1. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia ACCOUNTING FOR MANAGEMENT DECISIONS WEEK 1 INTRODUCTION TO ACCOUNTING READING: TEXT CHAPTER 1

2. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia Learning Objectives Define accounting Discuss the role of accounting information List the main accounting information user groups for a business entity Summarise the uses of accounting information Explain the procedures within the accounting information system State the key characteristics of accounting information

3. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia Learning Objectives cont’d Discuss the recent crisis in accounting Relate the steps in the planning process Discuss the nature of control in the decision-making process List some alternative business objectives Compare and contrast financial and management accounting Provide an overview of the main financial reports

4. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia Nature and Role of Accounting Learning Objective: Define accounting Accounting is concerned with the collection, analysis and communication of economic information. Accounting information is useful to those who need to make decisions and plans about businesses, and for those who control those businesses.

5. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia Nature and Role of Accounting Learning Objective: Discuss the role of accounting information Stewardship The more traditional role of providing accountability reports of transactions for a given period Decision usefulness Is about assisting users with making informed choices about issues e.g. resource allocation

6. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia Accounting information user groups Figure 1.1

7. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia Accounting as an information system Identify and capture relevant economic information Record the information collected in a systematic manner Analyse and interpret the information collected Report the information in a manner suitable to the needs of users Learning Objective: Explain the different procedures involved in the accounting information system

8. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia Accounting as an information system cont’d Figure 1.2

9. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia Accounting as a service function Relevance (ability to be used to influence decisions) Reliability (free from material error or bias) Comparability (consistency of measurement and presentation of items) Understandability (clarity and readability of presentation) Cost of information (is the benefit worth the cost) Learning Objective: State the key characteristics of accounting information

10. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia Characteristics of accounting information Figure 1.3

11. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia Accounting in crisis Enron and HIH are cases of recent notoriety HIH collapse caused losses of up to $5.3 billion Resultant scrutiny led to accusations of dubious accounting practices Credibility of financial reports has been undermined Tighter controls on quality of financial information have been introduced Learning Objective: Discuss the recent crisis in accounting

12. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia Decision-making, planning and control Planning is essential for business success Prudent decision-making is closely linked to effective planning Planning covers both long-term and short-term scenarios Over time, plans are normally adapted to changing circumstances

13. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia Decision-making, planning and control cont’d Learning Objective: Relate the steps in the planning process Planning is usually broken down into three stages: 1.Setting the objectives or mission of the business (Detailing what the business is basically trying to achieve) 2.Setting long-term plans (Describing how the business will set out to achieve its long- term objectives) 3.Setting detailed short-term plans or budgets (Typically financial plans for one year ahead)

14. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia Decision-making, planning and control cont’d Learning Objective: Discuss the nature of control in the decision-making process Control is the process of making planned events actually occur Accounting is useful in control to compare planned outcomes with actual outcomes in commonly specified terms Managers can take steps to get the business back on track if variances are highlighted between planned and actual outcomes

15. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia Overview of the planning and control process Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Identify business objectives Consider options Prepare a long-term plan based on the most appropriate option(s) Perform and collect information on actual performance Prepare short-term plans (budgets) Respond to divergences between plans and actuals, and exercise control Revise plans and budgets if necessary Figure 1.4

16. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia Business Objectives Learning Objective: Explain the different procedures involved in the accounting information system. The popular suggested business objectives include: Maximisation of sales revenue (this does not consider the need to cover business costs) Maximisation of profit (this takes in to account sales revenues as well as expenses, but is limited as it does not include other factors such as risk.

17. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia Business Objectives cont’d Maximisation of return on capital employed (accounts for level of profit as well as the level of investment) Survival (This is the aim of most businesses, however it is rarely a primary objective) Long-term stability (Like survival, most businesses aim for it, but it is rarely a primary objective) Growth (Encompasses survival and long-term stability and aims to strike a balance between short and long-term benefits, however it is probably not a specific enough target)

18. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia Business Objectives cont’d Satisficing (Attempting to grant a satisfactory return to all stakeholders - not just the owners. Difficult to define as a practical benchmark for business decisions.) Achieving sustainable development (Achieving economic growth while minimising or eliminating environmental impact and meeting society’s expectations of good corporate citizenship.)

19. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia Business Objectives cont’d Enhancement / maximisation of business wealth Means the business takes decisions intended to make it worth more. Encompasses all the valuable features of the previous suggested objectives. Likely to be the main financial objective for many businesses )

20. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia Financial and Management Accounting Learning Objective: Compare and contrast financial and management accounting Management accounting is concerned with providing managers with information required for day-to-day running of the business Financial accounting is concerned with providing the other users with useful information

21. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia Financial and Management Accounting cont’d Financial AccountingManagement Accounting FocusMainly externalInternal only Nature of reportsGeneral purposeSpecific purpose Level of detailBroad overviewQuite detailed RestrictionsAccounting standards and other regulations No restrictions Reporting intervalMainly semi-annual or annual Whenever required Time horizonMainly historicalBoth past and future Range of informationQuantifiable in money terms; focus on objective and verifiable data Can contain non-financial information; less focus on objectivity and verifiability

22. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia The Main Financial Reports - an overview Learning Objective: Provide an overview of the main financial reports There are four main financial reports: The Statement of Cashflows (shows the sources and uses of cash for a period) The Income Statement (traditionally known as Profit and Loss; measures and reports how much profit has been generated in a period) The Statement of Changes in Owner’s Equity (shows all changes in owner’s interest in net assets from transactions during the period) The Statement of Financial Position (otherwise known as the Balance Sheet; shows overall net financial position)

23. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia A Simple Example Paul starts a wrapping paper sales business with $100 On the first day, he uses the $100 to purchase wrapping paper (“inventory”) On the same day he sells 75% of that inventory for $110 in total What cash movements took place in the first day of trading? CASH FLOW STATEMENT Closing cash balance for the day is $110 (opening balance $100 - $100 stock purchase + $110 sales = $110)

24. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia A Simple Example cont’d How much did wealth increase as a result of the first day’s trading? INCOME STATEMENT The increase or decrease in wealth is measured as the difference between sales made and the cost of goods sold sales were $110 less cost of goods sold $75 = profit of $35 Note that only the cost of the paper sold is measured against the sales to find profit, not the total cost of the wrapping paper purchased.

25. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia A Simple example (cont) –What has happened to Owners’ Equity during this period? STATEMENT OF CHANGES IN OWNERS EQUITY Beginning Owners equity$100 Plus Profit$ 35 = Ending owners Equity$135

26. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia A Simple Example cont’d What is the financial position at the end of the first day? BALANCE SHEET At the end of the first day, a balance sheet is drawn up, showing the resources held by the business: Cash (closing balance) = $110 Inventory (stock available for resale) = $25 Total business wealth at end of day = $135 Note that the profit of $35 has led to an increase in wealth of $35 Note also that the increase in cash of $10 is not the same as the increase in wealth because wealth does not exist only in the form of cash (see inventory)

27. Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia Financial Report Relationships Balance sheet at the beginning of Period 1 Balance sheet at the end of Period 2 Balance sheet at the end of Period 1 Period 1 Period 2 Time Income statement Cash flow statement Statement of changes in owner ’ s equity Cash flow statement Statement of changes in owner ’ s equity Figure 1.6