Ch. 1 - Accounting - Information for Decision Making

7/27/2019 Ch. 1 - Accounting - Information for Decision Making

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Accounting: Information for

Decision Making

Joseph V. Carcello

Accounting 301


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Accounting Information: A Means

to an End

Primary objective of accounting is to

provide information that is useful for

decision making purposes

The final product is the decision, NOT the

accounting information


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Financial Accounting

Describes financial resources, obligations,

and activities of an economic entity

Used for many purposes (i.e., general-

purpose accounting information)


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Management Accounting

Used to assist management in business

operations

Assists in setting overall goals, evaluating

performance, and making managerial

decisions


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Tax Accounting

Involves the preparation of income tax

returns and tax planning

Tax planning anticipates tax effects of

transactions and structures them in a way

to minimize (avoid) income taxes


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Accounting Systems

Help an organization meet its needs for

information as efficiently as possible

Produce information about financial

position, profitability, and cash flows for

investors, creditors, and other users ofinformation


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Functions of an Accounting System

Interpreting and recording effects of

business transactions

Classifying effects of similar transactions

Summarizing and communicatinginformation to decision makers


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External Users of Accounting

Information

External users have a financial interest ina reporting entity, but are not involved inits operations. Examples include:

Owners Creditors

Suppliers

Customers External financial reporting is directed

primarily towards investors and creditors


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Objectives of External Financial

Reporting

To provide useful information to those makinginvestment or credit decisions

To provide information that can be used to assessthe timing, amount, and uncertainty of an entitysfuture cash flows

To provide information about an entitys resources(assets), claims to those resources, and how theresources and claims to resources change over time


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Financial Statements

Balance Sheet (statement of financial position) Shows a companys financial position at a

specific date

Income Statement Shows the results of a companys profit-related

activities for aperiod of time

Statement of Cash Flows Shows details of a companys cash-related activities

for aperiod of time


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Characteristics of Externally

Reported Information

Historical

Inexact and approximate measures

Estimates

Judgments

Assumptions

General-purpose information


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Internal Users of Accounting

Information

Information is used primarily for planning

and control decisions

Examples of internal users include:

Board of directors

CEO

CFO

Managers

Supervisors


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Characteristics of Management

Accounting Information

Developed in a timely manner

Provided to those who have decision-making

authority

Created and generated in order to affect thefuture

Used to measure the effectiveness andefficiency of operations


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Integrity of Accounting Information

Characteristics of integrity:

Complete

Honest

Sincere Unimpaired

Integrity of accounting information is enhanced

by:

Accounting standards, internal control, audits

Professional accounting organizations

Personal competence, judgment, ethical behavior


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Institutional Features

Generally accepted accounting principles

(GAAP)

Principles on measurement and presentation of

financial information Rules for preparation of financial statements

Only applies to the United States

Financial Accounting Standards Board (FASB) Develops new accounting standards (GAAP)

Is part of the private sector


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International Accounting Standards Board

(IASB)

Attempts to develop global accounting standards

Promotes the use of such standards

Securities and Exchange Commission (SEC)

Governmental agency with legal power to establish

accounting principles and reporting requirements for

publicly ownedcorporations

Generally adopts recommendations by the FASB


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Public Company Accounting Oversight

Board (PCAOB)

Developed as a result of the Sarbanes-Oxley

Act (2002)

Oversees the accounting profession

Sets auditing standards for public companies

Inspects audits performed by publicaccounting firms


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Internal Control Structure

Guards an organization against fraud and error

Ensures reliability of financial information

Promotes compliance with company policies

Audits of Financial Statements

An investigation to determine whether or not financial

statements are reliable, complete, conform to GAAP,

and are not misleading


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Sarbanes-Oxley Act of 2002

Created the PCAOB

Bans auditors from providing consultingservices to audit clients

Increases responsibility of CEOs andCFOs to certify the fairness of financial

statements


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American Institute of Certified

Public Accountants (AICPA)

Conducts accounting research

Works with the FASB to establish and

interpret GAAP

Prepares and grades the CPA exam


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Careers in Accounting

Public Accounting

Financial statement audits

Income tax services

Consulting services

Management Accounting

Financial forecasting

Cost accounting

Internal audit


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Careers in Accounting

Governmental Accounting

Governmental Accountability Office (GAO)

Audits federal agencies

Reports directly to Congress

Internal Revenue Service (IRS)

Securities and Exchange Commission (SEC)

Documents

Ch. 1 - Accounting - Information for Decision Making