Introduction

• What is accounting?

• End result of accounting – Financial statements and

various reports

• Accounting information and its users

– Internal users
– External users
 Accounting Information System
– Contemporary View
TRADITIONAL NONFINANCIAL
FINANCIAL Information
Accounting
Information
Qualitative
Other Quantitative
Financial Information:
Information:
Information: • Percentage of Defects • Customer &
• Assets • No. of Customer Complaints Employee
• Liabilities • Warranty Claims Satisfaction
• Revenues • Inventory Units • Product & Service
• Gross Margin • Budgeted Hours Quality
• Operating Expenses • Reputation
 Integration of
Quantitative and Qualitative Data

ERP systems aid in the integration of both

quantitative and qualitative data, so that data
become useful information, and this information can
be transformed into knowledge that allows effective
communication throughout an organization.
 Types of Accounting
• Financial Accounting – Area of accounting concerned with preparation of
financial statements to be a part of annual report. (external users)

• Cost Accounting – Area of accounting concerned with assessing a

company’s cost of product or services – Cost sheet. (internal users)

• Management Accounting – Concerned with financial or non-financial

information for use by business managers in their decision making. (internal
users)
Users of Financial Information
 Types of Information Needed By
External Users

• Information about current and future

Stockholders & profitability of a company
Investors • Examples: Annual reports, registration
statements, prospectuses
 Types of Information Needed By
External Users

Information about company

financial health and ability
to repay loans. Lenders
Examples: cash flow
statements, financial ratios
 Types of Information Needed By
External Users
• Specific information needs such as income
Government measurement, payroll, and taxable assets
Agencies • Examples: income tax returns and payroll
reports
 Types of Information Needed By
External Users

• Detailed information that’s more flexible than

financial information and similar to internal user Suppliers and
needs. Customers
• Examples: bank balances and inventory levels
 Types of Information Needed By Internal Users
• Internal users, particularly management, need more flexible and
detailed information that will allow them to perform three
primary activities:

Planning – Development of short-term (operational) and long-term

(strategic) objectives and goals and identification of resources needed to
achieve them.

Operating – What should be done to run the business on day-to-day

basis?

Controlling – Involve motivation and monitoring of employees and

evaluation of people and other resources used in the organization's
operations.
Short-term Planning Activities – Planning for Goals to be
Achieved within 1 year
Known as
Operational
Planning
includes:
Time
Current budgets
Sales
Customer targets
Service
Needs
Current
Cash
Needs
Long-term Planning Activities – Planning for Goals to be
Achieved beyond 1 year
Known as
Strategic
Planning
includes:
Plant
Sales Locations
Growth
New
Equipment
Investment
Market
Share
 Operating Activities
Should We
Accept Should We
Special Make or Buy
Orders? Parts?
Daily Business
Decisions

What Price
Should Should Be
We Advertise? Charged?
 Controlling Activities
Involves motivation, monitoring, and evaluation of
employees to attain company goals

It includes:
• Use incentives & Rewards to motivate
• Use mechanisms to detect and correct Purpose –
deviations Goals Achieved
• How to evaluate performance and
measures of performance

J
Functional Areas of Management
Managers in different
functional areas have
Finance
different accounting
information needs.

Marketing

Human Operations and

Resources
Production
• Operations and Production Function – Production cost, storing cost,
inventory levels etc.

• Marketing function – Cost of product to determine the selling price, impact

of adverting spent on number of units sold and profit, cost of enhancing the
product features and change in packaging, impact of commission paid and
profit etc.

• HR function – Impact of training cost, cost of hiring new workforce, cost of

rewarding employees etc.

• Finance – Cash requirements of the company cost of new equipment,

financing of funds etc.
Role of Managerial Accountants

Managerial accountants have become

decision-support specialists who see their role as
interpreting information, putting it into a useful
format for other managers, and facilitating
management decision making.
 Different Informational Needs
of Users

Due to the varying needs of internal users,

managerial accounting is more
FLEXIBLE
than financial accounting.
 Information Needs of
Internal Users

Marketing, operations and production,

USER:
finance, and human resource managers

Accounting Timely, detailed information on sales and

Information expenses, product costs, budget data, and
Needed: measures of performance

Cost reports, budgets, and other

SOURCE: internal documents
 Decision-Making
Process of identifying different courses of action and
selecting one, appropriate to a given situation

An effective decision making model is one that focuses on

relevant factors that differ between alternatives
 Relevant Costs

These are avoidable or can be eliminated by

choosing one alternative over another.

For Example: Buying a car with a CD changer versus

buying a car without one.
 Sunk Costs
These are costs that have already been
incurred. They cannot be avoided and are
irrelevant.

For Example: Watching a horrible rental movie that is

unbearable during its first 20 minutes. The rental fee is a
sunk cost. You can either decide to stick it out or use the time
to do something more fun.
 Opportunity Costs
These are benefits forgone by choosing one
alternative over
another. They are relevant.

For Example: Choosing to go to college or work full-time.

The opportunity cost is the higher salary you will receive as a
college graduate. (In general, these costs are hard to
quantify.)
 Ethics and Decision Making
• Why ethical issues arise – Undue pressures to achieve short-term goals e.g. to
falsify records, ignore product safety, long working hours etc.
• In today’s business environment, companies have to be aware not only of the
economic impact of their decisions, but also of their ethical impact.
• Managers must consider various stakeholders when evaluating ethical
dilemma.
• Integrity is the cornerstone of ethical business practices. Failure to build a
business on integrity carries cost.
End of Chapter 1