Week 1: Decision Making + Role of Financial Accounting and Financial Statements for Decison Making Flashcards
the dynamic environment of accounting
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
steps in the decision making process
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
when making decisions you must also consider
- personal taste
- social factors
- environmental factors
- religious and/or moral factors
- government policy
- legal
the accounting process
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
internal users are concerned with
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…?
external users are concerned with
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?
forms of information
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
accounting information and decisions
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
management accounting
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
financial accounting
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
accounting as a profession
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
public accounting
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
accountants in commerce and industry
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
public sector and not-for-profit accounting
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
ethics in business
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
ethics and professional accounting bodies
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
ethics in practise
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
main differences between accounting entities
- profit and loss sharing
- capital contributed at the start
- dissolution of the entity
- legal liability
- tax payable
single proprietorship or sole trader
owned by one person
simple to set up
separate accounting entity
collect all profits but bear all risks
partnership
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
company or corporation
owned by shareholders
separate accounting entity and separate legal entity
known as limited liability
less tax most of the time
management functions
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
role of managers
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
what information do users need
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
generating cash flow
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
the balance sheet (format)
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
assets
resources controlled by the entity
result of past transactions or events
future economic benefits are expected to flow to the entity
liabilities
present obligations of an entity
arising from past transactions or events
settlement is expected to result in an outflow of resources from the entity
equity
the residual interest of the owner/s in the assets (less liabilities) of the entity
sometimes called capital or accumulated surplus/funds
the income statement (format)
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
income
increases in economic benefits
inflows or enhancements of assets
decreases of liabilities
results in equity
separate to those relating to equity participants
expenses
decreases in economic benefits
outflows or incurrences of liabilities
result in decreases in equity
separate to those relating to equity participants
statement of changes in equity (format)
shows the changes in equity throughout the period
statement of cash flows
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
accrual basis assumptions
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
going concern assumption
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
period assumption
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
fundamental qualitative characteristics
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
enhancing qualitative characteristics
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
