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Accounting Information for Decision Making
The document provides an overview of accounting information and its role in decision-making, outlining types of accounting, the structure of accounting systems, and the objectives of financial reporting. It highlights the importance of accounting for both external users, such as investors and creditors, and internal users like management, emphasizing the characteristics and timeliness of the information provided. Additionally, it discusses internal control components and the ethical standards necessary in the accounting profession.
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Accounting Information for Decision Making
- 1. Copyright © 2012The McGraw-Hill Companies, Inc. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA McGraw-Hill/Irwin AccountingAccounting Information for Decision MakingInformation for Decision Making otaleem.blogspot.comotaleem.blogspot.com for more presentation(follow me)for more presentation(follow me) Chapter 1
- 2. 1-2 Accounting Information The Accounting Process Decision Makers Economic Activities Actions (decisions) Accounting links decision makers witheconomic activities and with the results of their decisions. Reported Results of Actions (decisions)
- 3. 1-3 Types of AccountingInformationTypes of Accounting Information Financial Management Tax
- 4. 1-4 Accounting SystemsAccounting Systems Anaccounting 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.
- 5. 1-5 Basic Functions ofan AccountingBasic Functions of an Accounting SystemSystem Summarize and communicate information to decision makers. Classify similar transactions into useful reports. Interpret and record business transactions.
- 6. 1-6 Components of InternalControlComponents of Internal Control Control Environment Risk Assessment Control Activities Information and Communication Monitoring
- 7. 1-7 External Users ofAccountingExternal Users of Accounting InformationInformation •Owners •Creditors •Potential investors •Labor unions •Governmental agencies •Suppliers •Customers •Trade associations •General public
- 8. 1-8 Provide specific informationabout 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 general information useful in making investment and credit decisions. Objectives of External FinancialObjectives of External Financial ReportingReporting
- 9. 1-9 Objectives of ExternalFinancialObjectives of External Financial ReportingReporting The primary financial statements. Balance Sheet Statement of Cash Flows Income Statement
- 10. 1-10 Characteristics of ExternallyCharacteristicsof Externally Reported InformationReported Information A Means to an End A Means to an End Broader than Financial Statements Broader than Financial Statements Historical in Nature Historical in Nature Results from Inexact and Approximate Measures Results from Inexact and Approximate Measures Based on General- Purpose Assumption Based on General- Purpose Assumption Usefulness Enhanced via Explanation Usefulness Enhanced via Explanation
- 11. 1-11 Users of InternalAccountingUsers of Internal Accounting InformationInformation Board of directors Chief executive officer (CEO) Chief financial officer (CFO) Vice presidents Business unit managers Plant managers Store managers Line supervisors
- 12. 1-12 Objectives of ManagementObjectivesof Management Accounting InformationAccounting Information To help achieve goals and missions To help achieve goals and missions To help evaluate and reward decision makers To help evaluate and reward decision makers
- 13. 1-13 Characteristics of ManagementCharacteristicsof Management Accounting InformationAccounting Information TimelinessTimeliness Identify Decision Maker Identify Decision Maker Oriented Toward Future Oriented Toward Future Measures of Efficiency and Effectiveness Measures of Efficiency and Effectiveness A Means to an End A Means to an End
- 14. 1-14 Competence, Judgment andCompetence,Judgment and Ethical BehaviorEthical Behavior Certified Public Accountant (CPA) Certified Management Accountant (CMA) Certified Internal Auditor (CIA) Ethical behavior is the cornerstone of the accounting profession.
- 15. 1-15 Careers in AccountingCareersin Accounting Public Accounting Management Accounting Governmental Accounting Accounting Education
- 16. 1-16 End of Chapter1End of Chapter 1
Editor's Notes
- #2 Chapter 1: Accounting—Information for Decision Making
- #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.
- #4 Broadly speaking, accounting information can be placed into one of three categories: financial, management, and tax. Financial accounting refers to information describing the financial resources, obligations, and activities of an economic entity (either an organization or an individual). Financial accounting information is designed primarily to assist investors and creditors in deciding where to place their scarce investment resources. Management (or managerial) accounting involves the development and interpretation of accounting information intended specifically to assist management in operating the business. A company’s managers and employees constantly need information to run and control daily business operations. Much management accounting information is financial in nature but is organized in a manner relating directly to the decision at hand. Tax accounting is a specialized field within accounting and focuses on the preparation of income tax returns and tax planning strategies.
- #5 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.
- #6 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.
- #7 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.
- #8 External users of accounting information are individuals and other enterprises that have a current or potential financial interest in the reporting enterprise, but that are not involved in the day-to-day operations of that enterprise. External users of financial information may include the following: owners, creditors, potential investors, labor unions, governmental agencies, suppliers, customers, trade associations, and the general public.
- #9 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.
- #10 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.
- #11 Financial information that is reported to investors, creditors, and others external to the reporting enterprise has certain qualities that must be understood for the information to have maximum usefulness. First, financial information is a means to an end, not an end in and of itself. Second, financial reporting is broader than financial statements. Third, externally reported financial information is generally historical in nature. Fourth, externally reported financial information may have a look of great precision, but in fact much of it is based on estimates, judgments, and assumptions that must be made about both the past and the future. Fifth, we assume that, by providing information that meets the needs of investors and creditors, we also meet the information needs of other external parties. So, we opt for preparing what is referred to general-purpose information that we believe is useful to multiple user groups. And, sixth, the accounting profession believes that the value of externally reported financial information is enhanced by including explanations from management.
- #12 Examples of internal users of accounting information include: board of directors, CEOs, CFOs, vice-presidents of information services, human resources, and ethics, business unit managers, plant managers, store managers, and line supervisors.
- #13 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.
- #14 The accounting information created and used by management is intended primarily for planning and control decisions. In order to plan for and control ongoing business processes, accounting information needs to be timely. Information that is produced to monitor and control processes needs to be provided to those who have decision-making authority to correct problems. Although some accounting information, like financial accounting information, is historical in nature, the purpose in creating and generating it is to affect the future. Accounting information measures the efficiency and effectiveness of resource usage. As with financial accounting information, management accounting information is a means to an end, not an end in and of itself.
- #15 If the public is to have confidence in the judgment of professional accountants, these accountants must first demonstrate that they possess the characteristic of competence. Both the accounting profession and state governments have taken steps to assure the public of the technical competence of certified public accountants (CPAs). CPAs are licensed by the states, in much the same manner as states license physicians and attorneys. The licensing requirements vary somewhat from state to state, but in general, an individual must be of good character, have completed 150 semester hours of college work with a major in accounting, pass a rigorous examination, and have accounting experience. In addition, most states require at least 40 hours a year in continuing professional education throughout a CPA’s career. While management accountants are not required to be licensed as CPAs, they may voluntarily earn the Certified Management Accountant or the Certified Internal Auditor as evidence of their professional competence. 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.
- #16 Careers in accounting can follow many paths. Certified public accountants (CPAs) offer a variety of accounting services to the public. The work consists primarily of auditing financial statements, income tax work, and management advisory services. To become a CPA, a person must meet several criteria, including an extensive university education requirement, passing the CPA examination, and meeting a practice experience requirement. The management accountant works for one enterprise and develops and interprets accounting information designed specifically to meet the various needs of management. Governmental agencies use accounting information in allocating their resources and in controlling their operations. Therefore, the need for management accountants in governmental agencies is similar to that in business organizations. Some accountants, including your instructor and the authors of this textbook, have chosen to pursue careers in accounting education. A position as an accounting faculty member offers opportunities for teaching, research, consulting, and an unusual degree of freedom in developing individual skills.
- #17 End of Chapter 1.