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HI5001 Accounting for Business Decisions

Lecture 1
Accounting for Decision Making

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Introduction

Not just Perform varied and

Accountants
number-crunchers interesting work

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Introduction

Record-
keeping
knowledge

Future
accountants

Analytical &
communication
skills

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Click
An Overview
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of The title
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 Topics
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style
Here’s what you will learn from this lecture:

1 understand the dynamic environment in which accountants work

2 discuss the nature of decisions and the decision-making process

3 explain the nature of accounting and its main functions

4 identify the potential users of accounting information

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 Topics
Click toCovered In This
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style
Here’s what you will learn from this lecture:

5 describe the role of accounting information in the decision‐making process

6 compare accounting information for management and external users

7 accounting bodies in Australia & accounting as a profession

8 Ethics in business and accounting

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 The Dynamic
Click Environment
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title style
Factors influencing change in current accounting environment

Rapid
development
of information
& B
communication B
technology b
Illegal

Holmes Institute
 The Dynamic
Click Environment
to edit Master of Accounting
title style
Factors influencing change in current accounting environment

Rapid
development
of information
& B
communication B
technology b
Illegal

Demand for
non-financial
information

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 The Dynamic
Click Environment
to edit Master of Accounting
title style
Factors influencing change in current accounting environment

Rapid
development
of information
&
communication
technology

Ordinary
Illegal

Demand for
Globalization
non-financial
of business
information

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 The Dynamic
Click Environment
to edit Master of Accounting
title style
Factors influencing change in current accounting environment

Rapid
development Adoption of
of information international
& B regulations &
communication B accounting
technology b standards

Ordinary
Illegal

Demand for
Globalization
non-financial
of business
information

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 Click to edit Master
Pause Point 1title style

• Accounting evolves as society and business changes.

• Some of these changes include:

– rapid developments in information and communication technologies
– increasing demand for information about organisational impact
– globalisation of business
– development of international regulations and standards
– digital disruption and power of big data

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 Decisions in Everyday
Click to edit Life
Master title style
• Decisions in everyday life
• Decisions involve choices because resources are limited
– we must choose how to spend our time
– we must choose how to spend our resources
– often competing options available.

Option 1

Option 2

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 Decisions in Everyday
Click to edit Life
Master title style
• Each decision has outcomes that will affect future decisions
• Good decisions require good processes
I choose option 1
as I have the
resource & skill
to execute this
project
High
Option 1
return
High Risk
Low
Option 2
return
Low Risk

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Click to edit
Overview of Master
Decision-Making
title style Process

Steps in decision making

Establish goals

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Click to edit
Overview of Master
Decision-Making
title style Process

Steps in decision making

Gather available
1 information on
alternatives

Establish goals

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Click to edit
Overview of Master
Decision-Making
title style Process

Steps in decision making

Determine
consequences
2
of alternatives
Gather available
1 information on
alternatives

Establish goals

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Click to edit
Overview of Master
Decision-Making
title style Process

Steps in decision making

Choose
course of
3
action
Determine
consequences
2
of alternatives
Gather available
1 information on
alternatives

Establish goals

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Click to edit
Overview of Master
Decision-Making
title style Process

Steps in decision making

Choose
course of
3
action
Determine
consequences
2
of alternatives
Gather available
1 information on Accounting
alternatives

Establish goals

Holmes Institute
Click to edit
Overview of Master
Decision-Making
title style Process

Steps in decision making

Choose
course of
3
action
Determine
consequences
2
of alternatives
Gather available
1 information on Accounting
alternatives

Establish goals

Holmes Institute
Click to edit
Overview of Master
Decision-Making
title style Process

Steps in decision making

Choose
course of
3
action
Determine
consequences
2
of alternatives
Gather available
1 information on Accounting
alternatives

Establish goals

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 Click to edit
Economic Decisions
Master title style
• Many (most) decisions involve economic resources.
• Economic resources have a price as they are scarce.
• Must also consider:

B
B
b

Ordinary
Ordinary
Illegal

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Economic Decisions
Master title style
• Economic decisions for different purposes
• consumption
• investment
• financial
B
B
b

Ordinary
Ordinary
Illegal

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 Click to edit
Economic Decisions
Master title style
• Must also consider:
Personal
Taste

Social factors
B
B
Environmental b

Ordinary
factors
Illegal

Religious/
Moral factors

Government
Policy

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 Click Pause
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Master2 title style

• Decision-making process involves four main steps.

• Economic decisions are made for consumption purposes,

investment purposes and/or financial purposes.

• Various factors must be considered when making economic

decisions

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 The Nature
Click ofMaster
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title style
• Accounting is a service activity:
– Its function is to provide and interpret financial information to
assist in decision making. (Steps 2, 3 and 4 of decision-making
process).
• Accounting is used in a range of organisations:
– business
– government
– charities
– not-for-profits.

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 The Nature
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title style
• Identification involves observing
economic events.
Process of identifying,
• External transactions involve economic
measuring, recording events between one entity and another
and Communicating entity.
economic • Measurement must take place before the
information to permit effects of transactions can be recorded.
Informed judgements • Recording provides a history of the
economic activities of a particular entity.
and economic decisions
• Communication is the final part of the
by users of the accounting process
information

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 The Nature
Click ofMaster
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title style

Identification Measurement Recording Communication

Recording,
Quantification in Accounting
Transactions classification,
monetary terms reports
summarisation

Analysis and
interpretation

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Pause Point 3 title style

• What’s the nature of accounting?

• What’s the accounting process?

• How is accounting defined?

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Users
Click of
to Accounting Information
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Why we have
accounting?

Who is involved
with accounting?

Accounting
decision they need
to make

Stakeholders
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 Users
Click of
to Accounting Information
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• Internal users:
– How much profit is being earned?
– What products should be produced?
– What resources are available?
– What is the most efficient production process?
– What is the cost to reduce carbon emissions?
– What will be the effect of increasing or decreasing selling prices?
– How much profit is owing to outsiders?
– Will cash be available to pay debts as they fall due?
– What are benefits of owning vs leasing? This is more complex than you
think as there are lease options (financial vs. operating)

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 Users
Click of
to Accounting Information
edit Master title style

• Providing data to help answer these and many other questions is an

accounting function generally called Management Accounting. The
data are presented to management in the form of Special purpose
financial statements.

• Special purpose financial statements are prepared for users who

have specialised needs and who possess the authority to obtain
information to meet those needs.

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 Users
Click of
to Accounting Information
edit Master title style
• External users:
– Should I invest money in this business?
– Will the business be able to repay money lent to it?
– Will they make a profit?
– What are the business’s earning prospects?
– Is the business financially sound?
– Is the business providing products that are socially and
environmentally friendly?
– Are they behaving ethically?

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 Users
Click of
to Accounting Information
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• General purpose financial statements provide general information

for use by all external users
• It consists of
▪ an income statement,
▪ a balance sheet,
▪ a statement of changes in equity and
▪ statement of cash flows.
• They are designed to meet the information needs of a wide range of
users who are unable to command the preparation of reports tailored
to satisfy their individual specific needs for information.

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Users
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to Accounting Information
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 Click Pause
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Master4 title style

• Who are the internal users?

• What questions do internal users need answers to?

• Who are the external users?

• What questions do external users need answers to?

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 Using
Click Information in title
to edit Master Economic
style Decisions
An Example:
– Darren is a hard-working sales assistant in a retailing shop.
– He would like to take on a new career and start his own lawn-mowing
business.
– Using the decision-making process already outlined he needs to
decide if this is the right decision for him
– Darren wants to do something different to standing behind a sales
counter all day. So clearly a lawn-mowing business will meet this goal.
– He also wants to be financially secure. To establish this will require
additional information

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 Using
Click Information in title
to edit Master Economic
style Decisions
First, Darren will need to invest in some equipment

Second-hand van $22,000

Trailer 1,500
Rotary lawn mower 950
Cylinder mower 1,600
Chainsaw 1,150
Edger 600
Hedge trimmer 700
Blower 1,000
Shredder 1,400
Brush-cutters 800
Other tools, ladders, brooms (approx.) 850
Total cost $32,550

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 Using
Click Information in title
to edit Master Economic
style Decisions
He will also need to consider what the running costs will be:

Fuels and oils, repairs and maintenance $500

– Estimated operating Part-time employee 300
costs per week $800

Lawn-mowing and trimming (regular) 60

– Estimated client numbers Gardening, with shredding (regular) 12
Tree-lopping and shredding (as requested) 20

Lawn-mowing $45
– Approximate charges per Gardening 90
client Tree-lopping 135

5 lawns mowed for each of 6 days @ $45 ea $1,350

– Estimated cash receipts 1 garden for each of 6 days for $90 each 540
$1,890
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 Using
Click Information in title
to edit Master Economic
style Decisions

Example (continue):

Based on these figures, Darren would expect over a 48-week year that
his income will be:

$1,890 x 48 = $90,720 plus any tree-lopping jobs that comes up.

As his earnings are more than $75K per annum, he will need to obtain an
ABN from the ATO plus he will be required to collect GST. This will add to
his costs and needs to be factored in (estimated to be $50.00 per week).

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 Using
Click Information in title
to edit Master Economic
style Decisions

Example (continue):

With $800 per week for operating costs, plus the additional $50.00 for
preparing annual tax return, GST documents, etc, (total of 2.4K per
annum) meaning that his weekly outgoings are $850.00.

So if his incomings are $1,890pw, outgoings are $850, he is left with

$1,040pw for himself. Plus any extra from tree-lopping.

Should Darren proceed with the business?

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 Using
Click Information in title
to edit Master Economic
style Decisions
Darren’s Lawn
Mowing

Incoming Outgoing

$1890 $850
per per
week week
Illegal

A
a
$1040 Any extra
per income from
week tree topping

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Using
Click Information in title
to edit Master Economic
style Decisions
Darren’s Lawn
Mowing

Incoming Outgoing

$1890 B
per $850 B
week per b

Ordinary
week
Illegal

$1040
per
Profit week

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 Accounting
Click to editInformation
Master title&style
Decisions
• Many decisions require significant amounts of financial
information
– Accounting information is a very important part of this process.
• Actual versus future events
– Accountants report on past.
– Still useful as a guide for making decisions about the future.
– Past performance not necessarily indicative of future results.
• Outcomes or results of activity
Accounting information assists owners and managers
to effectively and efficiently run their business

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 Click to edit Master
Pause Point 5 title style

• Based on your business knowledge, state a venture you

think would be profitable.

• Think and write down start-up and operating costs associated

with it.

• Also, project the cash inflow or revenue and determine your

profit.

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 Management
Click to edit and Financial
Master Accounting
title style
Management Accounting Financial Accounting

• Area of accounting concerned with • Concerned with reporting

providing financial and other
information to all levels of
management in an organisation.
• Internal focus
– Planning
– Controlling
– Decision-making
– Cost behaviour
– Budgeting
information to users external to an
entity and helps external users to
make sound economic decisions.
• Reporting information
– Financial Performance
– Financial Position
• Financing and investing
• Compliance
• Highly regulated

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 Management
Click to edit and Financial
Master Accounting
title style

Differences
between
Management
Accounting
and
Financial
Accounting

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 Management
Click to edit and Financial
Master Accounting
title style

Differences
between
Management
Accounting
and
Financial
Accounting
(Continue)

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 Click Pause
to edit Point
Master6 title style

• Discuss the differences between management accounting

and financial accounting

• State reasons why you think accounting is important for decision

making.

• For instance: Accounting provides the present financial status of a

business which impacts on budgeting.

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 Accounting
Click to editAs a Profession
Master title style

• Self-regulated by CA, CPA Australia and IPA, 3 professional

associations
• Chartered Accountants Australia and New Zealand (CA)
• Certified Practising Accountants (CPA)
• Institute of Public Accountants (IPA)

• Three main areas of practice

• Public accounting
• Commercial accounting
• Not-for-profit accounting

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 Public Accounting
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Public Accounting

• Public accountants work in businesses which offer services to the

public for a fee

• Four main speciality areas

o Auditing and assurance services
o Taxation services
o Advisory services
o Insolvency and administration

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 Accountants
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Master & Industry
title style
Commercial Accounting

• Accountants may be employed in business entities

• Responsibilities include
o General accounting
o Cost accounting
o Accounting information systems
o Budgeting
o Taxation accounting
o Internal auditing and audit committees

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 Not-for-Profit Accounting
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Not-for-Profit Accounting

• Government accounting is concerned with the efficient use of

resources consistent with the law applying at federal, state and local
levels

• Other not-for-profit organisations include hospitals, churches,

charities, clubs and private educational institutions. These also have
specialised accounting needs

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 Not-for-Profit Accounting
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Examples of Not-for-profits
entities

B
B
b

Ordinary
Hospital Educational
Institute
Charity

Church Club

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 Ethics and
Click to Accounting
edit Master title style
• Ethics in Business
– Businesses today appreciate the importance of ethical behaviour in
all their business dealings.
– All people working in the entity have to be honest, abide by the
rules and ‘do the right thing’.
– The audit and assurance services function
of accounting also represents a Business

controlling influence in
maintaining ethical Ethics
Professional
accounting
behaviour in bodies

business entities.
Practice
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 Ethics and
Click to Accounting
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• Ethics and professional accounting bodies
– Code of ethics for professional accountants
– Miscellaneous professional statements and joint guidance notes
– Such other ethical issues or similar matters of interest in respect of the
accounting profession.
• Ethics in practice
– self interest
Business
– failure to maintain objectivity and independence
– improper leadership and poor organisational culture
– lack of ethical courage to do what is right Ethics
Professional
accounting
– lack of ethical sensitivity bodies

– failure to exercise proper professional

judgement. Practice
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 Key Take
Click Aways
to edit Master title style
Summary of Lecture 1
• Understand the dynamic environment in which accountants work
• Discuss the nature of decisions and the decision-making process
• Explain the nature of accounting and its main functions
• Identify the potential users of accounting information
• Describe the role of accounting information in the decision‐making process
• Compare accounting information for management and external users
• Accounting bodies in Australia & accounting as a profession
• Ethics in business and accounting

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 End ofto
Click Lecture 1
edit Master title style

• Recommended Readings
Hoggett & Edwards (refer to unit outline) - Chapter 1

• Tutorial Questions
Hoggett & Edwards - Chapter End Questions

• Next Lecture
Lecture 2 – Financial Statements for Decision Making

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