Transcript Slide 1
ACCOUNTING FOR MANAGEMENT DECISIONS WEEK 1 INTRODUCTION TO ACCOUNTING READING: TEXT CHAPTER 1
Atrill, McLaney, Harvey, Jenner:
Accounting 4e
© 2008 Pearson Education Australia
Learning Objectives
• • • • • • Define accounting Discuss the role of accounting information List the main accounting information user groups for a business entity Summarise the uses of accounting information Explain the procedures within the accounting information system State the key characteristics of accounting information Atrill, McLaney, Harvey, Jenner:
Accounting 4e
© 2008 Pearson Education Australia
Learning Objectives cont’d
• • • • • • Discuss the recent crisis in accounting Relate the steps in the planning process Discuss the nature of control in the decision-making process List some alternative business objectives Compare and contrast financial and management accounting Provide an overview of the main financial reports Atrill, McLaney, Harvey, Jenner:
Accounting 4e
© 2008 Pearson Education Australia
Nature and Role of Accounting
Learning Objective: Define accounting
• Accounting is concerned with the collection, analysis and communication of economic information.
• Accounting information is useful to those who need to make decisions and plans about businesses, and for those who control those businesses.
Atrill, McLaney, Harvey, Jenner:
Accounting 4e
© 2008 Pearson Education Australia
Nature and Role of Accounting
Learning Objective: Discuss the role of accounting information
•
Stewardship
The more traditional role of providing accountability reports of transactions for a given period •
Decision usefulness
Is about assisting users with making informed choices about issues e.g. resource allocation Atrill, McLaney, Harvey, Jenner:
Accounting 4e
© 2008 Pearson Education Australia
Accounting information user groups
Figure 1.1
Atrill, McLaney, Harvey, Jenner:
Accounting 4e
© 2008 Pearson Education Australia
Accounting as an information system
Learning Objective: Explain the different procedures involved in the accounting information system
• • • • Identify and capture relevant economic information Record the information collected in a systematic manner Analyse and interpret the information collected Report the information in a manner suitable to the needs of users Atrill, McLaney, Harvey, Jenner:
Accounting 4e
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Accounting as an information system cont’d
Figure 1.2
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Accounting 4e
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Accounting as a service function
Learning Objective: State the key characteristics of accounting information
• • • Relevance (ability to be used to influence decisions) Reliability (free from material error or bias) Comparability (consistency of measurement and presentation of items) • Understandability (clarity and readability of presentation) • Cost of information (is the benefit worth the cost) Atrill, McLaney, Harvey, Jenner:
Accounting 4e
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Characteristics of accounting information
Figure 1.3
Atrill, McLaney, Harvey, Jenner:
Accounting 4e
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Accounting in crisis
Learning Objective: Discuss the recent crisis in accounting
• Enron and HIH are cases of recent notoriety • HIH collapse caused losses of up to $5.3 billion • Resultant scrutiny led to accusations of dubious accounting practices • Credibility of financial reports has been undermined • Tighter controls on quality of financial information have been introduced Atrill, McLaney, Harvey, Jenner:
Accounting 4e
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Decision-making, planning and control
• Planning is essential for business success • Prudent decision-making is closely linked to effective planning • Planning covers both long-term and short-term scenarios • Over time, plans are normally adapted to changing circumstances Atrill, McLaney, Harvey, Jenner:
Accounting 4e
© 2008 Pearson Education Australia
Decision-making, planning and control cont’d
Learning Objective: Relate the steps in the planning process Planning is usually broken down into three stages: 1.
Setting the objectives or mission of the business
(Detailing what the business is basically trying to achieve)
2.
Setting long-term plans
(Describing how the business will set out to achieve its long term objectives)
3.
Setting detailed short-term plans or budgets
(Typically financial plans for one year ahead) Atrill, McLaney, Harvey, Jenner:
Accounting 4e
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Decision-making, planning and control cont’d
Learning Objective: Discuss the nature of control in the decision-making process
• Control is the process of making planned events actually occur • Accounting is useful in control to compare planned outcomes with actual outcomes in commonly specified terms • Managers can take steps to get the business back on track if variances are highlighted between planned and actual outcomes Atrill, McLaney, Harvey, Jenner:
Accounting 4e
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Overview of the planning and control process
Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Identify business objectives Consider options Prepare a long-term plan based on the most appropriate option(s) Prepare short-term plans (budgets) Perform and collect information on actual performance Respond to divergences between plans and actuals, and exercise control Revise plans and budgets if necessary Figure 1.4
Atrill, McLaney, Harvey, Jenner:
Accounting 4e
© 2008 Pearson Education Australia
Business Objectives
Learning Objective: Explain the different procedures involved in the accounting information system.
The popular suggested business objectives include: • •
Maximisation of sales revenue
(this does not consider the need to cover business costs)
Maximisation of profit
(this takes in to account sales revenues as well as expenses, but is limited as it does not include other factors such as risk.
Atrill, McLaney, Harvey, Jenner:
Accounting 4e
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Business Objectives cont’d
• • • •
Maximisation of return on capital employed
(accounts for level of profit as well as the level of investment)
Survival
(This is the aim of most businesses, however it is rarely a primary objective)
Long-term stability
(Like survival, most businesses aim for it, but it is rarely a primary objective)
Growth
(Encompasses survival and long-term stability and aims to strike a balance between short and long-term benefits, however it is probably not a specific enough target) Atrill, McLaney, Harvey, Jenner:
Accounting 4e
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Business Objectives cont’d
• •
Satisficing
(Attempting to grant a satisfactory return to all stakeholders - not just the owners. Difficult to define as a practical benchmark for business decisions.)
Achieving sustainable development
(Achieving economic growth while minimising or eliminating environmental impact and meeting society’s expectations of good corporate citizenship.) Atrill, McLaney, Harvey, Jenner:
Accounting 4e
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Business Objectives cont’d
•
Enhancement / maximisation of business wealth
• Means the business takes decisions intended to make it worth more. • Encompasses all the valuable features of the previous suggested objectives. • Likely to be the main financial objective for many businesses ) Atrill, McLaney, Harvey, Jenner:
Accounting 4e
© 2008 Pearson Education Australia
Financial and Management Accounting
Learning Objective: Compare and contrast financial and management accounting
•
Management accounting
is concerned with providing managers with information required for day-to-day running of the business •
Financial accounting
is concerned with providing the other users with useful information Atrill, McLaney, Harvey, Jenner:
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Financial and Management Accounting cont’d
Focus Nature of reports Level of detail Restrictions Reporting interval Time horizon Range of information
Financial Accounting
Mainly external General purpose Broad overview
Management Accounting
Internal only Specific purpose Quite detailed Accounting standards and other regulations Mainly semi-annual or annual Mainly historical No restrictions Whenever required Both past and future Quantifiable in money terms; focus on objective and verifiable data Can contain non-financial information; less focus on objectivity and verifiability Atrill, McLaney, Harvey, Jenner:
Accounting 4e
© 2008 Pearson Education Australia
The Main Financial Reports - an overview
Learning Objective: Provide an overview of the main financial reports
• • • •
There are four main financial reports:
The Statement of Cashflows
(shows the sources and uses of cash for a period)
The Income Statement
(traditionally known as Profit and Loss; measures and reports how much profit has been generated in a period)
The Statement of Changes in Owner’s Equity
(shows all changes in owner’s interest in net assets from transactions during the period)
The Statement of Financial Position
(otherwise known as the Balance Sheet; shows overall net financial position) Atrill, McLaney, Harvey, Jenner:
Accounting 4e
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A Simple Example
• • Paul starts a wrapping paper sales business with $100 On the first day, he uses the $100 to purchase wrapping paper (“inventory”) • On the same day he sells 75% of that inventory for $110 in total What cash movements took place in the first day of trading?
• CASH FLOW STATEMENT Closing cash balance for the day is $110 (opening balance $100 - $100 stock purchase + $110 sales = $110) Atrill, McLaney, Harvey, Jenner:
Accounting 4e
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A Simple Example cont’d
How much did wealth increase as a result of the first day’s trading?
INCOME STATEMENT • The increase or decrease in wealth is measured as the difference between sales made and the cost of goods sold • sales were $110 less cost of goods sold $75 = profit of $35 Note that only the cost of the paper sold is measured against the sales to find profit, not the total cost of the wrapping paper purchased.
Atrill, McLaney, Harvey, Jenner:
Accounting 4e
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A Simple example (cont)
–
What has happened to Owners’ Equity during this period?
STATEMENT OF CHANGES IN OWNERS EQUITY Beginning Owners equity $100 Plus Profit $ 35 = Ending owners Equity $135
Atrill, McLaney, Harvey, Jenner:
Accounting 4e
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A Simple Example cont’d
What is the financial position at the end of the first day?
BALANCE SHEET At the end of the first day, a balance sheet is drawn up, showing the resources held by the business: • • • Cash (closing balance) = $110 Inventory (stock available for resale) = $25 Total business wealth at end of day = $135 Note that the profit of $35 has led to an increase in wealth of $35 Note also that the increase in cash of $10 is not the same as the increase in wealth because wealth does not exist only in the form of cash (see inventory) Atrill, McLaney, Harvey, Jenner:
Accounting 4e
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Financial Report Relationships
Balance sheet at the beginning of Period 1 Income statement Balance sheet at the end of Period 1 Balance sheet at the Income statement end of Period 2 Cash flow statement Statement of changes in owner ’ s equity Cash flow statement Statement of changes in owner ’ s equity Period 1 Period 2 Time Figure 1.6
Atrill, McLaney, Harvey, Jenner:
Accounting 4e
© 2008 Pearson Education Australia