BUSI3111 Ch1

Chapter 1
Accounting
Information for
Decision Making
Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Introduction
The primary objective of accounting is to provide
information that is useful in making good
decisions, and as a result of good decisions,
societal prosperity and welfare is maximized.
Accounting is sometimes called the

“language of business.”
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Primary Goals
In order to develop your ability to understand
and use accounting information, you need to
understand the following:
 The nature of economic activities that
accounting information describes.
 The assumptions and measurement techniques
involved in developing accounting information.
 The information that is most relevant for
making various types of decisions.
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Types of Accounting Information:
Financial
1. Financial Accounting
• Information describes the financial
resources, obligations, and activities of an
economic entity.
• Assists external users such as investors
and creditors in the decision-making
process.
• Is often called “general-purpose”
accounting information.
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Types of Accounting Information:
Management
2. Managerial/Cost Accounting
• Involves the development and
interpretation of accounting information
for management.
• Information can be specifically tailored to
management’s needs in order to assist in
the decision-making process.
• Reports are only provided to internal
users.
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Types of Accounting Information: Tax
3. Tax Accounting
• Information must conform with income
tax reporting requirements.
• Laws and regulations are often different
from those underlying the preparation of
financial accounting information.
KEY POINT
Because the focus of this text is introductory accounting, and because
tax accounting is quite complex, coverage of tax accounting subjects
is deferred to subsequent accounting courses.
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Information Systems
An information system consists of the
personnel, procedures, technology, and
records used by an organization (1) to
develop information and (2) to
communicate this information to decision
makers.
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Accounting as an Information System
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Basic Functions of an Information
System
Every accounting system performs the following
basic functions:
1. Interpret and record the effects of business
transactions.
2. Classify the effects of similar transactions to
compute totals to be used in reports.
3. Summarize and communicate the information
contained in the system to decision makers.
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Components of Internal Control
Control
Environment
Risk
Assessment
Control
Activities
Information and
Communication
Monitoring
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Control Environment
 Sets the tone for the organization.
 Organizational commitment to ethical values.
 Independence of the board of directors.
 Appropriate assignment of responsibility.
 Development and retention of competent
employees.
 Accountability at all levels.
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Risk Assessment
 Identifying, analyzing, and managing risks that
pose a threat to the achievement of
organizational goals.
 Involves the identification of risks and the
implementation of risk mitigation techniques.
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Control Activities
 Policies and procedures established by
management to address risks.
 Examples include:
◦ Approvals
◦ Reconciliations
◦ Reviews
◦ Segregation of duties
◦ Safeguarding assets
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Primary Financial Statements
 Balance sheet: shows where the company
stands in financial terms on a specific date; also
called the statement of financial position.
 Income statement: shows the details of a

company’s profit-related activities over a period
of time.
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Primary Financial Statements (cont.)
 Statement of cash flows: shows the details
of a company’s activities involving cash during a
period of time.
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Characteristics of Externally Reported
Information
1. Financial Reporting—A Means
a. A means to an end; not an end in and of
itself.
b. Improves the quality of decision making for
outside users.
c. Helps to create prosperous society.
2. Financial Reporting vs. Financial
Statements
a. Financial statements are a subset of the
broader concept of financial reporting.
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Characteristics (cont.): Historical
b. Financial reporting also includes other
communications to external parties
including press releases, disclosures, and
other open communications.
3. Historical in Nature
a. Financial statements report events for an
accounting period that has already occurred.
b. Focuses on the past more than the future.
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Characteristics (cont.): Inexact
4. Inexact and Approximate Measures
a. Accounting information is often based on
estimates, judgments, and assumptions about
the past and the future.
b. This characteristic is often misunderstood.
5. General-Purpose Assumption
a. Information is not tailored for a specific user.
b. The same financial reporting package is
available for multiple user groups.
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Characteristics (cont.): Explanation
6. Explanation
a. Value is enhanced by management
explanations.
b. Qualitative information assists in
interpreting the financial reports.
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Users of Internal Accounting
Information
Examples include:
 Board of directors
 Chief executive officer (CEO)
 Chief financial officer (CFO)
 Vice presidents
 Business unit managers
 Plant managers
 Store managers
 Line supervisors
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Simple Organizational Chart
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Objectives of Management Accounting
Information
 Help management achieve the organization’s
mission and goals.
 Evaluate and reward decision-making
performance.
KEY POINT
Many companies have a reward system linked to

performance as measured by the accounting system.
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Characteristics of Management
Accounting Information
1. Timeliness
a. Timely information is needed for planning
and controlling business activities.
b. Management can save money and make
better decisions by being able to act quickly.
2. Identity of Decision Maker
a. The right people need the right information
to make decisions and correct problems.
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Characteristics (cont.): Future
Oriented
3. Future Oriented
a. Purpose of generating management
information is to affect the future.
b. Motivate management to make future
decisions to achieve the organization’s goals.
4. Efficiency and Effectiveness
a. Measures the efficiency and effectiveness of
resource usage.
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Characteristics (cont.): A Means
5. A Means
a. A means to an end; not an end in and of
itself.
b. Ultimate objective is to design and use an
accounting system that helps management
achieve the goals and objectives of the
enterprise.
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Integrity of Accounting Information
Integrity refers to the following qualities:
 Complete
 Unbroken
 Unimpaired
 Sound
 Honest
 Sincere
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Integrity: GAAP
1. Institutional Features
a. Generally Accepted Accounting
Principles (GAAP)
1) Provides the general framework for
determining what information is included
in the financial statements and how this
information is prepared and presented.
2) Originates from a combination of tradition,
experience, and official decree.
3) May change over time.
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Integrity: SEC
b. Securities and Exchange Commission
(SEC)
1) Governmental agency with the legal power to
establish accounting principles and financial
reporting requirements for publicly owned
corporations.
2) Delegates standard setting responsibility to
the FASB (discussed on next slide).
3) Reviews the financial statements of publicly
owned corporations.
4) May initiate legal action against companies.
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Integrity: FASB
c. Financial Accounting Standards Board
(FASB)
1) Independent rule-making body.
2) Recognized as the most authoritative
source of GAAP.
3) Maintains the Accounting Standards
Codification which includes all standards
and represents an official expression of
GAAP.
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Integrity: IASB
d. International Accounting Standards
Board (IASB)
1) London-based panel of elite professionals
with expert knowledge of accounting
methods used in the most vibrant capital
markets.
2) Issues International Financial Reporting
Standards (IFRS).
3) More than 100 countries, including those in
the European Union, require companies to
follow IASB standards.
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Integrity: IASB (cont.)
d. International Accounting Standards
Board (IASB)
4) The SEC accepts financial statements
prepared using IASB standards from foreign
companies that are cross-listed on a U.S.
stock exchange.
5) The AICPA, which maintains jurisdiction over
private company reporting, accepts either
FASB standards or IASB standards as
authoritative sources of accounting principles.
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Integrity: PCAOB
e. Public Company Accounting Oversight
Board (PCAOB)
1) Board created by the Sarbanes-Oxley Act of
2002.
2) Charged with oversight of the public
accounting profession.
3) Sets auditing standards for audits of publicly
traded companies.
4) Inspects the quality of audits.
5) Conducts investigations and administers
penalties.
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Integrity: Audits
f. Financial Statement Audits
1) An examination of a company’s financial
statements, designed to determine the
fairness of the statements.
2) Must be conducted by an independent
certified public accountant (CPA).
3) Financial statements are judged based on
the standards of GAAP.
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Key Point
For the auditor to reach the conclusion that the
financial statements are fair representations of a
company’s financial position, results of operations,
and cash flows, the statements must comply in all
important ways with generally accepted
accounting principles.
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Integrity: Legislation
g. Legislation
1) Congress passed the Sarbanes-Oxley Act in 2002.
2) Auditors are prohibited from providing certain
nonaudit services to their audit clients to
preserve objectivity.
3) Board of directors and audit committees are
tasked with additional oversight responsibilities.
4) Chief executive officers (CEOs) and chief financial
officers (CFOs) must certify the fairness of the
company’s financial statements.
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Integrity: AICPA
2. Professional Organizations
Several professional accounting organizations play an
active role in improving the quality of accounting
information that is used by investors, creditors,
management, and others.
a. American Institute of CPAs (AICPA)
1) Mission is to provide members with the most
relevant knowledge.
2) Conducts research and works closely with
the FASB in the establishment and
interpretation of GAAP.
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Integrity: IMA
b. Institute of Management Accountants
(IMA)
1) Provides a forum for research, practice
development, education, knowledge sharing,
and the advocacy of the highest ethical and
best business practices in management
accounting and finance.
2) Influences concepts and ethical practices for
management accounting and financial
management.
3) Offers the Certified Management Accountant
(CMA) designation.
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Integrity: IIA
c. Institute of Internal Auditors (IIA)
1) Primary international professional
association dedicated to the promotion
and development of the practice of
internal auditing.
2) Offers professional development through
conferences and seminars.
3) Provides audit specialty services and
industry-specific auditing programs as well
as quality assurance review and
benchmarking services.
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Integrity: AAA
d. American Accounting Association
(AAA)
1) Mission is to further the discipline and
profession of accounting through
education, research, and service.
2) Made up primarily of accounting educators
who focus on improving the quality of
accounting education.
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Integrity: COSO
e. Committee of Sponsoring
Organizations of the Treadway
Commission (COSO)
1) Private-sector organization dedicated to
providing thought leadership through the
development of comprehensive frameworks
and guidance on enterprise risk management,
internal control, and fraud deterrence
designed to improve organizational
performance and governance and to reduce
the extent of fraud in organizations.
2) Best known for its work in developing the
standards for evaluating internal control.
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Integrity: CPA
Certification in a given area signals a level of
competence to financial users and decision
makers.
1. Certified Public Accountant (CPA)
a. Licensed by the state.
b. Must have completed 150 semester hours of
college work with a major in accounting.
c. Must pass the CPA exam.
d. Must have adequate professional experience.
e. Must spend at least 40 hours of continuing
professional education each year.
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Integrity: CMA and CIA
2. Certified Management Accountant (CMA)
a. Issued by the IMA.
b. Signifies professional competence in the area of
managerial accounting.
c. Requirements are similar to those of the CPA.
3. Certified Internal Auditor (CIA)
a. Issued by the IIA.
b. Signifies professional competence in the area of
internal auditing.
c. Requirements are similar to those of the CPA.
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What about Bookkeeping?
 Bookkeeping is the clerical side of
accounting—the recording of routine
transactions and day-to-day record
keeping.
 Professional accountants are involved
more with the interpretation and use of
accounting information than with its
actual preparation.
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I’m Not an Accounting Major
 Accounting is the language of business, and
trying to run a business without
understanding accounting information is
analogous to trying to play sports without
understanding the rules.
 Accounting knowledge is helpful in many
aspects of your personal life as well,
including personal budgeting, retirement and
college planning, lease versus buy decisions,
and evaluation of loan terms and investment
opportunities.
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Ethics, Fraud, & Corporate Governance
 Corporate governance entails corporate
structures and processes for overseeing the
company’s affairs to ensure that the company
is being managed with the best interests of
shareholders in mind.
Dennis Kozlowski, the former CEO of Tyco, was

sentenced to 8 1/3 to 25 years in prison for his
conviction for conspiracy, securities fraud, and falsifying
records.
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End of Chapter 1
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BUSI3111 Ch1

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Chapter 1

Accounting is sometimes called the

 Income statement: shows the details of a

Many companies have a reward system linked to

Dennis Kozlowski, the former CEO of Tyco, was

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