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ACCOUNTING:INFORMATION FOR DECISION MAKING

Chapter

1

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Understanding and using accounting information is an important ingredient of any business undertaking.

Information that is provided to external parties who have an interest in a company is sometimes referred to as financial accounting information.

Information used internally by management and others is commonly referred to as managerial accounting information.

Having different purposes and serve different audiences,

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ACCOUNTING INFORMATIONACCOUNTING INFORMATION

The primary objective of accounting is to provide information that is useful for decision making purposes.

it is sometimes referred to as the language of business

Costs, prices, sales volume, profits, and return on investment .

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Accounting

information

The accounting

process

Decision makers

Economic activities

Actions (decisions)

Accounting “links” decision

makers with economic

activities ¾ and with the

results of their decisions.

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The accounting process produces accounting information used by decision makers in making economic decisions and taking specific actions. These decisions and actions result in economic activities that continue the cycle.

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Types of Accounting InformationTypes of Accounting Information

FINANCIAL MANAGERIALTAX

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Information Users

InvestorsCreditors ManagersOwnersCustomersEmployeesRegulators -SEC -IRS -EPA

Information Users

InvestorsCreditors ManagersOwnersCustomersEmployeesRegulators -SEC -IRS -EPA

Decisions Supported

Performance evaluationsStock investmentsTax strategiesLabor relationsResource allocationsLending decisionsBorrowing

Decisions Supported

Performance evaluationsStock investmentsTax strategiesLabor relationsResource allocationsLending decisionsBorrowing

Information SystemInformation System

Financial Information

ProvidedProfitability

Financial position

Cash flows

Financial Information

ProvidedProfitability

Financial position

Cash flows

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Basic Functions of an Accounting System

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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External Users of Accounting Information

External Users of Accounting Information

•Owners

•Creditors

•Labor unions

•Governmental agencies

•Suppliers

•Customers

•Trade associations

•General public

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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.

Provide information useful in making investment and credit decisions.

(Specific)

(General)

Objectives of

Financial Reporting

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Objectives of External Financial Reporting

Objectives of External Financial Reporting

The primary financial

statements.

Income Statement

Balance Sheet

Statement of Cash Flows

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Characteristics of Externally Reported Information

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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Users of Internal Accounting Information

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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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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Objectives of Management Accounting Information

Objectives of Management Accounting Information

To help achieve goals and missions

To help achieve goals and missions

To help evaluate and reward

decision makers

To help evaluate and reward

decision makers

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Characteristics of Management Accounting Information

Characteristics of Management Accounting Information

TimelinessTimeliness

Identify Decision

Maker

Identify Decision

Maker

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