Chapter 1: financial and accounting

1 Chapter 1 Accounting Information: Users and Uses Albrecht, Stice, Stice, Swain... • Who uses accounting information?. • What information do you need to make the good decisions?. Inter

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Chapter 1

Accounting Information:

Users and Uses

Albrecht, Stice, Stice, Swain

LEARNING OBJECTIVES

• What’s the purpose of accounting?

• Who uses accounting information?

• What kind of environment does accounting

operate in?

• Why should I study accounting?

2

Food for thought

• You are running a grocery store List 5 daily

important decisions you need to make?

• What information do you need to make the good decisions? Where do you get it from?

3

How do you get the information?

4

• Accounting is a system that provides

“quantitative information primarily financial in

nature, about economic entities that is intended

to be useful in making economic decisions.”

5

The Purpose of Accounting

• Accumulates financial data

– analyzing, recording, classifying, summarizing the transactions of a business

• Measures financial performance

– Profitability, efficiency, risks

• Communicates financial information

– Financial statements

 Informed decisions can be made

Who Uses Accounting

Information?

Internal users (Management Accounting):

Management

– information needed for planning, implementing plans, and controlling costs

Examples of reports:

– Budgets

– Cost analyses

– Performance reports

• No standard reports

Who Uses Accounting

Information?

External users (Financial Accounting):

Investors Competitors

Lenders Government

Employees Press

Customers Suppliers

Examples of reports:

– Balance sheet

– Income statement

– Statement of cash flows

– Other regulatory reports

• The outputs of MA help managers make informed decisions How about the outputs of FA?

• Full and fair information for external users vs Protection of sensitive information

• Standard reports to meet standard accounting rules

Rules of the Game

External Reporting:

• General accepted accounting principles (GAAP)

– Comparability

– Reliability

Internal Reporting:

• No rules

Who Makes All the Rules?

Generally accepted accounting principles (GAAP) made by Financial Accounting Standards Board (FASB)

– U.S companies

• International Financial Reporting Standards

(IFRS) made by International Accounting

Standards Board (IASB)

– Most international companies

The Accounting Environment

Accounting Regulators

International

Accounting

Standards Board

(IASB)

Security

and Exchange

Commission

(SEC)

American Institute of Certified Public Accountants

(AICPA)

Internal Revenue Service

(IRS)

Public Company Accounting Oversight Board (PCAOB)

Financial Accounting Standards Board (FASB)

Accounting World

How much is 2 + 2 ?

• The engineer pulled out his slide rule and shuffled it back and forth, and finally announced, "It lies between 3.98

and 4.02"

• The mathematician said, "In two hours I can demonstrate

it equals 4 with the following short proof.“

• The logician paused for a long while and then said, "This problem is solvable.“

• The politician said, "I don't know the answer, but I ‘m

glad that we discussed this important question.”

• The trader asked, "Are you buying or selling?“

• The creative accountant , "What would you like it to be?“

Other Environmental Factors

• Ethics

– Professional judgment

– Enron: misrepresent the company’s performance by keeping reported income and reported cash flow up, asset values inflated, and liabilities off the books

• Technology

– Vast amounts of information about transactions can

be stored

– Data can be compiled quickly and accurately

Will computers replace the accountant?

Why Should I Study Accounting?

Everyone makes financial decisions

To make good financial decisions!

Buy ing

vs leas

ing

Fin an

cin g