© the mcgraw-hill companies, inc., 2002 mcgraw-hill/irwin accounting: information for decision...
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© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
ACCOUNTING:Information for Decision Making
Chapter
1
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Primary ObjectivesPrimary ObjectivesTo develop your ability to understand and use
accounting informationTo do this, you need to understand the following• The nature of economic activities that
accounting information describes.• The assumptions & measurement techniques
involved in developing accounting information• The information that is most relevant for
making various types of decision
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Accounting
information
The accounting
process
Decision makers
Economic activities
Actions (decisions)
Accounting “links” decision
makers with economic
activities and with the results of
their decisions.
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Manufacturing BusinessManufacturing BusinessManufacturing BusinessManufacturing Business
ProductProduct ProductProduct
General Motors Cars, trucks, vansIntel Computer chipsBoeing Jet aircraftNike Athletic shoes and apparelCoca-Cola BeveragesSony Stereos and television
General Motors Cars, trucks, vansIntel Computer chipsBoeing Jet aircraftNike Athletic shoes and apparelCoca-Cola BeveragesSony Stereos and television
Types of Businesses
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Merchandising BusinessMerchandising BusinessMerchandising BusinessMerchandising Business
ProductProduct ProductProduct
Wal-Mart General merchandiseToys “R” Us ToysCircuit City Consumer electronicsLands’ End ApparelAmazon.com Internet books, music, video
retailer
Wal-Mart General merchandiseToys “R” Us ToysCircuit City Consumer electronicsLands’ End ApparelAmazon.com Internet books, music, video
retailer
Types of Businesses
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Service BusinessService BusinessService BusinessService Business
ProductProduct ProductProduct
Disney EntertainmentDelta Air Lines TransportationMarriott Hotels Hospitality and lodgingMerrill Lynch Financial adviceSprint Telecommunication
Disney EntertainmentDelta Air Lines TransportationMarriott Hotels Hospitality and lodgingMerrill Lynch Financial adviceSprint Telecommunication
Types of Businesses
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There are three types of business organizations
There are three types of business organizations
Proprietorship Partnership Corporation
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A proprietorship is owned by one
individual.
A proprietorship is owned by one
individual.
Advantages• Ease in organizing• Low cost of
organizing
Disadvantage• Limited source of
financial resources• Unlimited liability
Joe’s
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A partnership is owned by two or more individuals.
A partnership is owned by two or more individuals.
Advantages• More financial
resources than a proprietorship.
• Additional management skills.
Disadvantage
• Unlimited liability.
Joe and Marty’s
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A corporation is organized under state or federal statutes as a separate legal entity.
A corporation is organized under state or federal statutes as a separate legal entity.
Advantage• The ability to obtain
large amounts of resources by issuing stocks.
Disadvantage
• Double taxation.
J & M, Inc.
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Business StrategiesBusiness StrategiesBusiness StrategiesBusiness Strategies
A business strategy is an integrated set of plans and actions designed to
enable the business to gain an advantage over its competitors, and in doing so, to maximize its profits.
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Business StrategiesBusiness StrategiesBusiness StrategiesBusiness Strategies
Under a low-cost strategy, a business designs and produces products or
services of acceptable quality at a cost lower than that of its competitors.
Wal-Mart
Southwest Airlines
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Business StrategiesBusiness StrategiesBusiness StrategiesBusiness Strategies
Under a differential strategy, a business designs and produces products or services
that possess unique attributes or characteristics which customers are willing
to pay a premium price.
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Value Chain of a BusinessValue Chain of a BusinessValue Chain of a BusinessValue Chain of a Business
A value chain is the way a business adds value for its
customers by processing inputs into product or service.
InputsInputsBusiness Business ProcessesProcesses
Products or Products or ServicesServices
Customer Customer ValueValue
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A business stakeholder is a person or entity having an interest in the
economic performance of the business.
Business StakeholdersBusiness StakeholdersBusiness StakeholdersBusiness Stakeholders
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2Assess stakeholders’ informational needs.
The Process of Providing The Process of Providing InformationInformation
The Process of Providing The Process of Providing InformationInformation
STAKEHOLDERSInternal: Owners, managers, employees
External: Customers, creditors, government
1Identify stake-holders.
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Accounting Information
System
Design the accounting information system to meet stakeholders’ needs.
34Record economic data about business activities and events.
The Process of Providing The Process of Providing InformationInformation
The Process of Providing The Process of Providing InformationInformation
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5Prepare accounting reports for stakeholders.
STAKEHOLDERSInternal: Owners, managers, employees
External: Customers, creditors, government
Accounting Information
System
The Process of Providing InformationThe Process of Providing InformationThe Process of Providing InformationThe Process of Providing Information
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Types of Accounting Information
Financial
Managerial
Tax
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Information Users
InvestorsCreditors ManagersOwnersCustomersEmployeesRegulatory agencies -SEC -IRS
Information Users
InvestorsCreditors ManagersOwnersCustomersEmployeesRegulatory agencies -SEC -IRS
Decision SupportCVP analysis Performance evaluationIncremental analysisBudgetingCapital allocationEarnings per shareRatio analysis
Decision SupportCVP analysis Performance evaluationIncremental analysisBudgetingCapital allocationEarnings per shareRatio analysis
Information SystemInformation System
Cost & Revenue Determination
Job costingProcess costingSales
Assets & Liabilities
Plant and equipmentLoans & equityReceivables, payables & cash
Cash FlowsFrom operationsFrom financingFrom investing
Cost & Revenue Determination
Job costingProcess costingSales
Assets & Liabilities
Plant and equipmentLoans & equityReceivables, payables & cash
Cash FlowsFrom operationsFrom financingFrom investing
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Basic Functions of an Accounting System
Interpret and record business
transactions.
Payment
Car
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Basic Functions of an Accounting System
Summarize and
communicate information to
decision makers.
Classify similar
transactions into useful
reports.
Interpret and record business
transactions.
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Objectives of External Financial Reporting
Cash Flow ProspectsInvestors Creditors
Return on Investment
Periodic dividends
Periodic interest
Return of Investment
Sale of ownership at a
future date
Repayment of loan at a
future date
The primary external users of financial information are investors and creditors.
The primary external users of financial information are investors and creditors.
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Information about economic resources, claims to resources, and changes in resources and claims.
Information useful in assessing amount, timing and uncertainty of
future cash flows.
Information useful in making investment and credit decisions.
(Specific)
(General)
Objectives of
Financial Reporting
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Objectives of External Financial Reporting
The primary financial
statements.
Income Statement
Balance Sheet
Statement of Cash Flows
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Financial Reporting
Financial Reporting
Financial Statements
Financial Statements: A Lens to View Business
Financial Statements: A Lens to View Business
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Characteristics of Externally Reported Information
A Means to an End
A Means to an End
Broader than Financial
Statements
Broader than Financial
Statements
Historical in Nature
Historical in Nature
Results from Inexact and Approximate Measures
Results from Inexact and Approximate Measures
Based on General Purpose
Assumption
Based on General Purpose
Assumption
Usefulness Enhanced via Explanation
Usefulness Enhanced via Explanation
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Accounting is Important
• Why does accounting matter?– Accounting is the language of business– Global economic systems depend on reliable and
accurate financial reporting
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Users and Uses of Accounting
• Accounting identifies and records the economic events of an organization and communicates to interested users
• There are two broad categories of users– Internal users– External users
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Users of Financial Information
• Internal users– Managers plan, organize, and run a
business
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Users of Financial Information
• External users – Investors– Creditors– Others• Tax authorities• Regulatory agencies• Customers• Labour unions• Economic planners
Primary usersPrimary users
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Internal Users of Accounting Information
Board of Directors Chief Executive Officer Chief Financial Officer Vice Presidents Business Unit Managers Plant Managers Store Managers Line Supervisors
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Typical S im ple O rganization C hart
PlantAccountant
PlantManager
PlantAccountant
PlantManager
Business UnitManager
V.P. HumanResources
V.P. InformationServices
Chief FinancialOfficer (CFO)
Chief ExecutiveOfficer(CEO)
Board ofDirectors(Owners)
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Information about decision-making authority, for decision-making support, and
for evaluating and rewarding decision-making performance.
Information useful in assessing both the past performance and future
directions of the enterprise and information from external and internal sources.
Information useful to help the enterprise achieve its goal, objectives and mission.
Objectives of
Managerial Reporting
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Characteristics of Management Accounting Information
TimelinessTimeliness
Identify Decision-Making
Authority
Identify Decision-Making
Authority
Oriented Toward Future
Oriented Toward Future
Measures of Efficiency and Effectiveness
Measures of Efficiency and Effectiveness
A Means to an End
A Means to an End
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Integrity of Accounting Information
Institutional FeaturesGenerally Accepted Accounting Principles (GAAP)Financial Accounting Standards BoardSecurities and Exchange CommissionInternal Control StructureAudits
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Integrity of Accounting Information
Professional OrganizationsAmerican Institute of Certified Public Accountants Institute of Management AccountantsInstitute of Internal AuditorsAmerican Accounting Association
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Integrity of Accounting Information
Competence, Judgment and Ethical BehaviorCertified Public Accountants (CPAs)Certificate in Management Accounting (CMA)Certificate in Internal Auditing (CIA)Code of Professional Conduct
CPA
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3 Types of Business Activities
• Financing• Investing• Operating
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Financing Activities• Obtaining (and repaying) funds
to finance the operations of the business
• Examples– Borrowing money or repaying loans (debt)– Selling or repurchasing shares (equity)
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Investing Activities
• Obtaining the resources or assets needed to operate the business for the long term
• Examples– Purchase or sale of investments– Purchase or sale of long-lived assets such as
property, plant and equipment and intangible assets
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Operating Activities
• Operating activities are the main day-to-day activities of the business
• Examples– Revenues– Expenses– Related accounts
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Financial Statements• Statement of earnings (also called
income statement)– Reports the results of operations for
a specific period of time
• Statement of retained earnings– Reports the changes in retained
earnings for a specific period of time
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Financial Statements
• Balance sheet– Reports the assets, liabilities, and shareholders’
equity as at a specific point in time
• Cash flow statement – Reports the cash receipts and payments for a
specific period of time
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Statement of Earnings• Revenues – Arise from the sale of a product or
service– Result in an inflow of assets
• Expenses– Costs of assets consumed or services
used to generate revenues
• Net earnings (loss)– Revenues - expenses
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CSU CORPORATIONStatement of Earnings
Year Ended December 31, 2009
First:Statement of Earnings• Name of company• Name of statement• Period of time covered
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CSU CORPORATIONStatement of Earnings
Year Ended December 31, 2009
[List revenues]
RevenuesService revenue $22,200
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CSU CORPORATIONStatement of Earnings
Year Ended December 31, 2009[List and total the expenses. Note that income tax is shown separately from other expenses.]
Revenues Service revenue $22,200Expenses Rent expense $9,000 Insurance expense 1,000 Supplies expense 200 10,200Earnings before income tax 12,000Income tax expense 5,200
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CSU CORPORATIONStatement of Earnings
Year Ended December 31, 2009[Subtract expenses from revenues to obtain net earnings (loss).]
Revenues Service revenue $22,200
Expenses Rent expense $9,000 Insurance expense 1,000 Supplies expense 200 10,200
Earnings before income tax 12,000Income tax expense 5,200Net earnings $ 6,800
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Statement of Retained Earnings
• Shows the cumulative earnings that have been retained in the corporation less dividends distributed to shareholders
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CSU CORPORATIONStatement of Retained EarningsYear Ended December 31, 2009
Second:Statement of Retained Earnings
- Name of company - Name of statement
- Period of time covered (same period as statement of earnings)
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CSU CORPORATIONStatement of Retained EarningsYear Ended December 31, 2009
[Start with beginning retained earnings (same as ending retained earnings of prior period)]
Retained earnings, January 1 $ 0
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CSU CORPORATIONStatement of Retained EarningsYear Ended December 31, 2009
[Add net earnings (subtract loss) from the current year (see Statement of Earnings) and subtotal]
Retained earnings, January 1 $ 0Add: Net earnings 6,800
6,800
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CSU CORPORATIONStatement of Retained EarningsYear Ended December 31, 2009
Check: Ending retained earnings should agree withamount reported on balance sheet
[Subtract current year’s dividends (if any) and total]
Retained earnings, January 1 $ 0Add: Net earnings 6,800
6,800Less: Dividends 600Retained earnings, December 31 $6,200
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Balance Sheet
• Assets– Resources owned by a business
• Liabilities– Obligations of the business
• Shareholders’ equity– Share capital
• Represents the primary ownership interest in a corporation
– Retained earnings• Accumulated earnings of the corporation that have not
been distributed to shareholders
55
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CSU CORPORATIONBalance Sheet
December 31, 2009
Third:Balance Sheet
- Name of company - Name of statement
- Date (as at a specific point in time)
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CSU CORPORATIONBalance Sheet
December 31, 2009
[List the assets and total]
AssetsCash $ 1,400Accounts receivable 4,000Supplies 1,800Equipment 16,000Total assets $23,200
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CSU CORPORATIONBalance Sheet
December 31, 2009[List the liabilities and subtotal]
AssetsCash $ 1,400Accounts receivable 4,000Supplies 1,800Equipment 16,000Total assets $23,200
Liabilities and Shareholders’ EquityLiabilitiesAccounts payable $ 2,000Notes payable 5,000
Total liabilities 7,000
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CSU CORPORATIONBalance Sheet
December 31, 2009[List shareholders’ equity; subtotal and total]
AssetsCash $ 1,400Accounts receivable 4,000Supplies 1,800Equipment 16,000Total assets $23,200
Liabilities and Shareholders’ EquityLiabilitiesAccounts payable $ 2,000Notes payable 5,000
Total liabilities 7,000Shareholders’ equityCommon shares 10,000Retained earnings 6,200Total shareholders’ equity 16,200Total liabilities and shareholders’ equity $23,200
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END OF CHAPTER 1