Chapter1_AccountingInformationforDecisionMaking.pdf

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ACCOUNTING
INFORMATION FOR DECISION
MAKING

Chapter 1

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Accounting
Information

The
Accounting

Process

Decision
Makers

Economic
Activities

Actions
(decisions)

Accounting links
decision makers
with economic

activities ¾ and
with the results of

their decisions.
Reported
Results of

Actions
(decisions)

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Types of Accounting Information

Financial

Management

Tax

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Accounting Systems

An accounting system consists of the
personnel, procedures, technology, and

records used by an organization to
develop accounting information and to

communicate this information to
decision makers.

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Information
Users

Ÿ Investors
Ÿ Creditors
Ÿ Managers
Ÿ Owners
Ÿ Customers
Ÿ Employees
Ÿ Regulators

– SEC
– IRS
– FTC

Decisions
Supported

Ÿ Performance
evaluations

Ÿ Stock
investments

Ÿ Tax strategies
Ÿ Labor

relations
Ÿ Resource

allocations
Ÿ Lending

decisions
Ÿ Borrowing

Information System

Financial
Information

Provided
Ÿ Profitability
Ÿ Financial

position
Ÿ Cash flows

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Although much accounting information
clearly is essential to business operations,
management still has many choices as to

the types and amount of accounting
information to be developed.

Determining Information Needs

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Basic Functions of an
Accounting System

Summarize and
communicate
information to

decision
makers.

� Classify
similar

transactions
into useful

reports.

Interpret
and record
business

transactions.

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Components of Internal Control

Control
Environment

Risk
Assessment

Control
Activities

Information and
Communication

Monitoring

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External Users of Accounting
Information

• Owners
• Creditors
• Potential investors
• Labor unions
• Governmental agencies
• Suppliers
• Customers
• Trade associations
• General public

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Provide specific information about
economic resources, claims to resources,

and changes in resources and claims.

Provide information useful in assessing
amount, timing and uncertainty of future

cash flows.

Provide general information useful in
making investment and credit decisions.

Objectives of External Financial
Reporting

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Objectives of External Financial
Reporting

The primary financial
statements.

Balance
Sheet

Statement
of Cash
Flows

Income
Statement

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Characteristics of Externally Reported
Information

A Means to an
End

Broader than
Financial

Statements

Historical in
Nature

Results from Inexact and
Approximate Measures

Based on General-
Purpose

Assumption

Usefulness
Enhanced via
Explanation

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Users of Internal Accounting
Information

� Board of directors
� Chief executive officer (CEO)
� Chief financial officer (CFO)
� Vice presidents
� Business unit managers
� Plant managers
� Store managers
� Line supervisors

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Typical
Simple

Organization
Chart

Plant
Accountants

Plant
Managers

Plant
Accountants

Plant
Managers

Business
Unit

Managers

V.P.
Human

Resources

V.P.
Information

Services

Chief
Financial

Officer (CFO)

Chief Executive
Officer
(CEO)

Board of
Directors

Owners

V.P
Ethics

Controller Treasurer

1-14

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Objectives of Management Accounting
Information

To help achieve
goals and
missions

To help evaluate
and reward

decision makers

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Characteristics of Management
Accounting Information

Timeliness
Identify

Decision Maker

Oriented Toward
Future

Measures of
Efficiency and
Effectiveness

A Means to an
End

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Institutional Features

Ÿ Generally Accepted Accounting Principles (GAAP)
Ÿ Financial Accounting Standards Board
Ÿ International Accounting Standards Board
Ÿ Securities and Exchange Commission
Ÿ Public Company Accounting Oversight Board
Ÿ Audits of Financial Statements
Ÿ Legislation

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Professional Organizations

Ÿ American Institute of Certified Public Accountants
Ÿ Institute of Management Accountants
Ÿ Institute of Internal Auditors
Ÿ American Accounting Association
Ÿ Committee of Sponsoring Organizations of the

Treadway Commission (COSO)

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Competence, Judgment and Ethical
Behavior

Ÿ Certified Public Accountant (CPA)
Ÿ Certified Management Accountant (CMA)
Ÿ Certified Internal Auditor (CIA)

Ethical behavior is the
cornerstone of the

accounting
profession.

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Careers in Accounting

Ÿ Public Accounting
Ÿ Management Accounting
Ÿ Governmental Accounting
Ÿ Accounting Education

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What About Bookkeeping?
Bookkeeping is the clerical side of accounting—
the recording of routine transactions and day-to-

day record keeping.

Professional accountants are involved more with
the interpretation and use of accounting

information than with its actual preparation.

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I’m Not An Accounting Major

Accounting is the language of business,
and trying to run a business without

understanding accounting information is
analogous to trying to play sports without

understanding the rules.

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Accounting as a Stepping-Stone

An accounting background is invaluable for
key positions in management or

administration, as well as helpful in many
aspects of your personal lives, including

personal budgeting, retirement decisions, and
avoiding investment fraud.

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Ethics, Fraud & Corporate Governance

Corporate governance entails corporate
structures and processes for overseeing
the company’s affairs to ensure that the

company is being managed with the best
interests of shareholders in mind.

Dennis Kozlowski, the former CEO
of Tyco, was sentenced to 8 1/3 to
25 years in prison for his
conviction for conspiracy,
securities fraud, and falsifying
records.

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THE END