Accounting: Information for Decision Making
Joseph V. Carcello Accounting 301
Accounting Information: A Means to an End
Primary objective of accounting is to provide information that is useful for decision making purposes
The final product is the decision, NOT the accounting information
Financial Accounting
Describes financial resources, obligations, and activities of an economic entity
Used for many purposes (i.e., generalpurpose accounting information)
Management Accounting
Used to assist management in business operations Assists in setting overall goals, evaluating performance, and making managerial decisions
Tax Accounting
Involves the preparation of income tax returns and tax planning Tax planning anticipates tax effects of transactions and structures them in a way to minimize (avoid) income taxes
Accounting Systems
Help an organization meet its needs for information as efficiently as possible
Produce information about financial position, profitability, and cash flows for investors, creditors, and other users of information
Functions of an Accounting System
Interpreting and recording effects of business transactions Classifying effects of similar transactions
Summarizing and communicating information to decision makers
External Users of Accounting Information
External users have a financial interest in a reporting entity, but are not involved in its operations. Examples include:
Owners Creditors Suppliers Customers
External financial reporting is directed primarily towards investors and creditors
Objectives of External Financial Reporting
To provide useful information to those making investment or credit decisions
To provide information that can be used to assess the timing, amount, and uncertainty of an entitys future cash flows To provide information about an entitys resources (assets), claims to those resources, and how the resources and claims to resources change over time
Financial Statements
Balance Sheet (statement of financial position)
Shows a companys financial position at a specific date
Income Statement
Shows the results of a companys profit-related activities for a period of time
Statement of Cash Flows
Shows details of a companys cash-related activities for a period of time
Characteristics of Externally Reported Information
Historical Inexact and approximate measures
Estimates Judgments Assumptions
General-purpose information
Internal Users of Accounting Information
Information is used primarily for planning and control decisions Examples of internal users include:
Board of directors CEO CFO Managers Supervisors
Characteristics of Management Accounting Information
Developed in a timely manner
Provided to those who have decision-making authority Created and generated in order to affect the future Used to measure the effectiveness and efficiency of operations
Integrity of Accounting Information
Characteristics of integrity:
Complete Honest Sincere Unimpaired
Integrity of accounting information is enhanced by:
Accounting standards, internal control, audits Professional accounting organizations Personal competence, judgment, ethical behavior
Institutional Features
Generally accepted accounting principles (GAAP)
Principles on measurement and presentation of financial information Rules for preparation of financial statements Only applies to the United States
Financial Accounting Standards Board (FASB)
Develops new accounting standards (GAAP) Is part of the private sector
Institutional Features
International Accounting Standards Board (IASB)
Attempts to develop global accounting standards Promotes the use of such standards
Securities and Exchange Commission (SEC)
Governmental agency with legal power to establish accounting principles and reporting requirements for publicly owned corporations Generally adopts recommendations by the FASB
Institutional Features
Public Company Accounting Oversight Board (PCAOB)
Developed as a result of the Sarbanes-Oxley Act (2002) Oversees the accounting profession Sets auditing standards for public companies Inspects audits performed by public accounting firms
Institutional Features
Internal Control Structure
Guards an organization against fraud and error Ensures reliability of financial information Promotes compliance with company policies
Audits of Financial Statements
An investigation to determine whether or not financial statements are reliable, complete, conform to GAAP, and are not misleading
Sarbanes-Oxley Act of 2002
Created the PCAOB Bans auditors from providing consulting services to audit clients Increases responsibility of CEOs and CFOs to certify the fairness of financial statements
American Institute of Certified Public Accountants (AICPA)
Conducts accounting research
Works with the FASB to establish and interpret GAAP
Prepares and grades the CPA exam
Careers in Accounting
Public Accounting
Financial statement audits Income tax services Consulting services
Management Accounting
Financial forecasting Cost accounting Internal audit
Careers in Accounting
Governmental Accounting
Governmental Accountability Office (GAO)
Audits federal agencies Reports directly to Congress
Internal Revenue Service (IRS) Securities and Exchange Commission (SEC)
