Chapter 1 - Decision making and the role of accounting Flashcards
What is Accounting?
The process of recording financial transactions pertaining to a business
What does the accounting process include?
- Summarizing,
- Analyzing,
- and Reporting
financial transactions to oversight agencies, regulations and tax collection entities.
What is Decision Making?
Due to limited resources, one should maximize the use of their available resources.
Choices of decision making:
- How to spend our time
- How to spend our resources
- The competing options available
Good decisions require good processes
What are the steps in Decision Making?
1) Goals - what are we achieving?
2) Information - what information do we need (costs, rents, expenses, etc)
3) Consequences - what are the consequences of different alternatives (profit or loss)
4) Choose - which course of action should we choose
What are Economic Decisions?
Decisions that rely on both Internal and External Decisions
What is the PESTEL Analysis?
Economic Decisions
Political
Economic
Social
Technological
Environmental
Legal
What is the Nature of Accounting?
- It is a service activity
- It doesn’t provide goods as its function is to provide and interpret financial information to assist in decision making
What is the Process of Accounting?
1) Identification - transactions (internal/external)
2) Measurement - quantification in monetary terms (currency)
3) Recording - recording classification; summarization
4) Communication - accounting reports and analysis and interpretation
What are the 2 Types of Accounting Information Users?
- Internal users
- External users
What are some Examples of Internal Users?
- Owners
- Managers
- Employees
What are some Examples of External Users?
- Investors
- Lenders
- Suppliers
- Customers
- Tax Authors
- Government
- Auditors
- The Public
What are some questions Internal Users tend to ask themselves?
- How much profit?
- What should be produced?
- What resources are available?
- How much does it cost?
- How much do we owe
- What would happen if..?
- Do we have enough cash?
What are some questions External Users tend to ask themselves?
- Should I invest?
- Can the business pay..?
* Wages
* Loans - Will they make profit?
- Are they behaving ethically?
- Is the business socially and environmentally friendly?
Financial Reports and Users
..
Why do many decisions require significant amounts of Financial Information?
Accounting information is very important part of this process
Why do accountants report on the past?
- It is useful as a guide for making decisions about the future
- However, Past performance is not necessarily indicative of future results
- It is also useful for assessing/confirming past decisions
Why do accountant also look into the future?
- Budgeting: future plans, strategy and planning
What are the 2 types of Accounting focuses?
- Management accounting
- Financial accounting
What does Management accounting focuses on?
- Internal focus
* Planning
* Controlling
* Decision-making - Cost behavior / break-even
- Budgeting
- Strategy
What does Financial accounting focuses on?
- External users
- Reporting information
* Performance
* Position - Financing and investing
- Legal compliance
- Highly regulated
What are the 3 types of Accounting?
- Public Accounting
- Accounting in commerce and industry (internal business activities)
- Not-for-profit accounting
What is Public Accounting?
- Accountants who offer their professional services to the public for a fee
- Can vary in size, from quite small to large international organizations
- Four main areas with many specialties
* Auditing and assurance services
* Taxation services
* Advisory services
* Insolvency and administration
What is Accounting in Commerce and Industry?
- Accountants who are employed in business entities
- Many areas of interest;
* General accounting
* Cost accounting
* Accounting information systems design
* Budgeting
* Taxation accounting
* Internal auditing and audit committees
What is Not-for-profit Accounting
- Many accountants work in the not-for-profit area
- This requires a slightly different approach as profit is nit the primary focus
- Includes a range of organizations;
* Government
* NGO (non-governmental organizations)
* Charities
Why is Ethic important in Accounting and Business in general?
- Important in all business dealings
- More recent failures has raised awareness
- Important for the standing of the profession ]ethical conduct can be considered essential to a business’ long-term survival because;
* It attracts a regular and stable client base;
* The legal implications of unethical conduct may prove to be costly
* It may attract shareholders and/or consumers in that they trust you to manage their money successfully and/or provide a quality service
* Unethical conduct can lead to government intervention and even closure of the business
What are Assets?
- A present economic resource controlled by the entity as a result of past events
- An economic resource is a right that has the potential to produce economic benefits.
What are Liabilities?
A present obligation of the entity to transfer an economic resource as a result of past event.
What is Capital or equity?
The residual interest in the assets of the entity after deducing all its liabilities.
Equity is a residual
Equity = Assets - Liabilities
Increases in profit
Influenced by the measurement system for A&L and the concepts of capital and capital maintenance
