Chapter 1: financial and accounting

Chapter Accounting Information: Users and Uses Albrecht, Stice, Stice, Swain COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation Thomson, the Star logo, and South-Western are trademarks used herein under license 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? Food for thought • You are running a grocery store List daily important decisions you need to make? • What information you need to make the good decisions? Where you get it from? How you get the information? Accounting • 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.” 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 Lenders Employees Customers Competitors Government Press 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 10 The Accounting Environment Accounting Regulators Financial Accounting Standards Board (FASB) Public Company Accounting Oversight Board (PCAOB) International Accounting Standards Board (IASB) Accounting World Security and Exchange Commission (SEC) Internal Revenue Service (IRS) American Institute of Certified Public Accountants (AICPA) 11 How much is + ? • 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 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?“ 12 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? 13 Why Should I Study Accounting? Everyone makes financial decisions Budgeting y u B v g in Investing g n i s a e s l F n a in g n ci To make good financial decisions! 14 ... (SEC) Internal Revenue Service (IRS) American Institute of Certified Public Accountants (AICPA) 11 How much is + ? • The engineer pulled out his slide rule and shuffled it back and forth, and... accountant? 13 Why Should I Study Accounting? Everyone makes financial decisions Budgeting y u B v g in Investing g n i s a e s l F n a in g n ci To make good financial decisions! 14 ... trader asked, "Are you buying or selling?“ • The creative accountant , "What would you like it to be?“ 12 Other Environmental Factors • Ethics – Professional judgment – Enron: misrepresent the company’s