01 Basics of financial decision

1. ACCOUNTING:
Information for Decision Making

2. i
n
Accounting
formation
The
accounting
process
Decision
makers
Economic
activities
Actions
(decisions)
Accounting
“links” decision
makers with
economic
activities and
with the results of
their decisions.

3. Types of Accounting Information
Financial
Managerial
Tax

4. Financial Accounting Financial accounting
refers to information describing the
financial resources, obligations, and activities of
an economic entity (either an organization
or an individual). Accountants use the term
financial position to describe an entity’s
financial resources and obligations at a point in
time and the term results of operations to
describe its financial activities during the year.

6. Management Accounting Management (or
managerial) accounting involves the
development and interpretation of accounting
information intended specifically to assist
management in operating the business.
Managers use this information in setting the
company’s overall goals, evaluating the
performance of departments and individuals,
deciding whether to introduce a new line of
products, and making virtually all types of
managerial decisions.

7. company’s managers and employees
constantly need information to run and control
daily business operations. For example, they
need to know the amount of money in the
company’s bank accounts; the types,
quantities, and dollar amounts of merchandise
in the company’s warehouse;
and the amounts owed to specific creditors.
Much management accounting information
is financial in nature but is organized in a
manner relating directly to the decision at
hand.

8. Tax Accounting The preparation of
income tax returns is a specialized
field within accounting. To a great
extent, tax returns are based on
financial accounting information.
However, the information often is
adjusted or reorganized to conform
with income tax reporting
requirements.

9. Information
Users
Investors
Creditors
Managers
Customers
Employees
Regulatory
agencies
-SECP
-FBR
Decision Support
Performance
evaluation
Budgeting
Capital
allocation
Earnings per
share
Information System
Cost & Revenue
Determination
Job costing
Process costing
Sales
Assets &
Liabilities
Plantand
equipment
Loans& equity
Receivables,
payables & cash
Fromoperations
Fromfinancing
Frominvesting
Cash Flows

10. Basic Functions of an Accounting
System
Interpret
and record
business
transactions.
Payment
Car

11. Basic Functions of an Accounting
System
Summarize
and
communicate
information to
decision
makers.
Classify
similar
transactions
into useful
reports.
Interpret
and record
business
transactions.

12. Objectives of External Financial
Reporting
Cash Flow Prospects
Investors Creditors
Return on
Investment
Periodic
dividends
Periodic
interest
Return of
Investment
Sale of
ownership at a
future date
Repayment of
loan at a
future date
The primary external users of financial information are
investors and creditors.

13. Information about economic resources, claims to
resources, and changes in resources and claims.
Information useful in assessing
amount, timing and uncertainty of
future cash flows.
(Specific)
Information useful in making
investment and credit decisions.
(General)
Objectives
of
Financial
Reporting

14. Objectives of External Financial
Reporting
The primary
financial
statements.
Income Statement
Balance Sheet
Statement of Cash Flows

15. Financial
Statements
Financial Statements:
A Lens to View Business

16. Internal Users of Accounting
Information
 Board of Directors
 Chief Executive Officer
 Chief Financial Officer
 Vice Presidents
 Business Unit Managers
 Plant Managers
 Store Managers
 Line Supervisors

17. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
Typical Simple Organization Chart
Plant
Accountant
Plant
Manager
Plant
Accountant
Plant
Manager
Business Unit
Manager
V.P.Human
Resources
V.P.Information
Services
Chief Financial
Officer(CFO)
Board of
Directors(
Owners)
ChiefExecutive
Officer
(CEO)

18. Information about decision-making
authority, for decision-making support, and for
evaluating and rewarding decision-making
performance.
Information useful in assessing both
the past performance and future
directions of the enterprise and information
from external and internal sources.
Information useful to help the enterprise
achieve its goal, objectives and mission.
Objectives
of
Managerial
Reporting

19. Characteristics of Management
Accounting Information
Timeliness
Identify
Decision-
Making
Authority
Oriented
Toward
Future
Measures of
Efficiency and
Effectiveness
A Means to
an End

20. Integrity of Accounting Information
Institutional Features
Generally Accepted Accounting Principles (GAAP)
Financial Accounting Standards Board
Securities and Exchange Commission
Internal Control Structure
Audits

21. End of the Chapter