Financial

Accounting

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Accounting:
Information for Decision Making
Chapter 1

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 The
Accounting
Process

Accounting links
decision makers
with economic Accounting
Economic activities  and Information
Activities
with the results of
their decisions.

Reported
Results of
Decision Actions
Actions
(decisions)
Makers (decisions)
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Accounting Systems
An accounting system consists of the
personnel, procedures, technology, and
records used by an organization to
develop accounting information and to
communicate this information to decision
makers.

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 Basic Functions of an
Accounting System
1) Interpret 2) Classify
and record similar
business transactions
transactions. into useful
reports.
3) Summarize
and
communicate
information to
decision
makers.
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Types of Accounting
Information

Financial Tax

Management

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 Information
Information System
System

Information
Information Financial
Financial Decisions
Decisions
Users
Users Information
Information Supported
Supported
Investors
Investors Provided
Provided Performance
Performance
Creditors
Creditors Profitability evaluations
evaluations
Managers Profitability Stock
Managers Financial
Financial Stock
Owners
Owners position investments
investments
Customers position Tax
Customers Cash
Cashflows
flows Taxstrategies
strategies
Employees
Employees Labor
Laborrelations
relations
Regulators
Regulators Resource
Resource
-SEC
-SEC allocations
allocations
-IRS
-IRS Lending
Lending
-FTC
-FTC decisions
decisions
Borrowing
Borrowing
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 External Users of
Accounting Information
• Owners
• Creditors
• Potential investors
• Labor unions
• Governmental agencies
• Suppliers
• Customers
• Trade associations
• General public

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Objectives of External
Financial Reporting
Provide specific information about
economic resources, claims to resources,
and changes in resources and claims.

Provide information useful in assessing

amount, timing and uncertainty of future
cash flows.

Provide general information useful in

making investment and credit decisions.
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Objectives of External
Financial Reporting
The primary financial
statements.
Balance Income
Sheet Statement

Statement
of Cash
Flows
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 Characteristics of
Externally Reported
Information
AAMeans
Meansto
toan
an
End
End
Usefulness
Usefulness Broader
Broaderthan
than
Enhanced
Enhancedviavia Financial
Financial
Explanation
Explanation Statements
Statements

Based
Basedon
onGeneral-
General-
Purpose Historical
Historicalin
in
Purpose Nature
Assumption
Assumption Nature

Results
Resultsfrom
fromInexact
Inexactand
and
Approximate
ApproximateMeasures
Measures
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Users of Internal
Accounting Information
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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 Owners
Typical
Board of
Directors Simple
Organization
Chief Executive
Officer Chart
(CEO)

Business V.P. V.P. Chief

V.P
Unit Human Information Financial
Ethics
Managers Resources Services Officer (CFO)

Plant Plant
Managers Managers Controller Treasurer

Plant Plant
Accountants Accountants
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Objectives of
Management Accounting
Information
To
Tohelp
helpachieve
achieve
goals
goalsand
and
missions
missions

To
Tohelp
helpevaluate
evaluate
and
andreward
reward
decision
decisionmakers
makers

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Characteristics of
Management Accounting
Information
Timeliness
Timeliness
Identify
Identify
AAMeans Decision
DecisionMaker
Meanstotoan
an Maker
End
End

Measures
Measuresof of Oriented
OrientedToward
Toward
Efficiency
Efficiencyand
and Future
Future
Effectiveness
Effectiveness

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Determining Information
Needs

Although much accounting information

clearly is essential to business operations,
management still has many choices as to
the types and amount of accounting
information to be developed.
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Components of Internal
Control
Control
Environment

Risk
Assessment

Control
Activities

Information and
Communication

Monitoring

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 Institutional Features
Generally Accepted Accounting Principles (GAAP)
Financial Accounting Standards Board
International Accounting Standards Board
Securities and Exchange Commission
Public Company Accounting Oversight Board
Audits of Financial Statements
Legislation

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 Professional Organizations

 American Institute of Certified Public Accountants

 Institute of Management Accountants
 Institute of Internal Auditors
 American Accounting Association
 Committee of Sponsoring Organizations of the
Treadway Commission (COSO)

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 Competence, Judgment
and Ethical Behavior
 Certified Public Accountant (CPA)
 Certified Management Accountant (CMA)
 Certified Internal Auditor (CIA)

Ethical behavior is the

cornerstone of the
accounting
profession.
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 Careers in Accounting

 Public Accounting
 Management Accounting
 Governmental Accounting
 Accounting Education

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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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 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.

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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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