© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

Financial & Managerial Accounting

Financial & Managerial Accounting

The Basis for Business DecisionsFOURTEENTH EDITION

Williams Haka Bettner Carcello

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

AccountingInformation for Decision Making

Chapter

1

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

Accounting

information

The accounting

process

Decision makers

Economic activities

Actions (decisions)

Accounting “links” decision

makers with economic

activities and with the results of

their decisions.

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

Accounting is an information system that

1) identifies, 2) records, and 3) communicates the economic events of an organization to interested users

WHAT IS ACCOUNTING?WHAT IS ACCOUNTING?

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

Identification

Select economic events

(transactions)

Recording

Record, classify

and summarize

Accounting Reports

SOFTBYTEAnnual Report

Prepare accounting

reports

Analyze and interpretfor users

Communication

ILLUSTRATION ILLUSTRATION 1-1 1-1 THE ACCOUNTING PROCESSTHE ACCOUNTING PROCESS

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

Accounting

1 Includes bookkeeping

2 Also includes much more

Bookkeeping

1 Involves only the recording of economic events

2 Is just one part of accounting

BOOKKEEPING DISTINGUISHED BOOKKEEPING DISTINGUISHED FROM ACCOUNTINGFROM ACCOUNTING

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

Types of Accounting InformationTypes of Accounting Information

Financial

Managerial

Tax

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

Accounting SystemsAccounting 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.

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

Information Users

InvestorsCreditors ManagersOwnersCustomersEmployeesRegulators -SEC

Information Users

InvestorsCreditors ManagersOwnersCustomersEmployeesRegulators -SEC

Decisions Supported

Performance evaluationsStock investmentsTax strategiesLabor relationsResource allocationsLending decisionsBorrowing

Decisions Supported

Performance evaluationsStock investmentsTax strategiesLabor relationsResource allocationsLending decisionsBorrowing

Information SystemInformation System

Financial Information

ProvidedProfitabilityFinancial positionCash flows

Financial Information

ProvidedProfitabilityFinancial positionCash flows

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

Basic Functions of an Accounting System

Basic Functions of an Accounting System

Summarize and

communicate information to

decision makers.

Classify similar

transactions into useful

reports.

Interpret and record business

transactions.

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

Components of Internal ControlComponents of Internal Control

Control Environment

Risk Assessment

Control Activities

Information and Communication

Monitoring

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

External Users of Accounting Information

External Users of Accounting Information

•Owners

•Creditors

•Potential investors

•Labor unions

•Governmental agencies

•Suppliers

•Customers

•Trade associations

•General public

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

ILLUSTRATION ILLUSTRATION 1-31-3

QUESTIONS ASKED BY EXTERNAL USERSQUESTIONS ASKED BY EXTERNAL USERS

Is the company earning satisfactory income?

Will the company be able to pay its debts as they come due?

How does the company compare in size and profitability with its competitors? What do we

do if they catch us?

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

Provide 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 information useful in making investment and credit decisions.

(Specific)

(General)

Objectives of

External Financial Reporting

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

Objectives of External Financial Reporting

Objectives of External Financial Reporting

The primary financial

statements.

Income Statement

Balance Sheet

Statement of Cash Flows

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

Characteristics of Externally Reported Information

Characteristics of Externally Reported Information

A Means to an End

A Means to an End

Broader than Financial

Statements

Broader than Financial

Statements

Historical in Nature

Historical in Nature

Results from Inexact and Approximate Measures

Results from Inexact and Approximate Measures

Based on General-Purpose

Assumption

Based on General-Purpose

Assumption

Usefulness Enhanced via Explanation

Usefulness Enhanced via Explanation

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

Users of Internal Accounting Information

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

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

ILLUSTRATION ILLUSTRATION 1-21-2

QUESTIONS ASKED BY INTERNAL USERSQUESTIONS ASKED BY INTERNAL USERS

Is cash sufficient to pay bills?

What is the cost of manufacturing each unit of product?

Can we afford to give employee pay raises this year?

Which product line is the most profitable?

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

Objectives of Management Accounting Information

Objectives of Management Accounting Information

To help achieve goals and missions

To help achieve goals and missions

To help evaluate and reward

decision makers

To help evaluate and reward

decision makers

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

Characteristics of Management Accounting Information

Characteristics of Management Accounting Information

TimelinessTimeliness

Identify Decision

Maker

Identify Decision

Maker

Oriented Toward Future

Oriented Toward Future

Measures of Efficiency and Effectiveness

Measures of Efficiency and Effectiveness

A Means to an End

A Means to an End

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

Integrity of Accounting InformationIntegrity of Accounting Information

Institutional FeaturesGenerally Accepted Accounting Principles (GAAP)Financial Accounting Standards BoardInternational Accounting Standards BoardSecurities and Exchange CommissionPublic Company Accounting Oversight BoardAudits of Financial StatementsLegislation

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

Ethics - standards of conduct by which one’s actions are judged as right or wrong, honest or dishonest.

Competence, Confidentiality, Integrity, Objectivity Generally Accepted Accounting Principles - primarily

established by the Financial Accounting Standards Board and the Securities and Exchange Commission

Assumptions

1 Monetary Unit - only transaction data that can be expressed in terms of money is included in the accounting records.

2 Economic Entity - includes any organization or unit in society.

THE BUILDING BLOCKS THE BUILDING BLOCKS OF ACCOUNTINGOF ACCOUNTING

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

Integrity of Accounting InformationIntegrity of Accounting Information

Competence, Judgment and Ethical BehaviorCertified Public Accountants (CPAs)Certificate in Management Accounting (CMA)Certificate in Internal Auditing (CIA)

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

THE ACCOUNTING PROFESSIONTHE ACCOUNTING PROFESSION

Public accountants offer expert service to the general public through the services they perform.

Private accountants are employees of individual companies and are involved in a number of activities including cost and tax accounting, systems, and internal auditing.

Not for Profit accounting includes reporting and control for government units, foundations, hospitals, labor unions, colleges/universities, and charities.

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

ACCOUNTING CAREER LADDERACCOUNTING CAREER LADDER

10+ years

6 to 8 years

2 to 4+ years

Entry level

Partner

Public Accounting

Audit Manager

Senior Auditor

Junior Auditor

Private AccountingVP Finance and Chief Financial

OfficerCorporate Controller

Senior Accountant

Junior Accountant

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

End of Chapter 1End of Chapter 1