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NATURE OF ACCOUNTING • Relevant analysis

 Identify • Capital budgeting


 Collect • Quantitative techniques (Least
 Measure squares,regression, ROI, Cash flow
 Process projections,etc.)
 Communicate
Economic data to interested parties to assist decision- 5. ACHIEVEMENT OF BROAD SOCIAL
making. OBJECTIVES
“Accounting is the language of business” Social legislation
 New Deal, Civil Rights, Great
ACCOUNTING ENVIRONMENT Society, Welfare, etc.)
Accounting information helps decision makers evaluate  Government involvement
economic opportunities for gain and the related inherent  Not-for-Profit organizations
– Computer technology
risks of providing capital to a particular venture.
– Space age
– Demands for corporate social responsibility
KAM’S HISTORY  Environmental
 Ancient civilizations  Employee rights
 Accounting in Antiquity
 Health concerns
– Egypt
– Increasing regard for business ethics
– Babylonia
– New regulations on business and financial
– Greece
markets (SOX)
– Rome
 Middle ages (Feudal System)
“Accounting of itself cannot be the vehicle
 Double-entry bookkeeping
– Luca Pacioli of social and political change although
 Accounting & Capitalism knowledge and understanding of the
 Managerial Cost Accounting financial data which accounting can
 Professional Accounting Societies produce may well be vitally important both
to those who wish a change and those who
FUNCTIONS OF ACCOUNTING
wish to resist it; but accounting as a
1 .RECORDING & WEALTH MEASUREMENT discipline cannot take sides although those
 Writing and numerical systems who use it may well do so.”
 “Capturing” the information
 Feudal system “The interdependency of accounting and its
 “Traveling merchants” environment results in change being
 Relatively simple business structures brought
 Single entry accounting = “lists of things” about by a process of mutual adaption.
2. MANAGERIAL CONTROL & INCOME MEASUREMENT Environmental demands lead to changes in
 Crusades open new commerce accounting practice and changes in
 Greater complexity and continuity of business accounting
 Information is necessary to operate the business practice lead to changes in environmental
 Early cost accounting demands and expectations.”
 Town economies
 Magna Carta/Renaissance/Age of exploration Evolution of the Knowledge Professional
 Evolution of double-entry accounting Elliott & Jacobson
 Pacioli’s “Summa”  Economic paradigms
 Periodic income determination – Hunting and gathering
3. PROTECTION OF EQUITIES (STAKEHOLDERS) – Agriculture
– Industry revolution/Factory system – Industry
– National economies – The Information economy
– Need for significant capital  Information professional
– Rise of the corporation – Shaman
• Separation of owners and managers – Scribe
• Stock exchanges – Accountant
• Taxing authorities – Information professional
 Larger scale (often based on income) Power of Information
• Anti-trust regulators “In this society, knowledge is the primary
• Need for audited financial statement resource for individuals and for the
4. MODERN ANALYSIS & INTERPRETATION economy overall. Land, labor, and capital –
– World Wars I & II the economist’s traditional factors of
– International economies production – do not disappear, but they
– Demand for greater economic analysis and improved become secondary.”
resource allocation
“Scientific management”
Sophisticated management accounting
• Standard costing & variance analysis
THE ACCOUNTANT’S ROLE IN The Value Chain and Supply Chain Analysis
ORGANIZATION This theme has two related aspects:
 Management Accounting 1. Treat each of the business functions in the
It measures and reports financial and nonfinancial value chain as an essential and valued
information that helps managers make decisions to fulfill
contributor.
the goals of an organization. 2. Integrate and coordinate the efforts of all
 Financial Accounting business functions in addition to developing
Its focus is on reporting to external parties.It measures and the capabilities of each individual business
records business transactions It provides financial function.
statements based on generally accepted accounting Supply chain – describes the flow of goods,
principles. services, and information from cradle to
 Cost Accounting grave, regardless of whether those activities
It provides information for both management accounting occur in the same organization or other
and financial accounting. It measures and reports financial organizations.
and nonfinancial data. KEY SUCCESS FACTORS
 Cost Management These are operational factors that directly
It describes the activities of managers in planning and affect the economic viability of the
control of costs. It includes the continuous reduction of organization
costs. It is a key part of general management strategies and COST – organizations are under continuous
their implementation. pressure to reduce costs
STRATEGIC COST MANAGEMENT QUALITY – customers are expecting higher
Building resources and capabilities levels of quality.
-Current Assets TIME – organizations are under pressure to
-Long-Term Productive Assets
complete activities faster and to meet
-Intangible Assets
promised delivery dates more reliably.
WHAT IS PLANNING? INNOVATION – there is now heightened
 Setting goals recognition that a continuing flow of
 Predicting results innovative products or services is a
 Deciding how to attain goals prerequisite to the ongoing success of most
WHAT IS CONTROL? organizations.
 Deciding and taking actions CONTINUOUS IMPROVEMENT AND
 Deciding on performance evaluation and feedback BENCHMARKING
WHAT ARE BUDGETS? Continuous improvement by competitors
 They are quantitative expressions of a proposed plan of
creates a never-ending search for higher
action.
 They aid in the coordination and implementation of the levels of performance within many
plan. organizations.
WHAT ARE PERFORMANCE REPORTS? VALUE CHAIN
 These are reports that compare actual results with The term “value chain” refers to the sequence
budgeted amounts. of business functions in which usefulness is
FEEDBACK added to the products or services of an
This involves managers examining past performance and organization. The term “value” is used because
systematically exploring alternative ways to make better as the usefulness of the product or service is
informed decisions in the future. increased, so is its value to the customer.
PROBLEM SOLVING
This involves comparative analysis for decision making.
This role asks: Of the several alternatives available, which is
the best? User Applications
SCOREKEEPING Owner’s , Stockholders, -To evaluate operations of the
This involves accumulating data and reporting reliable Potential Investor’s, firm. To make investment
results to all levels of management. This role asks: How Creditor decision
is the business doing? Management To plan and control
Employees, Union To use in Contract Negotiation
ATTENTION DIRECTING officials
This involves helping managers properly focus their Lender’s Suppliers To evaluate Credit Ratings
attention. This role asks: Which opportunities and Government Agencies , To evaluate Tax Liabilities. To
problems should be emphasized first.Attention Economic Planner, approve New Issues of Stock
directing should focus on all opportunities to add value Consumer Groups Bonds
to an organization, not just cost-reduction opportunities.
VALUE CHAIN FUNCTIONS Open book management Sharing sensitive financial
1. Research and Development- It is the process that is information with employees and teaching them how
conducted to generate and experiment with ideas related to understand and use financial statements.
to new products, services, or processes. • Viewing financial information may help them
2. Design- It is the detailed planning and engineering of
better understand how their work contributes to the
products, services, or processes.
company’s success.
3. Production- It is the acquisition, coordination, and
• Outsiders use financial data to evaluate investment
assembly of resources to produce a product or deliver a
service. opportunities
4. Marketing- It is the manner by which companies promote • Accountants serve public good.
and sell their products or services to customers or BUSINESS ACTIVITIES INVOLVING ACCOUNTING
prospective customers. Accounting plays a key role in each of a business’s
5. Distribution- It is the delivery of products or services to three key areas:
the customer • Financing activities -Provide necessary funds to
6. Service- It is the after-sale support activities provided to start and expand a business.
customers • Investing activities -Provide valuable assets
required to run a business.
Key Guidelines
• Operating activities -Focus on selling goods and
1. Cost-benefit approach services, but they also consider expenses as
A cost-benefit approach should be used in order to spend important elements of sound financial
resources if they promote decision making that better attains management
organization goals in relation to the costs of those resources. ACCOUNTING PROFESSIONALS
Public accountant- Accountant who works for an
2. Behavioural and Technical Considerations independent accounting firm.
A management accounting system should have two
• Provide three basic services to clients:
simultaneous missions for providing information:
• Auditing, or examining, financial records.
1. To help managers make wise economic decisions
2. To help managers and other employees to aim and
• Tax preparation, planning, and related services.
strive for goals of the organization • Management consulting for an independent
3. Different Costs for Different Purposes accounting firm.
A cost concept used for the external reporting purpose need • Four largest firms dominate the industry:
not be the appropriate concept for the purpose of internal Deloitte & Touche, Ernst & Young, KPMG, and
routine reporting to managers. PricewaterhouseCoopers.
• Legislation limits the types of consulting services
LINE AND STAFF RELATIONSHIPS auditors can provide.
Line management is directly responsible for attaining the Certified public accountant (CPA) Accountant
objectives of the organization.
who meets specified educational and experiential
Staff management exists to provide advice and assistance to
requirements and has passed a comprehensive
line management
examination on accounting theory and practice.
PROFESSIONAL ETHICS
Management accountant- Accountant employed by a
Competence
business other than a public accounting firm.
Integrity
• Collects and records financial transactions and
Confidentiality
prepares financial statements used by the firm’s
Objectivity
managers in decision making.
Ethical Guidelines
Answers questions such as:
 The Institute of Management Accountants (IMA) is the
largest association of management accountants in the • Where is the company going?
United States. • What opportunities await it?
 The IMA has issued a Standards of Ethical Conduct for • Do certain situations expose the company to
Management Accountant. excessive risk?
• Does the firm’s information system provide
Understanding Accounting and Financial Statements detailed and timely information to all levels of
Accounting Process of measuring, interpreting, and management?
communicating financial information to support • Often specialize (e.g., internal auditor, tax
internal and external business decision making accountant).
Government and Not-for-Profit Accountants Basic accounting equation- Relationship that
• Perform professional services similar to those of states that assets equal liabilities plus owners’
management accountants equity.
Accounting process- Set of activities involved in
converting
Double-entry bookkeeping- Process by which
information about transactions into financial
accounting transactions are entered; each
statements.
individual transaction always has an offsetting
transaction.
The Impact of Computers and the Internet on the
FINANCIAL STATEMENTS
Accounting Process
• Provide managers with information for
Simplifies the accounting process by automating data
evaluating organization’s ability to meet
entry and calculations.
current obligations and needs, its
• Available products are customized for businesses of
profitability, and its overall financial health.
different sizes.
The Balance Sheet
• Entrepreneurs and small businesses: QuickBooks,
Balance sheet Statement of a firm’s financial
Peachtree, and BusinessWorks.
position—what it owns and the claims against
• Larger firms: Computer Associates, Oracle, and SAP.
its assets—at a particular point in time.
• Software that handles accounting information for
The Income Statement
international businesses is also available.
Income statement-Financial record of a
• Some systems are Web-based.
company’s revenues, expenses, and profits
The Foundation of the Accounting System
over a period of time.
Generally accepted accounting principles (GAAP)-
• Helps decision makers focus on overall
Principles that encompass the conventions, rules, and
revenues and the costs involved in generating
procedures for determining acceptable accounting
these revenues.
practices at a particular time.
• Sometimes called a profit-and-loss, or P&L,
• Financial Accounting Standards Board (FASB)
statement.
Organization primarily responsible for evaluating,
The Statement of Cash Flows
setting, or modifying GAAP in the U.S.
Statement of cash flows-Statement of a
• Monitors changing business conditions.
firm’s cash receipts and cash payments that
• Enacts new rules.
presents information on its sources and uses
• Modifies existing rules when necessary.
of cash.
Sarbanes-Oxley Act A response to cases of accounting
Accrual accounting - Accounting method that
fraud.
records revenue and expenses when they
• Created the Public Accounting Oversight Board,
occur, not necessarily when cash actually
which sets audit standards and investigates and
changes hands.
sanctions accounting firms that certify the books of
• Inadequate cash flow is a reason for many
publicly traded firms.
business failures.
• Added to the reporting requirements for publicly
FINANCIAL RATIO ANALYSIS
traded companies.
• Ratio analysis Tool for measuring a firm’s
• Senior executives must personally certify that the
liquidity, profitability, and reliance on debt
financial information reported by the company is
financing, as well as the effectiveness of
correct.
management’s resource utilization.
• Resulted in increase in demand for accountants.
Liquidity Ratios
The Accounting Equation
• Liquidity ratios Firm’s ability to meet short-term
Assets- Anything of value owned or leased by a
obligations when they must be paid.
business.
• Current ratio compares current assets to current
• Tangible: Equipment, buildings, inventory.
liabilities.
• Intangible: Patents, trademarks
• Acid-test (or quick) ratio measures the ability of a
Liability -Claim against a firm’s assets by a creditor.
firm to meet its debt payments on short notice.
Owner’s equity -All claims of the proprietor, partners,
Activity ratios -Measure the effectiveness of
or stockholders against the assets of a firm, equal to the
management’s use of the firm’s resources.
excess of assets over liabilities.
• Inventory turnover ratio indicates the number of
times merchandise moves through a business.
 Total asset turnover ratio indicates how much in sales
each dollar invested in assets generates.
 Profitability ratios Measure the organization’s overall
financial performance by evaluating its ability to
generate revenues in excess of operating costs and
other expenses.
 Leverage ratios Measure the extent to which a firm
relies on debt financing.
• Total liabilities to total assets ratio > 50 percent
indicates that a firm is relying more on borrowed
money than owners’ equity.

BUDGETS
Budget Planning and control tool that reflects a firm’s
expected sales revenues, operating expenses, and
cash receipts and outlays.
• Preparation is generally time-consuming, involving
people
throughout the organization.
• Cash budget Tracks the firm’s cash inflows and
outflows.
INTERNATIONAL ACCOUNTING
• Global firms must translate financial statements of the
firm’s international affiliates, branches, and
subsidiaries and convert data about foreign currency
transactions to dollars.
Exchange Rates
• Ratio at which a country’s currency can be exchanged
for other currencies.
• Consolidated financial statements must reflect gains
and losses due to changes in exchange rates.
• Can have significant impact on financial statement.
• Over a recent three-year period, foreign currency
adjustments effectively added more than $1.5 billion
to Procter & Gamble’s earnings.
International Accounting Standards
• International Accounting Standards Committee (IASC)
promotes
worldwide consistency in financial reporting practices.
• Working to create one worldwide set of accounting
rules.

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