Financial accounting provides information to external decision makers such as shareholders and creditors. It measures a business's economic activity to provide useful information for decisions. Financial accounting information is used to evaluate a company's performance and decide whether to invest in or lend to the business. Managerial accounting provides more detailed internal information for managers to make decisions about new plants, advertising spending, equipment purchases, and more. Tax accounting involves tax compliance like filing tax forms and tax planning to structure transactions in a tax-efficient way.

1. Financial Accounting
Topic 1: Introduction
Notes by:
MADDY KALEEM

2. Agenda
• What is Accounting?
• Types of Accounting
• Financial Accounting
• Managerial Accounting
• Tax Accounting
Notes by:
MADDY KALEEM

3. What is ACCOUNTING?
• Accounting is the systematic process of measuring the
economic activity of a business to provide useful
information to those who make economic decisions.
• Accounting information is used in many different situations.
• Bankers use accounting information when deciding
whether or not to make a loan.
• Stockbrokers and other financial advisers base investment
recommendations on accounting information.
• Government regulators use accounting information to
determine if firms are complying with various laws and
regulations.
Notes by:
MADDY KALEEM

4. TYPES OF ACCOUNTING
• The examples mentioned in the last section explained
how accounting information can be helpful in a
number of situations.
• In fact, the field of accounting consists of several
specialty areas that are based on the nature of the
decision.
• The following are three major types of accounting:
1. Financial Accounting
2. Managerial Accounting
3. Tax Accounting
Notes by:
MADDY KALEEM

5. THREE MAJOR TYPES OF ACCOUNTING
Notes by:
MADDY KALEEM

6. A Typical Corporation:
Notes by:
MADDY KALEEM

7. Financial Accounting
• Financial accounting provides information to decision
makers who are external to the business.
• To understand the role of financial accounting, consider a
large corporation such as IBM.
• The owners of corporations are called shareholders, and
IBM has more than 600,000 shareholders.
• Obviously, each shareholder cannot participate directly in
the running of IBM, and because IBM needs to maintain
various trade secrets, its many thousands of shareholders
are not permitted access to much of the firm’s information.
• Because of this, shareholders delegate most of their
decision-making power to the corporation’s board of
directors and officers.
Notes by:
MADDY KALEEM

8. Financial Accounting
• Shareholders, however, need information to
evaluate
• (1) the performance of the business and
• (2) the advisability of retaining their investment
in the business.
• Financial accounting provides some of the
information for this purpose.
• Such information is also used by potential share-
holders who are considering an investment in the
business.
Notes by:
MADDY KALEEM

9. Financial Accounting
• Creditors and potential creditors are also served
by financial accounting.
• Firms often seek loans from banks, insurance
companies, and other lenders.
• Creditors need information about firms so that
funds are loaned only to credit-worthy
organizations.
• Financial accounting will usually provide at least
some of the information needed by these
decision makers.
Notes by:
MADDY KALEEM

10. Managerial Accounting
• Managers make numerous decisions. These include
• (1) whether to build a new plant,
• (2) how much to spend for advertising, research, and
development,
• (3) whether to lease or buy equipment and facilities,
• (4) whether to manufacture or buy component parts for inventory
production, or
• (5) whether to sell a certain product.
• Managerial accounting provides information for these decisions.
• This information is usually more detailed and more tailor made to
decision making than financial accounting information.
• It is also proprietary; that is, the information is not disclosed to
parties outside the firm. Notes by:
MADDY KALEEM

11. Managerial Accounting
• Sterling Collision Centers, Inc. provides a good illustration of
managerial accounting at work.
• Although Sterling only has 18 shops, it hopes to put a major dent in the
automotive body shop business through aggressive expansion and the
introduction of innovative management techniques.
• One of its strategies is to use computers to better track repair times,
which will provide both standards for different types of repair jobs as
well as measures of how individual workers perform relative to the
standards.
• By tying pay to performance, Sterling hopes to improve worker
productivity.
• Knowledge of repair times will also help Sterling to determine
estimated bids for its repair jobs.
• Managerial accountants play a major role in all these activities.
Notes by:
MADDY KALEEM

12. Managerial Accounting
• Although distinguishing between financial and
managerial accounting is convenient, the distinction is
somewhat blurred.
• For example, financial accounting provides information
about the performance of a firm to outsiders.
• Because this information is essentially a performance
report on management, managers are appropriately
interested in and influenced by financial accounting
information.
• Accordingly, the distinction between financial and
managerial accounting depends on who is the primary
user of the information.
Notes by:
MADDY KALEEM

13. Tax Accounting
• Tax accounting encompasses two related functions: tax
compliance and tax planning.
• Tax compliance refers to the calculation of a firm’s tax
liability. This process entails the completion of
sometimes lengthy and complex tax forms.
• Tax compliance takes place after a year’s transactions
have been completed.
• In contrast, tax planning takes place before the fact.
• A business transaction can be structured in a variety of
ways; a car can be purchased by securing a loan, for
example, or it can be leased from the dealer.
Notes by:
MADDY KALEEM

14. Tax Accounting
• The structure of a transaction determines its
tax consequences.
• A major responsibility of tax accountants is to
provide advice about the tax effects of a
transaction’s various forms.
• Although this activity may seem to be an
element of managerial accounting, it is
separately classified due to the necessary
specialized tax knowledge.
Notes by:
MADDY KALEEM

15. THE END