Decision Making + Role of Financial Accounting and Financial Statements for Decison Making

Question 1

the dynamic environment of accounting

Answer 1

accounting evolves as society and business changes

• rapid development in communication technologies
• increasing demand for information about organisational impact
• globalisation of business
• development of international regulations and standards
• digital disruption and power of big data

Question 2

steps in the decision making process

Answer 2

identify each situation in which a decision needs to be made

gather information relevant to each decision

assess the consequences or outcomes of the alternatives available

after consideration, choose a course of action

Question 3

when making decisions you must also consider

Answer 3

• personal taste
• social factors
• environmental factors
• religious and/or moral factors
• government policy
• legal

Question 4

the accounting process

Answer 4

the process of identifying, measuring, recording and communicating economic information

accounting is a service activity = its function is to provide and interpret financial information to assist in decision making

• occurs in steps 2, 3 and 4 of decision making process
• measurement must take place before the effects of transactions can be recorded
• recording provides a history of the economic activities of a particular entity

Question 5

internal users are concerned with

Answer 5

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…?

Question 6

external users are concerned with

Answer 6

should i invest?

can the business pay?
- wages? loans?

will they make a profit?

are they behaving ethically?

is the business socially and environmentally friendly?

Question 7

forms of information

Answer 7

special purpose financial statements

• users who have specialised needs and who possess the authority to obtain information to meet those needs
• serves the needs of one or two specific users
• things such as management reports and tax returns

general purpose financial statements
- consists of an income statement and a balance sheet etc

Question 8

accounting information and decisions

Answer 8

many decisions require significant amounts of financial information
- accounting information is very important part of this process

accountants report on the past

• still useful as a guide for making decisions about the future
• past performance not necessarily indicative of future results

Question 9

management accounting

Answer 9

area of accounting concerned with providing financial and other information to all levels of management in an organisation

it used in all forms of organisations

• for‐profit and not‐for‐profit organisations
• sole traders
• partnerships
• trusts

Question 10

financial accounting

Answer 10

concerned with reporting information to users external to an entity

helps external users to make sound economic decisions

reflect the entity’s performance and financial position

Question 11

accounting as a profession

Answer 11

self-regulated profession

three major professional associations

• CPA australia (CPA)
• institute of chartered accountants australia (ICAA)
• institute of public accountants (IPA)

membership requires

• tertiary qualification
• ongoing professional development

Question 12

public accounting

Answer 12

accountants who offer their professional services to the public for a fee

vary from small to large international organisations

four main areas with many specialties

• auditing and assurance services
• taxation services
• advisory services
• insolvency and administration

Question 13

accountants in commerce and industry

Answer 13

accountants who are employed in business entities

many areas of interest

• general accounting
• cost accounting
• accounting information systems
• budgeting
• taxation accounting
• internal auditing and audit committees

Question 14

public sector and not-for-profit accounting

Answer 14

other areas of activity employing many accountants are public sector accounting

many accountants work in the not-for-profit area

this requires a slightly different approach as profit is not the primary focus

includes a range of organisations
- government , NGO, charities, etc

Question 15

ethics in business

Answer 15

businesses today appreciate the importance of ethical behaviour in all their business dealings

all people working in the entity have to be honest, abide by the rules and ‘do the right thing’

the audit and assurance services function of accounting also represents a controlling influence in maintaining ethical behaviour in business entities

Question 16

ethics and professional accounting bodies

Answer 16

issue professional and ethical standards that are integral to the australian accounting profession

be innovative in engaging key stakeholders, including professional accountants and the public

influence the international standards agenda

advocate for professionalism and ethical conduct to drive the behaviour of accountants

the professional and ethical standards include but are not limited to

• code of ethics for professional accountants
• miscellaneous professional statements and joint guidance notes
• such other ethical issues or similar matters of interest in respect of the accounting profession

Question 17

ethics in practise

Answer 17

self interest

failure to maintain objectivity and independence

improper leadership and poor organisational culture

lack of ethical courage to do what is right

lack of ethical sensitivity

failure to exercise proper professional judgement

Question 18

main differences between accounting entities

Answer 18

• profit and loss sharing
• capital contributed at the start
• dissolution of the entity
• legal liability
• tax payable

Question 19

single proprietorship or sole trader

Answer 19

owned by one person

simple to set up

separate accounting entity

collect all profits but bear all risks

Question 20

partnership

Answer 20

owned by two or more partners

simple to set up

separate accounting entity, not separate legal entity

more expertise, intellectual and physical capital

must split profits but also risks = if one partner acts recklessly, all parties are held accountable

Question 21

company or corporation

Answer 21

owned by shareholders

separate accounting entity and separate legal entity

known as limited liability

less tax most of the time

Question 22

management functions

Answer 22

an organisation is defined as a group of people who share common goals with a well-defined division of labour

all decision-making responsibilities for such functions as purchasing, selling, performing services, accounting and financing rest with the individual owner-manager

consequently, the role of management becomes increasingly important

Question 23

role of managers

Answer 23

every business entity is to achieve satisfactory performance

developing a good reputation ultimately attracts strong customer support for the business’s products and services

management decision process

• planning
• organising
• directing
• controlling

Question 24

what information do users need

Answer 24

financial performance

• the ability of the entity to utilise its assets effectively and efficiently
• what are the business goals

financial position

• the financial resources controlled by the entity = look at all assets minus liabilities = equity
• financial structure = debt to equity ratio
• measure of liquidity and solvency

Question 25

generating cash flow

Answer 25

operating activities = the provision of and payment for goods and services

investing activities = the acquisition and disposal of long term assets

financing activities = he raising of funds for an entity to carry out its operating and investing activities

Question 26

the balance sheet (format)

Answer 26

reports financial position of an entity at a specific point in time

shows assets, liabilities and equity of the entity

represents the accounting equation assets = liabilities + equity

Question 27

assets

Answer 27

resources controlled by the entity

result of past transactions or events

future economic benefits are expected to flow to the entity

Question 28

liabilities

Answer 28

present obligations of an entity

arising from past transactions or events

settlement is expected to result in an outflow of resources from the entity

Question 29

equity

Answer 29

the residual interest of the owner/s in the assets (less liabilities) of the entity

sometimes called capital or accumulated surplus/funds

Question 30

the income statement (format)

Answer 30

reports financial performance over a specific time period

shows income and expenses

• income > expenses = profit
• income < expenses = loss

sometimes called profit or loss statement or operating statement

Question 31

income

Answer 31

increases in economic benefits

inflows or enhancements of assets

decreases of liabilities

results in equity

separate to those relating to equity participants

Question 32

expenses

Answer 32

decreases in economic benefits

outflows or incurrences of liabilities

result in decreases in equity

separate to those relating to equity participants

Question 33

statement of changes in equity (format)

Answer 33

shows the changes in equity throughout the period

Question 34

statement of cash flows

Answer 34

reports on the cash inflows and outflows of the entity

useful in
- helping users to assess the sources and applications of cash and the ability of the entity to remain solvent

Question 35

accrual basis assumptions

Answer 35

accounting is an event driven process

the effects of transactions are recognised when they occur, not when the cash is received/paid

it is argued in the framework…

• the accrual basis provides information about the transactions and other events
• the information is most useful for decision making by both internal and external users

Question 36

going concern assumption

Answer 36

assume an entity will continue to operate in the future

unless there is evidence to the contrary

liquidation values (prices in a forced sale) of the entity’s assets are not generally reported

Question 37

period assumption

Answer 37

the life of the entity can be ‘broken up’ into equal time intervals

profit is determined for particular periods of time in order to be comparable

this division of the life of the entity into equal time intervals is known as the period assumption

Question 38

fundamental qualitative characteristics

Answer 38

relevance

• information is useful for decision making
• can influence economic decisions by users

faithful representation

• information presented faithfully, without bias or undue error
• economic substance over form

Question 39

enhancing qualitative characteristics

Answer 39

comparability and consistency
- users can identify similarities and differences between two sets of economic data

verifiability
- different, independent observers can reach consensus that information faithfully represents what it claims to

understandability

• expect a reasonable knowledge of business and economic activity and financial accounting.
• study the information with reasonable diligence

materiality

• the extent to which omission or misstatement would be misleading to users
• needs to be considered in determining if the information is relevant
• this can vary from entity to entity