© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-1

Financial AccountingFinancial Accounting

THIRTEENTH EDITION

Williams Haka Bettner Carcello

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-2

AccountingInformation for Decision Making

Chapter

1

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-3

Learning ObjectiveLearning Objective

LO1

To discuss accounting as the language of

business and the role of accounting information

in making economic decisions.

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-4

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.

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-5

Types of Accounting InformationTypes of Accounting Information

Financial

Managerial

Tax

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-6

Learning ObjectiveLearning Objective

LO2

To discuss the significance of accounting systems in generating reliable accounting information,

and understand the five components of internal control per COSO’s Internal Control—

Integrated Framework.

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-7

Accounting SystemsAccounting 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.

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-8

Information Users

InvestorsCreditors ManagersOwnersCustomersEmployeesRegulators -SEC -IRS -FTC

Information Users

InvestorsCreditors ManagersOwnersCustomersEmployeesRegulators -SEC -IRS -FTC

Decisions Supported

Performance evaluationsStock investmentsTax strategiesLabor relationsResource allocationsLending decisionsBorrowing

Decisions Supported

Performance evaluationsStock investmentsTax strategiesLabor relationsResource allocationsLending decisionsBorrowing

Information SystemInformation System

Financial Information

ProvidedProfitabilityFinancial positionCash flows

Financial Information

ProvidedProfitabilityFinancial positionCash flows

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-9

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.

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-10

Components of Internal ControlComponents of Internal Control

Control Environment

Risk Assessment

Control Activities

Information and Communication

Monitoring

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-11

Learning ObjectiveLearning Objective

LO3

To explain the importance of financial accounting information for external

parties—primarily investors and creditors—in terms of the objectives and the characteristics of

that information.

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-12

External Users of Accounting Information

External Users of Accounting Information

•Owners

•Creditors

•Potential investors

•Labor unions

•Governmental agencies

•Suppliers

•Customers

•Trade associations

•General public

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-13

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

External Financial Reporting

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-14

Objectives of External Financial Reporting

Objectives of External Financial Reporting

The primary financial

statements.

Income Statement

Balance Sheet

Statement of Cash Flows

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-15

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

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-16

Learning ObjectiveLearning Objective

LO4

To explain the importance of financial accounting information for internal

parties—primarily management—in terms of

the objectives and the characteristics of that

information.

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-17

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

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-18

Typical Simple

Organization Chart

PlantAccountants

PlantManagers

PlantAccountants

PlantManagers

Business Unit

Managers

V.P. Human

Resources

V.P. Information

Services

Chief Financial

Officer (CFO)

Chief ExecutiveOfficer(CEO)

Board ofDirectors

Owners

V.PEthics

Controller Treasurer

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-19

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

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-20

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

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-21

Learning ObjectiveLearning Objective

LO5

To discuss elements of the system of external and internal financial reporting that create

integrity in the reported information.

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-22

Integrity of Accounting InformationIntegrity of Accounting Information

Institutional FeaturesGenerally Accepted Accounting Principles (GAAP)Financial Accounting Standards BoardInternational Accounting Standards BoardSecurities and Exchange CommissionPublic Company Accounting Oversight BoardAudits of Financial StatementsLegislation

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-23

Learning ObjectiveLearning Objective

LO6

To identify and discuss several professional

organizations that play important roles in

preparing and communicating

accounting information.

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-24

Integrity of Accounting InformationIntegrity of Accounting Information

Professional OrganizationsAmerican Institute of Certified Public Accountants Institute of Management AccountantsInstitute of Internal AuditorsAmerican Accounting AssociationCommittee of Sponsoring Organizations of the Treadway Commission (COSO)

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-25

Learning ObjectiveLearning Objective

LO7

To discuss the importance of personal

competence, professional judgment, and ethical behavior on the part of accounting

professionals.

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-26

Integrity of Accounting InformationIntegrity of Accounting Information

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

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-27

Learning ObjectiveLearning Objective

LO8

To discuss various career opportunities in

accounting.

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-28

Careers in AccountingCareers in Accounting

Public AccountingManagement AccountingGovernmental AccountingAccounting Education

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

1-29

End of Chapter 1End of Chapter 1