Topic 1 Accounting and Business

MCD 2150 ACCOUNTING FOR
MANAGERS
COMMONWEALTH OF AUSTRALIA
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EXPECTATIONS
> Welcome to MCD2150 Accounting for Managers

> Students in MCD2150 are expected to:
•Access the lectures
•Purchase e textbook and read required related chapter(s)
•Attend the allocated lecture and tutorial – on time
•Review materials
•Prepare for tutorials and tutorial quiz by doing homework
•Check Moodle regularly for updates
ASSESSMENTS
TOPIC 1 (CHAPTER 1)
ACCOUNTING AND BUSINESS

LEARNING OBJECTIVES
After studying this presentation you should be able to:

1. Explain the process of accounting
2. Outline the importance of accounting and its role in decision making by various
users
3. Explain the differences between financial accounting and management
accounting
4. Discuss the globalisation of financial reporting
5. Evaluate the role of the Conceptual Framework and illustrate the qualitative
characteristics of financial statements
6. Give examples of the limitations of accounting information
THE ACCOUNTING PROCESS
> Accounting is the process of identifying, measuring and communicating
economic information about an entity to a variety of users for decision making
purposes.
Accounting information and its role
king
External users Internal users

 Accounting information is extremely
(stakeholders) are parties outside the entity
valuable to an entity’s owner or
who use information to make decisions about
management.
the entity. Stakeholders can include:
– shareholders (both current and
prospective)
– customers
– suppliers and banks
– employees
– government authorities (e.g. ATO and
ASIC).
8 8
ACTIVITY
Users Accounting information Decision making
KING Shareholder
Employees
Suppliers
Customers
Lenders
ATO
Regulators
Accounting information and its role in decision making
Stakeholders and the accounting information they need for their decision
making:
10
Financial accounting and management accounting
Financial accounting:
preparation and presentation of financial statements
allow users to make economic decisions about the entity.
Financial statements:
a set of statements
directed towards the common information needs of a wide range of users (both internal and external).
11
Financial accounting and management accounting
 Financial statements:  Management accounting:

– Economic information for internal users.
consist of: – Reflected in financial accounting
– Statement of cash flows statements for external users.
– Income statement – Predominately about planning and
– Balance sheet decision making for future events.
– Statement of changes in equity. – Core activities include:
 formulating plans and budgets
 providing information to be used in
monitoring and control within the entity.
12 12
Differences between financial accounting and management accounting
13
Activity
Information FA MA
Budgeted financial statements
Income statement
Balance sheet
Cash flow statement
Cash budget
Sales budget
Production report
Employee satisfaction survey
Warranty claim report
Delivery report
14
Australian and international accounting standards
Since 1 Jan 2005, Australian entities have complied with

International Financial Reporting Standards (IFRS).
IFRS are prepared and issued by the International
Accounting Standards Board (IASB).
Australian Accounting Standards Board (AASB) is
responsible for:
issuing Australian versions of International Accounting Standards
significantly influencing development of IFRS.
15
AUSTRALIAN AND INTERNATIONAL ACCOUNTING
STANDARDS
> The Corporations Act stipulates that all disclosing entities must apply
AASB in preparing their financial reports.
> The development of an accounting standard is a lengthy and rigorous
procedure that must follow due process.
> Australian Accounting Standards are based on IFRS with input from the
AASB.
Role of the conceptual framework
Relates to financial accounting.
A document underlying accounting which outlines the ‘who’, ‘what’ and ‘why’ of
financial reporting.
WHO has to prepare general purpose financial statements
WHAT is included in them
WHY the release of this information is necessary
Provides guidance on qualitative characteristics of financial information, as well as

important definitions and recognition criteria of the five elements of accounting.
17
ROLE OF THE CONCEPTUAL FRAMEWORK
Qualitative characteristics of financial reports:
Fundamental qualitative characteristics (2):
• Relevance:
- If it is capable of making a difference to the decisions made
by users
- If it has predictive value or confirmatory value
• Faithful representation:
- implies that financial information faithfully represents the
phenomena it purports to represent.
- Information should be complete, neutral, and free from
material error.
Role of the conceptual framework
Enhancing qualitative characteristics (4):

 Comparability:
• Enables users to identify and understand similarities in, and differences among, items.
 Verifiability:
• Different knowledgeable and independent observers could reach consensus, although not necessarily complete
agreement, that a particular depiction is a faithful representation.
• Verification can be direct and indirect
 Timeliness:
• Information is available to all stakeholders in time for decision making purposes.
 Understandability:
• The preparers should present information in the most understandable manner for users.
• Classifying, characterising and presenting information clearly and concisely makes it understandable
19
ROLE OF THE
CONCEPTUAL
FRAMEWORK
Enhancing qualitative
characteristics (4):
> Comparability
> Verifiability
> Timeliness
> Understandability
THE CONCEPTUAL FRAMEWORK
Elements of Financial Statements:
Balance Sheet elements
> Assets
> Liabilities and
> Equity
Income Statement elements

> Income and
> Expenses
Elements of Financial Statements:
Income Statement elements

> Income and
> Expenses
Activity
Google search any published financial statements (maybe CBA or ANZ)

See what are listed in
Balance sheet statement
Income statement
Cash flow statement
23
The conceptual framework
Definition of assets
• Right
• Controlled by the entity
• Has potential to produce economic benefits
24
Definition of liabilities:
• The entity has a present obligation (which is the result of past
events)
• The obligation is to transfer an economic resource
25
Definition of Equity:
• the residual interest in the assets of the entity after deducting

all its liabilities
Equity = Assets – Liabilities = Net Assets
26
Definition of Income:
Income – is often referred to as “the revenue from providing services to
customers or from the sale of goods”
• Income is defined as increases in assets, or decreases in liabilities,
that result in increases in equity, other than those relating to
contributions from the owner. (AASB Framework, Para 4.68)
• Example: service fees, sales
27
Definition of Expenses:
Expenses – are often referred to as “costs of goods and services
used in the process of earning income”
• Expenses are defined as decreases in assets, or increases in
liabilities that result in decreases in equity, other than those
relating to distributions to the owner. (AASB Framework, Para
4.69)
• Example: rent, wages
28
Recognition criteria of the financial elements:

The recognition criteria for the asset, liabilities,
income and expenses are:
 Relevance:
• Existence uncertainty
• Low probability of a flow of economic benefits
Faithful representation:
• Measurement uncertainty
• Recognition inconsistency
• Presentation and disclosure
Accounting Elements Definition Recognition
Assets  Right  Relevance
 Controlled by the entity  Faithful representation
 Has potential to produce economic benefits
Liabilities  Present obligation  Relevance

 A result from the past event  Faithful representation
 An obligation to transfer the economic resource
Equity The residual interest in the assets of the entity of OE = A - L
deducting its liabilities
Revenue  An increase in assets or a decrease in liabilities  Relevance
 Result in an increase in equity  Faithful representation
 Exclude owner’s contributions of equity
Expenses  A decrease in assets or an increase in liabilities  Relevance

 Result in a decrease in equity  Faithful representation
 Excludes distributions to owners
LIMITATIONS OF ACCOUNTING INFORMATION
> Time lag:
in the distribution of information to users, therefore affecting its accuracy.
> Historical information:
based on past data and is often outdated.
> Subjectivity of information:
Refers to choice involved in inclusion of items to be reported and choice of accounting policies to adopt.
There is much subjectivity involved in the inclusion of items to be reported and the choice of accounting policies to adopt.
> Generally accepted accounting principles (GAAP):
a set of rules and practices, having substantial authoritative support that guide financial reporting.
> Potential costs of providing accounting information:
Information costs:
Costs involved in gathering, summarising and producing info contained in financial report.
Release of competitive information:
Information in the financial report may contain proprietary information that could be used by competitors to strengthen
their market position.
Homework
Revise chapter 1
Prepare for in class quiz in week 2
Read Chapter 2
32

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MCD 2150 ACCOUNTING FOR

> Welcome to MCD2150 Accounting for Managers

ACCOUNTING AND BUSINESS

After studying this presentation you should be able to:

External users Internal users

 Financial statements:  Management accounting:

Cash flow statement

Employee satisfaction survey

Warranty claim report

Since 1 Jan 2005, Australian entities have complied with

Relates to financial accounting.

Provides guidance on qualitative characteristics of financial information, as well as

Enhancing qualitative characteristics (4):

Income Statement elements

Income Statement elements

Google search any published financial statements (maybe CBA or ANZ)

• the residual interest in the assets of the entity after deducting

Equity = Assets – Liabilities = Net Assets

• Example: service fees, sales

• Example: rent, wages

Recognition criteria of the financial elements:

Liabilities  Present obligation  Relevance

Expenses  A decrease in assets or an increase in liabilities  Relevance

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