1-7 Information Users  Investors  Creditors  Managers  Owners  Customers  Employees  Regulators -SEC -IRS -EPA Information Users  Investors  Creditors  Managers  Owners  Customers  Employees  Regulators -SEC -IRS -EPA 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

8. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 1-8 Basic Functions of an Accounting System  Summarize and communicate information to decision makers.  Classify similar transactions into useful reports.  Interpret and record business transactions.

9. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 1-9 External Users of Accounting Information Owners Creditors Labor unions Governmental agencies Suppliers Customers Trade associations General public

10. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 1-10 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 Financial Reporting

11. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 1-11 Objectives of External Financial Reporting The primary financial statements. Income Statement Balance Sheet Statement of Cash Flows

12. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 1-12 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

13. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 1-13 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

14. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 1-14

15. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 1-15 Objectives of Management Accounting Information To help achieve goals and missions To help evaluate and reward decision makers

16. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 1-16 Characteristics of Management Accounting Information Timeliness Identify Decision Maker Oriented Toward Future Measures of Efficiency and Effectiveness A Means to an End