Financial and Managerial Accounting The Basis for Business Decisions 14 th Edition Williams Haka Bettner Carcello
2 Chapter 1: Accounting—Information for Decision Making
Learning objective number 1 is to discuss accounting as the language of business and the role of accounting information in making economic decisions.
3 Not all transactions entered into by a business entity are capable of being recorded. The first task for accountants is to identify those economic events that can be recorded in the accounting system. Once the necessary economic information has been accumulated in a readable format, decision makers use this information to improve the decision-making process. Decisions made will impact future economic activities which will then find their way into the data accumulation process.
3 Broadly speaking, accounting information can be placed into one of three categories: Financial accounting information , primarily used by external parties; managerial accounting information , used by persons within the organization to help manage and control business processes; or tax information , used to help organizations complete obligations to report to the Internal Revenue Service and other regulatory agencies.
Learning objective number 2 is to discuss the significance of accounting systems in generating reliable accounting information, and understand the five components of internal control per COSO’s Internal Control—Integrated Framework.
An accounting system consists of the personnel, procedures, technology, and records used by an organization to develop accounting information and to communicate this information to decision makers.
3 Investors, creditors, owners, customers, and regulatory agencies are external users of financial information. Managers of business operations are internal users of accounting information. Both external and internal users are interested in the profitability, financial position, and cash flows of the entity. Profitability is often measured on the Income Statement prepared for the company. The Statement of Financial Position, also know as the Balance Sheet, reports the financial position of the company at any point in time. The Statement of Cash Flows reports the cash inflows and outflows during a period of time. The examination of the financial statements of a company leads to decisions about the economic viability of the company. This assessment may impact the company’s ability to raise money in capital markets or negotiate with labor unions.
The first step in the accounting process is to identify and record business transactions. Often, the identification of economic events that can be recorded by accountants is a difficult process. After the economic information is gathered and recorded, similar transactions must be classified so they appear on the proper financial reports. Chapter 2 will spend a significant amount of time on mastering the preparation of the basic financial statements. Once the information has been properly grouped, the results may be communicated to users of the information. If the information is to have meaning, it must impact the decisions of an informed user.
Internal control is a process designed to provide reasonable assurance that the organization produces reliable financial reports, complies with applicable laws and regulations, and conducts its operations in an efficient and effective manner. The five components of internal control are the control environment, risk assessment, control activities, information and communication, and monitoring. An organization’s control environment is the foundation for all the other elements of internal control, setting the overall tone for the organization. Risk assessment involves identifying, analyzing, and managing those risks that pose a threat to the achievement of the organization’s objectives. Control activities are the policies and procedures that management puts in place to address the risks identified during the risk assessment process. Information and communication includes the information systems developed to capture and communicate operational, financial, and compliance-related information necessary to run the business. Monitoring enables the company to evaluate the effectiveness of its system of internal control over time.
Learning objective number 3 is to explain the importance of financial accounting information for external parties—primarily investors and creditors—in terms of the objectives and the characteristics of that information.
3 Here is a comprehensive list of external users of financial accounting information.
3 The objectives of external financial reporting range from general to specific. The most general objective is to provide information useful in making investment and credit decisions. A more specific objective is to provide information that is useful in assessing the amount, timing and uncertainty of future cash flows. Without positive future cash flows a company cannot sustain operations. The most specific objective is to provide information about economic resources , claims against those resources , and changes in the balance of resources and claims .
There are three basic financial statements that we will study in this course. These three include the balance sheet, income statement, and statement of cash flows. The balance sheet is often referred to as the statement of financial position because it shows the resources of a business and the claims against those resources. The income statement is often referred to as the statement of operations. This financial statement measures the revenues earned by a company during a period of time and the expenses incurred to generate those revenues. The statement of cash flows provides information about how a company receives its cash and where it spends its cash during a period of time.
3 Accounting is the process of identifying, recording, and communicating information that is relevant, reliable, and comparable. The goal of the accounting process is to provide helpful information to users of financial information. Quality information may help users reach more informed decisions.
Learning objective number 4 is to explain the importance of financial accounting information for internal parties—primarily management—in terms of the objectives and the characteristics of that information.
3 Managers of a business need information to help direct and control operations. The sales or marketing department needs information about customers and products. Officers of the company need information to develop strategic plans.
3 Here is a typical organizational chart for a company. The CEO reports to the board of directors and owners of the company. Senior managers report to the CEO.
3 Unlike financial accounting information, managerial accounting information is developed to help managers achieve the goals and missions of an organization. The information can be used to evaluate the performance of managers responsible for decisions about directing and controlling resources.
3 Perhaps the most important characteristic of managerial accounting information is that it be timely. Most managers are willing to accept less precise information on a timely basis, rather than having to wait for information until it is too late to assist in the decision-making process. Most managerial information is directed toward future operations, rather than looking backward at historical information.
Learning objective number 5 is to discuss elements of the system of external and internal financial reporting that create integrity in the reported information.
3 The Financial Accounting Standards Board is recognized as the group in the private sector that makes specific accounting principles. If an accountant departs from the principles established by the FASB , proper disclosure of the departure must be made. When an enterprise operates beyond the boarders of its own country, differences in financial reporting practices between countries can pose significant problems. Efforts are underway to harmonize accounting standards around the world and the International Accounting Standards Board is playing a leading role in this process. In the public sector, the Securities and Exchange Commission has the authority to establish accounting principles for companies reporting to the agency. Currently the Securities and Exchange Commission has accepted all pronouncements of the F A S B for use by reporting companies. The Public Company Accounting Oversight Board is a quasi-governmental body charged with oversight of the public accounting profession. Audits of financial statements by a certified public accountant provides outsiders with an opinion on whether the financial statements are misleading. Congress passed the Sarbanes-Oxley Act in 2002. Among the more important provisions of this legislation is the creation of the Public Company Accounting Oversight Board mentioned earlier. Another important provision of the Act is to ban auditors from providing many nonaudit services for their audit clients on the assumption that those services interfere with the objectivity required of auditors.
Learning objective number 6 is to identify and discuss several professional organizations that play important roles in preparing and communicating accounting information.
3 One of the most influential professional organizations in accounting is the American Institute of Certified Public Accountants or AICPA . It represents the interests of Certified Public Accountants (or CPAs ). The Institute of Management Accountants, or IMA , and the Institute of Internal Auditors, or IIA , represent the interests of accountants and auditors working with an organization. The American Accounting Association is composed of members from academics. Your accounting instructor may be a member of the American Accounting Association. The Committee of Sponsoring Organizations of the Treadway Commission is a voluntary private sector organization dedicated to improving the quality of financial reporting through business ethics, effective internal controls, and corporate governance.
Learning objective number 7 is to discuss the importance of personal competence, professional judgment, and ethical behavior on the part of accounting professionals.
3 Ethical behavior is the cornerstone of the accounting profession. Recently there have been many corporate scandals involving individuals who acted in an unethical, and often times illegal, way. Ethics is the belief system that permits us to distinguish right from wrong and identify good and bad behavior. Professional organizations have promulgated codes of ethics that must be followed by members of that organization.
Learning objective number 8 is to discuss various career opportunities in accounting.
3 Careers in accounting can follow many paths. Financial accountants prepare financial statements, deal with regulatory agencies like the Internal Revenue Service, and do consulting work. There is a great demand for financial accountants. Management accountants help track product costs, prepare budgets, and serve as a consultant to managers. The field of taxation includes everything from the preparation of tax returns to consulting with clients about estate and gift planning.
4 End of chapter 1.
Financial & Managerial Accounting The Basis for Business Decisions FOURTEENTH EDITION Williams Haka Bettner Carcello
Accounting Information for Decision Making Chapter 1
Learning Objective LO1 To discuss accounting as the language of business and the role of accounting information in making economic decisions.
Accounting information The accounting process Decision makers Economic activities Actions (decisions) Accounting “links” decision makers with economic activities and with the results of their decisions.
Types of Accounting Information Financial Managerial Tax
Learning Objective LO2 To discuss the significance of accounting systems in generating reliable accounting information, and understand the five components of internal control per COSO’s Internal Control—Integrated Framework.
Accounting Systems An accounting system consists of the personnel, procedures, technology, and records used by an organization to develop accounting information and to communicate this information to decision makers.
Summarize and communicate information to decision makers.
Classify similar transactions into useful reports.
Components of Internal Control Control Environment Risk Assessment Control Activities Information and Communication Monitoring
Learning Objective LO3 To explain the importance of financial accounting information for external parties—primarily investors and creditors—in terms of the objectives and the characteristics of that information.
Objectives of External Financial Reporting 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)
Income Statement Balance Sheet Statement of Cash Flows
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
Learning Objective LO4 To explain the importance of financial accounting information for internal parties—primarily management—in terms of the objectives and the characteristics of that information.