Financial
Financial &
& Managerial
Managerial
Accounting
Accounting
The Basis for Business Decisions
TWELFTH EDITION
Williams Haka Bettner Meigs
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Chapter
1 ACCOUNTING:
Information for Decision Making
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Key
Key Terms
Terms
Business: is an economic activity, undertaken
for the sake of profit, through production,
distribution and exchange of goods/services.
Transaction: Every activity and event that
occurs in a business has an associated cost or
value and is known as a transaction
One of the responsibility of accountants is to
quantify these activities or events.
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Accounting
Accounting Information
Information
Have you ever heard about profit & loss, sales,
revenue & expenses, earnings, cash, debts etc.?
All the above terms are used to describe
events/activities effecting a business
Accounting: is the language of business that
describe all types of business activities/events
Sometimes the information communicates good
news, sometimes bad news to decision makers
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Accounting
Accounting Information
Information
Accounting information: is simply the “means”
by which we measure and communicate
economic events
The primary purpose of accounting information is
to provide information that is useful for decision
makers
So, it is a “mean to an end” the final product of
accounting information is the decisions, whether
made by external or internal users/decision
makers.
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The
accounting
process
Accounting
“links” decision
makers with Accounting
Economic
economic
activities information
activities and
with the results of
their decisions.
Actions
(decisions) Decision
makers
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Accounting
Accounting System
System
It consists of the personnel, procedures, devices and
records used by an organization a) To develop
accounting information b) to communicate this
information to decision makers
Small business A.S. (cash register, a check book,
calculator or may be an annual trip to tax department,
owner working as an accountant)
Large business A.S. (computers, highly trained
personnel, and accounting reports)
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Accounting
Accounting System
System
Factors effecting A.S. structure a) the company’s needs for
accounting information and (b) the resources available for
operation of the system.
Basic purpose of A.S. remains the same: to meet the
organization’s needs for accounting information as
efficiently as possible i.e. cost-effective (the value of
information produced should exceed the cost of producing it)
Accounting information system focuses on i) the accounting
information provided ii) the users of information and iii)
support for financial decisions that is provided by financial
information
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Accounting
Accounting as
as an
an
Information
Information System
System
Financial
Financial
Information Information
Information Decisions
Information provided Decisions
Users
Users provided Supported
Supported
Investors
Investors
Creditors Cost
Cost&&Revenue
Revenue CVP
Creditors Determination CVPanalysis
analysis
Managers
Managers Determination Performance
Performance
Owners (Profitability)
(Profitability) evaluation
Owners evaluation
Customers
Customers Incremental
Incremental
Employees Assets analysis
Employees Assets&& analysis
Regulatory
Regulatory Liabilities Budgeting
Budgeting
Liabilities
agencies
agencies (Financial Capital
Capital
(Financial
-SEC
-SEC Position) allocation
allocation
Position) Earnings
-IRS
-IRS Earningsper
per
-EPA
-EPA share
share
Cash
CashFlows
Flows Ratio
Ratioanalysis
analysis
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Basic
Basic Functions
Functions of
of an
an Accounting
Accounting
System
System
Interpret
and record
business
transactions.
Payment
Car
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Basic
Basic Functions
Functions of
of an
an Accounting
Accounting
System
System
Interpret Classify
and record similar
business transactions
transactions. into useful Summarize
reports. and
communicate
information to
decision
makers.
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Types
Types of
of Accounting
Accounting Information
Information
There
There are
are many
many types
types of
of economic
economic decision,
decision, there
there
are
are also
also many
many types
types of
of accounting
accounting information
information
Financial Tax
Managerial
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Accounting
Accounting Information
Information
1. Financial Accounting: refers to an information
describing the financial resources, obligations
and activities of an economic entity
Financial Position: is used to describe an
entity’s financial resources and obligations at
one point in time.
Results of operation: is used to describe its
financial activities during the year.
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Accounting
Accounting Information
Information
User of information: Mostly creditors & Investors
Purpose: Where to place their scarce resources
2.Managerial Accounting: refers to accounting
information intended specifically to assist
management in running the business e.g. setting
company’s overall goals, evaluation of department
or employee performance or a new line of a product
User: Company manager’s and employees
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Accounting
Accounting Information
Information
Purpose: To run & control daily business operations.
3.Tax accounting: Information required to prepare
income tax returns and tax planning
Tax returns are based on financial accounting
information, which is adjusted according to tax
reporting requirements
Tax planning: anticipating the tax effects of business
transactions
The focus of this course will be mainly on financial
accounting developed for profit oriented business
organization
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External
External Users
Users of
of Financial
Financial Reporting
Reporting
External user: Individuals and other enterprises
that have a current or potential financial interest in
a reporting enterprise
They are not involved in day to day operations of
a business
Owners Creditors
Labor unions Government agencies
Suppliers Customers
Trade associations General Public
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Objectives
Objectives of
of External
External Financial
Financial
Reporting
Reporting
The
Theprimary
primaryexternal
external users
usersof
offinancial
financial information
informationare
are
investors
investorsand
and creditors.
creditors.
Investors:
Investors:Individuals
Individualsand
andother
otherenterprises
enterprisesthat
thatown
ownthe
thereporting
reporting
enterprise
enterprise
Creditors:
Creditors:Individuals
Individualsand
andother
otherenterprises
enterprisesto
towhom
whomthe
thereporting
reporting
entity
entityowes
owesmoney,
money,goods,
goods,or
orservices
services
Cash Flow Prospects
Investors Creditors
Return on Periodic Periodic
Investment dividends interest
Sale of Repayment of
Return of ownership at a loan at a
Investment future date future date
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(Specific)
Information about economic
Objectives
resources, claims to resources, and
changes in resources and claims. of
Financial
Reporting
Provide information useful in
assessing amount, timing and
uncertainty of future cash flows.
Provide general information useful in
making investment and credit
decisions.
(General)
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Objectives
Objectives of
of External
External Financial
Financial
Reporting
Reporting
Balance Sheet
One of the primary ways
Income Statement investors and creditors
assess whether an
Statement of Cash Flows
enterprise will be able
to make future cash
payments is to examine
and analyze the
enterprise’s financial
statements.
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Financial
Financial Reporting
Reporting vs
vs Financial
Financial
Statements
Statements
Financial Reporting: A broad term that describes all
information provided to external users, including but
not limited to financial statements.
Financial statements are the subset of financial
reporting.
Investors, creditors, and other external users of
financial information learn about an enterprise in a
variety of ways in addition to financial statements.
For example: press release, business articles, annual
reports, company’s websites etc.
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Financial
Financial Statements:
Statements:
AALens
Lensto
toView
View Business
Business i ng
o rt
ep
al R
nci
a
Fin
Financial
Statements
Fin
anc
ial R
epo
rt i ng
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Characteristics
Characteristics of
of Externally
Externally
Reported
Reported Information
Information
AAMeans
Meanstoto
an
anEnd
End
Usefulness
Usefulness Broader
Broaderthan
than
Enhanced
Enhancedviavia Financial
Financial
Explanation
Explanation Statements
Statements
Based
Basedonon Historical
Historical in
in
General
General Purpose
Purpose Nature
Nature
Assumption
Assumption
Results
Resultsfrom
fromInexact
Inexactand
and
Approximate
ApproximateMeasures
Measures
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Internal
Internal Users
Users of
of Accounting
Accounting
Information
Information
Board of Directors
Chief Executive Officer
Chief Financial Officer
Vice Presidents
Business Unit Managers
Plant Managers
Store Managers
Line Supervisors
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T yp ical S im p le O rg an izatio n C h art
Board of
Directors
(Owners)
Chief Executive
Officer
(CEO)
Business Unit V.P. Human V.P. Information Chief Financial
Manager Resources Services Officer (CFO)
Plant Plant
Manager Manager
Plant Plant
Accountant Accountant
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Information about decision-making
authority, for decision-making support, and Objectives
for evaluating and rewarding decision-making of
performance.
Managerial
Reporting
Information useful in assessing
both the past performance and future
directions of the enterprise and information
from external and internal sources.
Information useful to help the enterprise
achieve its goal, objectives and mission.
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Characteristics
Characteristics of
of Management
Management
Accounting
Accounting Information
Information
Timeliness
Timeliness
Identify
Identify
AAMeans
Meanstoto Decision-
Decision-
an
anEnd
End Making
Making
Authority
Authority
Measures
Measuresof of Oriented
Oriented
Efficiency
Efficiencyand
and Toward
Toward
Effectiveness
Effectiveness Future
Future
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Integrity
Integrity of
of Accounting
Accounting Information
Information
Integrity: refers to the qualities of complete, unbroken, unimpaired,
sound, honest and sincere
How Individuals can rely on accounting information in making important
financial decisions?
The integrity of A.I. is enhanced through three primary ways
Institutional Features
Professional Organizations
Competence, Judgment and ethical behavior of professional
accountants
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Institutional
Institutional Features
Features
1. Standards for preparing accounting standards: Generally
Accepted Accounting Principles (GAAP): Standards principles &
rules for preparing accounting information, used in USA
In USA, three organizations are responsible for establishing
accounting standards
a. Securities and Exchange Commission: a governmental agency
with the legal power to establish accounting principles and financial
reporting requirements for publicly owned corporations.
b. Financial Accounting Standards Board: A private-sector
organization that is responsible for determining generally accepted
accounting principles in the United States.
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Institutional
Institutional Features
Features
c. International Accounting Standard Board: The group
responsible for creating and promoting International Financial Reporting
Standards (IFRSs). In 2002, FASB & IASB both started closely working
together to create a common set of accounting rules & to harmonize
accounting standards around the world.
2. Internal Control Structure: It is a process designed to provide
reasonable assurance that the organization produces reliable financial
reports, complies with applicable laws and regulations, and conducts its
operations in an efficient and effective manner
3. Audits of financial Statements: An audit is an investigation of a
company’s financial statements, designed to determine the fairness of
these statements
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Integrity
Integrity of
of Accounting
Accounting Information
Information
Professional Organizations
Several professional accounting organizations that play an
active role in improving the quality of accounting
information
American Institute of Certified Public Accountants
Institute of Management Accountants
Institute of Internal Auditors
American Accounting Association
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Integrity
Integrity of
of Accounting
Accounting Information
Information
Professional Accounting Organizations in
Pakistan
Under the Companies Act of 2017, accounting standards are
approved for use as adopted by the Securities and Exchange
Commission of Pakistan (SECP).
The SECP, however, has delegated the responsibility of
developing and adopting both accounting and auditing standards to
the Institute of Chartered Accountants of Pakistan (ICAP).
ICAP has adopted the International Financial Reporting Standards
(IFRS)
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Professional
Professional Accounting
Accounting
Organizations
Organizations in
in Pakistan
Pakistan
In Pakistan, professional accountants are self-regulated by the
three professional accountancy organizations (PAOs):
(i)the Institute of Chartered Accountants of Pakistan (ICAP);
(ii)the Institute of Cost and Management Accountants of Pakistan
(ICMAP); and
(iii) the Pakistan Institute of Public Finance Accountants (PIPFA).
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Integrity
Integrity of
of Accounting
Accounting Information
Information
Competence, Judgment and Ethical Behavior
Certified Public Accountants (CPAs)
Certificate in Management Accounting (CMA)
Certificate in Internal Auditing (CIA)
Code of Professional Conduct
CP
A
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End
End of
of Chapter
Chapter 11
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