Understanding Business OrganisationsProvide Goods and Services to earn ProfitTypes and forms of business organisationsCash MachineImportance of InformationAccounting as the language of business
What is Accounting?Identifying to Measuring Economic various Information Users for Making DecisionsCommunicating
Definition of Accounting “The process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information.” —American Accounting Association (AAA)
Internal and External Users of Accounting InformationCurrent Customers Banks and CreditorsPotentialOwners Internal Public Users -Financial ManagementAnalysts Suppliers Employees and Government and Trade Regulatory Unions Agencies
What is an AIS? A system is a set of two or more interrelated components that interact to achieve a goal. Systems are almost always composed of smaller subsystems, each performing a specific function supportive of the larger system. An accounting information system (AIS) consists of: People Procedures Data Software Information technology
3 Basic Functions of AIS1. Collecting and processing data about the organization business activities efficiently and effectively2. Providing information useful for decision making3. Establishing adequate controls to ensure that data about business activities are recorded and processed accurately and to safeguard both that data and other organizational assets
Basic Subsystems in the AIS1 The expenditure cycle: involves activities of buying and paying for goods or services used by the organization.2 The production cycle: involves activities converting raw materials and labor into finished goods.3 The human resources/payroll cycle: involves activities of hiring and paying employees.
Basic Subsystems in the AIS4 The revenue cycle: involves activities of selling goods or services and collecting payment for those sales.5 The financing cycle: involves activities of obtaining necessary funds to run the organization, repay creditors, and distribute profits to investors.
Basic Subsystems in the AISFinancing Expenditure Human Cycle Cycle Resources General Ledger & Reporting System Production Revenue Cycle Cycle
How An AIS Can Add Value To An Organization An AIS adds value...– by providing accurate and timely information so that five primary value chain activities can be performed more effectively and efficiently. This is done by: – improving the quality and reducing the costs of products or services.
How An AIS Can Add Value To An OrganizationAn AIS can…– improve efficiency.– improve decision making capabilities.– increase the sharing of knowledge. A well-designed AIS can also help an organization profit by improving the efficiency and effectiveness of its supply chain.
The Value Chain The ultimate goal of any business is to provide value to its customers. A business will be profitable if the value it creates is greater than the cost of producing its products or services.
The Value Chain An organization’s value chain consists of nine interrelated activities that collectively describe everything it does. The five primary activities consist of the activities performed in order to create, market, and deliver products and services to customers and also to provide post-sales services and support.
The Value Chain Primary ActivitiesInbound Outbound OperationsLogistics Logistics Marketing Service and Sales
The Value Chain The four support activities in the value chain make it possible for the primary activities to be performed efficiently and effectively.
The Value Chain Support ActivitiesInfrastructure Technology Human Purchasing Resources
The Value System The value chain concept can be extended by recognizing that organizations must interact with suppliers, distributors, and customers. An organization’s value chain and the value chains of its suppliers, distributors, and customers collectively form a value system.
The Supply ChainRaw Materials Supplier Manufacturer Distributor Retailer Consumer
Information and Decision Making What is information? The term data refers to any and all of the facts that are collected, stored, and processed by an information system. Information is data that has been organized and processed so that it is meaningful.
Information and Decision Making Characteristics of Useful Information Relevant Timely Reliable Understandable Complete Verifiable
Value of Information The value of information is the benefit produced by the information minus the cost of producing it.
Information and Decision Making What is decision making? Decision making involves the following steps:1 Identify the problem.2 Select a method for solving the problem.3 Collect data needed to execute the decision model.4 Interpret the outputs of the model.
Information and Decision Making5 Evaluate the merits of each alternative.6 Choose and execute the preferred solution. Decisions can be categorized in terms of the degree of structure that exists
Decision Structure Structured decisions are repetitive, routine, and understood well enough that they can be delegated to lower- level employees in the organization. An example is: Extending credit to customers.
Decision Structure Semi-structured decisions are characterized by incomplete rules for making the decision and the need for subjective assessments and judgments to supplement formal data analysis. An example is: Setting a marketing budget for a new product.
Decision Structure Unstructured decisions are nonrecurring and non routine. An example is: Choosing the cover for a magazine.
Decision Making Process Recognize dilemma Identify interested parties / associated variables List alternatives and Evaluate Select best alternative
Decisions Made with Financial /Accounting Information Add new Invest?? product line?? Borrow?? Build new plant?? Loan ??Extend credit??Start new business?? Sell stocks or bonds??
The Future of AIS The Internet makes strategy more important than ever Enterprise resource planning (ERP) systems are a recent development that integrate all aspects of a company’s operations with its traditional AIS. The important point underlying ERP systems is the need for and value of cross- functional integration of financial data and other non financial operating data.
What is Accounting?Identifying to Measuring Economic various Information Users for Making DecisionsCommunicating
Assumptions underlying measurement Economic Cost Entity Principle Time Period Going Monetary Concern Unit
Economic Entity Concept Each entity has its own books, records and financial statements that are separate from owners No intermingling of personal and business assets and liabilities or income and expenses Owners’ Business Books & Books & Records Records
Cost Principle Record assets at cost paid to acquire them Continue to value assets at historical cost until sold More objective than market value
Going Concern Assume business will continue indefinitely into the foreseeable future Justifies use of historical cost
Monetary Unit How we measure (e.g. U.S. dollar, Japanese yen, Mexican peso, etc.) Assumes economic measure is relatively stable; no adjustment for inflation made in financial statements
Time Period Assumption Assumes it is possible to break up an entity’s earnings in discrete time periods (a month, quarter, year) Necessary to provide users with financial results on a timely basis 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31
Generally Accepted Accounting Principles Generally Accepted Accounting Principles known as GAAP are the commonly understood and accepted conventions, rules and procedures for gathering, organizing, and reporting the financial history of an organization.
Generally Accepted Accounting Principles Generally GAAP applies to one or more of the following three broad areas: Accounting Valuation Recognition Disclosure
Generally Accepted Accounting Principles Accounting Valuation - GAAP helps to specify the value of the items reported. It provides guidance and restrictions on the accounting values used in the financial statements.
Generally Accepted Accounting Principles Recognition – How should an item be treated in the accounting records? Should an item be treated as an asset or an expense? For instance, does an advertising campaign have future benefits?
Generally Accepted Accounting Principles Disclosure – The act of providing information about the organization and construction of its accounting reports. GAAP requires the disclosure of measurement methods, assumptions, etc., that add to the information content of the annual report.
Institutional ContextDCA IASB IFA IndianSEBI GAPP RBIICAI ITA CAG
Ethical Dilemmas Conflicting GAAP rules Pressure to make Pressure to choices not in best compromise interests of company,acctg procedures employees, and stockholders Personal responsibilities and obligations “Aggressive” No specific accounting GAAP rules practices Biased information or fraud
Ethics Decision-Making Model Likely to occur whenRecognize dilemma considering decision about accounting methods or Identify interested disclosures and: parties • There are conflicting rules • There are no clear GAAP List alternatives • Fraud or other questionable actions have occurredSelect best alternative
Ethics Decision-Making Model For each group (management,Recognize dilemma shareholders, investors, auditor, creditors, employees), identify Identify interested potential: parties • Benefits • Harm List alternatives • Rights / claimsSelect best alternative • Conflicting interests • Responsibilities
Ethics Decision-Making ModelRecognize dilemma Which alternative provides: Identify interested • The most useful and timely parties info? • The most reliable info?List alternatives and • Info that most accurately evaluate represents what it claims? • Info that is free from bias?Select best alternative
Ethics Decision-Making ModelRecognize dilemma Which alternative best Identify interested provides decision makers parties with: • The most relevant info?List alternatives and evaluate • The most reliable info? • The most accurate info?Select best alternative • The most neutral info?
The Accounting EquationAssets = Liabilities + Owners’ Equity (or Stockholders Equity)Economic Creditors OwnersResources = Claims + Claims to Assets to AssetsExamples:Cash Accounts payable Capital stockAccounts receivable Notes payable Retained earningsInventory
Financial StatementsFinancial Statements Balance Sheet Income Statement Statement of Cash Flows
Financial StatementsThe financial statements are part of acomprehensive financial report referred toas the annual report.
Balance Sheet Shows relationship between assets liabilities and equities--on a particular date (i.e., point in time). Assets and liabilities and stockholders equity must balance.
Balance Sheet Assets – A probable future economic benefit obtained by entering into a transaction. The resources owned by the business. Liabilities – The probable future sacrifice of economic benefits arising from an entity’s obligation to transfer assets or provide services for a past transaction. Creditors claims on total assets (obligations or debts of the business).
Balance Sheet (continued) Stockholders Equity – The difference between an entity’s assets and liabilities. The owners’ claim on total assets.
Income Statement Reports success or failure of the companys operations during the period. Summarizes all revenue and expenses for period--month, quarter, or year. If revenues exceed expenses, the result is a net income. If expenses exceed revenue, the result is a (net loss).
Income Statement (continued) Revenues – increases in net assets resulting from an entity’s operation over a period of time. Expenses – decreases in net assets resulting from an entity’s operation over a period of time. Net Income - the excess of revenues over expenses.
Cash Flow StatementThe Cash Flow Statement - describes the flowof cash into and out of an organization during anaccounting period. These flows are classified inthree categories:Operating activities – The change in cashresulting from actions intended to generate netincome.Investing activities – The change in cashresulting from actions taken to acquire ordispose of productive company assets.
Cash Flow Statement (continued)Financing activities – The change in cashresulting from payments to or receiptsfrom suppliers of money to the firm (e.g.,common shareholders or debt holders).
Other Elements of Annual Reports Management Discussion and Analysis Notes to Financial Statements Auditors Report
Management Discussion and AnalysisCovers three aspects of a company: liquidity - ability to pay near-term obligations capital resources - ability to fund operations and expansions results of operation - profitability and efficiency
Notes to Financial Statements Provide additional information not included in body of statements Does not have to be numeric Examples: Description of accounting policies or explanation of uncertainties and contingencies Company statistics (e.g., market share, percentage of international sales, etc.)
Auditors Report Auditor, a professional accountant who conducts an independent examination of the financial accounting data presented by a company. Auditor gives an unqualified opinion if the financial statements present the financial position, results of operations, and cash flows in accordance with GAAP.