Principles of Accounting

(Accounting 1 for BBA - Undergraduate) SBS

Victor Yerris, PhD victor.yerris@gmx.ch Tel: 079 434 36 13 OCTOBER 2012

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Week 1
(Accounting: Information for Decision Making)

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Financial & Managerial Accounting

The Basis for Business Decisions
Williams, Haka, Bettner & Carcello FOURTEENTH EDITION

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Chapter

1
Accounting
Information for Decision Making

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Learning Objective
To discuss accounting as the language of business and the role of accounting information in making economic decisions.

LO1
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The accounting process

Economic activities

Accounting links decision makers with economic activities and with the results of their decisions.
Decision makers

Accounting

information

Actions (decisions)
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Types of Accounting Information

Financial

Tax

Managerial

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Learning Objective
To discuss the significance of accounting systems in generating reliable accounting information, and understand the five components of internal control per COSOs Internal Control Integrated Framework.

LO2
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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 System

Information Users Investors Creditors Managers Owners Customers Employees Regulators -SEC -IRS -FTC
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Financial Information Provided Profitability Financial position Cash flows

Decisions Supported Performance evaluations Stock investments Tax strategies Labor relations Resource allocations Lending decisions Borrowing
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Basic Functions of an Accounting System

Interpret and record business transactions. Classify similar transactions into useful reports.

Summarize and communicate information to decision makers.

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Components of Internal Control

Control Environment
Risk Assessment Control Activities Information and Communication Monitoring
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Learning Objective
To explain the importance of financial accounting information for external partiesprimarily investors and creditors in terms of the objectives and the characteristics of that information.

LO3
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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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(Specific)

Provide 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.

Objectives of External Financial Reporting

Provide information useful in making investment and credit decisions.

(General)
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Objectives of External Financial Reporting

Balance Sheet
Income Statement
Statement of Cash Flows

The primary financial statements.

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Characteristics of Externally Reported Information

A Means to an End
Usefulness Enhanced via Explanation Broader than Financial Statements

Based on General-Purpose Assumption Results from Inexact and Approximate Measures

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Historical in Nature

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Learning Objective
To explain the importance of financial accounting information for internal partiesprimarily managementin terms of the objectives and the characteristics of that information.

LO4
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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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Owners

Board of Directors

Chief Executive Officer (CEO)

Typical Simple Organization Chart

V.P. Information Services Chief Financial Officer (CFO)

V.P Ethics

Business Unit Managers

V.P. Human Resources

Plant Managers

Plant Managers

Controller

Treasurer

Plant Accountants
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Plant Accountants
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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 A Means to an End Identify Decision Maker

Measures of Efficiency and Effectiveness

Oriented Toward Future

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Learning Objective
To discuss elements of the system of external and internal financial reporting that create integrity in the reported information.

LO5
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Integrity of Accounting Information

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

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Sarbanes-Oxley Act of 2002

The US Senate passed and implemented SOX following a public outcry over corporate scandals of the early 2000s (Enron &WorldCom) Establishes the PCAOB (Public Company Accounting Oversight Board) to supervise accounting firms. Requires
Greater independence of auditors and clients (Prohibited public accounting firms from engaging in non-audit services to a client it is also auditing. Greater independence of corporate boards (Members of the boards audit committee must be independent). Independent audits of internal controls Increased disclosures of off-balance sheet arrangements and obligations (Required the reporting of off-balance sheet activities). More types of disclosures

SEC enforces SOX and rules of the PCAOB

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Learning Objective
To identify and discuss several professional organizations that play important roles in preparing and communicating accounting information.

LO6
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Integrity of Accounting Information

Professional Organizations American Institute of Certified Public Accountants (CPA) Swiss Institute of Certified Accountants and Tax Consultants (CPA) Institute of Management Accountants (IMA) Institute of Internal Auditors (IIA) American Accounting Association Committee of Sponsoring Organizations of the Treadway Commission (COSO)
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Learning Objective
To discuss the importance of personal competence, professional judgment, and ethical behavior on the part of accounting professionals.

LO7
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Integrity of Accounting Information

Competence, Judgment and Ethical Behavior Certified Public Accountants (CPAs) Certificate in Management Accounting (CMA) Certificate in Internal Auditing (CIA)

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Learning Objective

To discuss various career opportunities in accounting.

LO8
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Careers in Accounting

Public Accounting Management Accounting Governmental Accounting Accounting Education

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End of Chapter 1

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