Accounting provides essential information for organizations to make decisions and measure performance. It identifies, measures, records, and communicates financial information. The accounting process allows organizations to determine value created through transformations of resources and profits earned. However, accounting relies on assumptions and constraints that could impact profit calculations if invalid. Management selection of accounting policies can affect financial statements and influence economic consequences and stakeholder perceptions.

1. 1-1
Accounting Foundations:
Information for Decisions
Chapter 1
Accounting and organisations

2. 1-2
Accounting Scandals

3. • Your perception
of Accounting
• What do you think a
balance sheet tells a
reader?
• What does the
income statement
tell a reader?
3

4. Initial questions
1. What role does Accounting serve?
Basic: to help people in organisations
make decisions about economic activities
2. Does Accounting have economic
consequences?
Yes: it affects organisation plans,
employment, future value (like share
prices)
3. Are Ethics important in Accounting?
Very important. Unethical accounting
practices can ruin the fortunes of
employees, suppliers and investors

5. The Nature of Accounting
Identification Measurement Recording Communication
Accounting
Accounting
Recording
Recording
Quantification
Quantification Reports,
Reports,
Transactions
Transactions classification
in $ terms classification Analysis,
in $ terms Analysis,
summarisation
summarisation Interpretation
Interpretation
and advice
and advice
Value - low Value -
high

6. • Definitions 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 1966)
Correct - but implies a deterministic process – i.e.
if do this the outcome is valid
• “Accounting is the art of being excruciatingly
exact about a lot of arbitrary assumptions”
(Austin Donnelly, about 1975)
Insight?
6

7. Alternative definitions of Accounting
"Systematic method of converting
organisational activity into numbers in order
to provide one explanation of what has
occurred“ ?
Insight?
• “Accounting is a way of making the
invisible (performance, value) visible
(profit, cost, value).”
Insight?
• “Accounting is story telling with numbers”
Insight?
• 7
31 January 2013

8. Purpose of Accounting
• Individual Level
– planning
– controlling
– decision support
• Organisation Level
– planning
– controlling
– decision support
– external reporting – why?

9. Accounting &
Questions Financial
Management
Unit
2
• Who are the stakeholders affected by
managerial choices around accounting and
financial reporting practices?
•
• What purposes should drive the manager’s
decisions around accounting and financial
reporting practices?
9

10. 1-10
Exhibit 4
Exhibit 4 Transformation of
resources into goods
and services

11. 1-11
If the transformation of
If the transformation of
resources meets a need of
resources meets a need of
society, it creates value
society, it creates value
because more people are
because more people are
better off after the
better off after the
transformation than before.
transformation than before.

12. 1-12
Creating value
Creating value
A market is any location or
A market is any location or
process that permits resources
process that permits resources
to be bought and sold.
to be bought and sold.

13. 1-13
Creating value
Creating value
Accounting measures the
Accounting measures the
increase in value created by a
increase in value created by a
transformation as the difference
transformation as the difference
between the total price of goods
between the total price of goods
and service sold in a market
and service sold in a market
and the total costs of resources
and the total costs of resources
consumed in developing,
consumed in developing,
producing, and selling the goods
producing, and selling the goods
and services.
and services.

14. 1-14
Exhibit 5
Exhibit 5 Value added by
transforming resources
(A) – (B)
} Value
Added
(A)
Sales price (B)Total cost of
of one box resources
of biscuits consumed to
produce and
make one box of
biscuits available
$3.50 – $3.00 = $0.50

15. 1-15
Profit is the difference between
Profit is the difference between
the price a seller receives for
the price a seller receives for
goods or services and the total
goods or services and the total
cost to the seller of all resources
cost to the seller of all resources
consumed in developing,
consumed in developing,
producing, and selling these goods
producing, and selling these goods
or services during a particular
or services during a particular
period.
period.

16. 1-16
Mum’s Biscuits Pty Ltd
Profit Earned
for January
Resources created from selling biscuits $11 400
Resources consumed:
Cost of merchandise inventory sold $7600
Wages 1000
Rent 600
Supplies 300
Utilities 200
Total cost of resources consumed 9700
Profit earned $ 1700

17. 1-17
Risk
Accounting involves risk. It will
be used to calculate the amount
of profit a business will earn.
It relies on a number of
assumptions and constraints
which, if they don’t turn out to
be valid, may mean that the
profit calculation is misleading

18. The Accounting Game!
• Assumptions
– Entity
– Monetary unit
– Going concern
– Period
– Realisation
– Matching
– Prudence / conservatism
• Characteristics
– Relevance
– Reliable
– Comparable
– Understandable
• Constraints
– Timely
– Materiality
– Benefit versus Cost
18

19. 1-19
The role of accounting in
The role of accounting in
business organisations
business organisations
Key: return on their investments from
Key: return on their investments from
profits earned by that business.
profits earned by that business.
Profit
ROI =
Amount invested

20. 1-20
The role of accounting in
The role of accounting in
business organisations
business organisations
If Megan and Ryan invested
If Megan and Ryan invested
$10 000 to start Mum’s Biscuits
$10 000 to start Mum’s Biscuits
Pty Ltd and earned a $1700 profit,
Pty Ltd and earned a $1700 profit,
what would be the return on
what would be the return on
investment?
investment?
$1700
Profit
ROI = =17%
Amount Invested
$10 000

21. 1-21
The role of effectiveness
The role of effectiveness
and efficiency
and efficiency
An effective business
An effective business
An efficient business
An efficient business

22. Choice of Accounting
Systems
• Must consider
– organisational goals
– organisational structure
– size of the organisation
– information needs of management

23. Choice of Accounting
Systems
• Computer-based:
–Packages
• Ledger - MYOB
–Data base
• Microsoft Access
• Enterprise resource planning (erp) - SAP
–Analysis
• Excel

24. Economic Consequences
1. Management’s accounting policies
affect the numbers that appear in
financial statements.
2. Financial statements affect wealth
of owners / lenders/ managers /
society via:
– management compensation plans
– debt contracts
– political costs

25. Economic Consequences
Management Compensation
• Jodee Rich and Brad Keeling: each collected a
$7.5 million pay packet in 2000-01 from One-Tel,
based on company market capitalisation, not
profit.
Political cost
• Depreciation of railway rolling stock in nineteenth
century – to justify ticket prices

26. Environmental Considerations
• Economic
– e.g. interest rates, currency translation
rates, expectations (boom, etc),
obsolescence.
• Regulatory
– Company regulations
– Accounting Standards – Accounting
Policies
• Social and Environmental
– (un)employment, pollution, health issues

27. Management selection of
accounting policies
Management selection is a function of:
1. Need to provide information for
economic decision-making.
2. Desire to influence economic
consequences.

28. Values informing Selection
Self interest
wealth, power, fame, authority
(Pre-conventional ethical reasoning – Kohlberg)
Concern for others
fairness, justice, trust in social institutions
(conventional ethical reasoning)
Doing what is right
do the social institutions still represent the best
way to do what is right?
(post-conventional ethical reasoning)

29. What is “Ethics”?
The central question of ethics is:
The central question of ethics is:
"what should you do?"
"what should you do?"
Morality – how we actually behave. Answers the
Morality – how we actually behave. Answers the
question “How?”
question “How?”
Ethics – theoretical reflection on that behaviour.
Ethics – theoretical reflection on that behaviour.
“Why did s/he behave so badly/well?” What
“Why did s/he behave so badly/well?” What
values made her/him behave that way? Answers
values made her/him behave that way? Answers
the question “Why?”
the question “Why?”
Tend to get confused – but are linked.
Tend to get confused – but are linked.