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HI5001 ACCOUNTING FOR BUSINESS DECISIONS

TOPIC 1 Accounting for Decision Making

Introduction
Welcome to HI5001
In this session we look from an overview perspective, why we have accounting and who is

involved with accounting. We consider the various stakeholders and the basic accounting decision that they need to make.

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THE CHANGING ENVIRONMENT OF ACCOUNTING

Rapid development of information and

communication technology Increasing demand for information of a non-financial nature by society Globalisation of business Adoption of international regulations including accounting standards

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DECISIONS IN EVERYDAY LIFE


Decisions involve choices because resources are limited
Each decision has outcomes that will affect

future decisions

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Steps in decision-making

Choose course of action

Determine consequences of alternatives

Gather available information on alternatives

Establish goals
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ECONOMIC DECISIONS
Involve the use of economic resources
Must also consider
Personal taste Social factors Environmental factors Religious and/or moral factors Government policy

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THE NATURE OF ACCOUNTING

Service activity
Business Government Charities Clubs

Families

Process of identifying, measuring, recording and communicating economic information to permit informed judgements and economic decisions by users of the information

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THE NATURE OF ACCOUNTING


continued

The accounting process


Identification Measurement
Quantification in monetary terms

Recording
Recording, classification, summarisation

Communication
Accounting reports

Transactions

Analysis and interpretation


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USERS OF ACCOUNTING INFORMATION


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 OF ACCOUNTING INFORMATION


continued

External users
Should I invest money in this business? Will the business be able to repay money lent to it?

What are the businesss earning prospects?


Is the business financially sound? Is the business providing products that are socially

and environmentally friendly?

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USING INFORMATION IN ECONOMIC DECISIONS

Starting a small business


Equipment purchases Repairs and maintenance

Insurance
Administrative costs Services to provide What to charge Potential customers

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Refer 1.4 Using Info for economic decisions


The following example (1.4, pp10-11) shows that Darren will need close to $33K to set up his business. He will also need to consider what the running costs will be, those costs that will be incurred as an ongoing cost such as wages, rent, petrol & oil, etc.

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USING INFORMATION IN ECONOMIC DECISIONS continued

Darrens Lawn-mowing (1.4) Set up costs


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 INFORMATION IN ECONOMIC DECISIONS continued

Operating costs
Fuels and oils, repairs and maintenance Part-time employee $500 300 $800
60 12 20

Clients
Lawn-mowing and trimming (regular) Gardening, with shredding (regular) Tree-lopping and shredding (as requested)

We can see that Darren has also considered how many clients he expects to have, and the type of services
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USING INFORMATION IN ECONOMIC DECISIONS continued

Now based on an understanding/expectation of the client list and the type of services required, he can then determine what fees to charge.

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USING INFORMATION IN ECONOMIC DECISIONS


continued

Charges
Lawn-mowing Gardening Tree-lopping $45 90 135

Estimated cash receipts


5 lawns mowed for each of 6 days @ $45 ea 1 garden for each of 6 days for $90 each $1,350 540 $1,890

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USING INFORMATION IN ECONOMIC DECISIONS continued

Based on these figures, Darren would expect over a 48-week year that his income will be; $1890 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 INFORMATION IN ECONOMIC DECISIONS continued

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.

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ACCOUNTING INFORMATION AND DECISIONS


How much information?
Actual vs future events Outcomes and results of activity

Accounting information assists owners and managers to effectively and efficiently run their business

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MANAGEMENT AND FINANCIAL ACCOUNTING

Management accounting Internal focus


Planning Controlling Decision-making

Financial accounting External focus


Reporting information
Performance

Cost behaviour Budgeting Little/no regulation

Position

Financing and investing Compliance

Highly regulated

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ACCOUNTING AS A PROFESSION AUSTRALIAN PERSPECTIVE

Self-regulated by ICAA, CPA Australia and IPA


Chartered Accountants (CA) Certified Practising Accountant (CPA)

Public Accountant (IPA)

Three main areas of practice


Public accounting

Commercial accounting
Not-for-profit 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
Auditing and assurance services
Taxation services Advisory services

Insolvency and administration

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Accountants in commerce and industry


Accountants may be employed in business entities
Responsibilities include
General accounting
Cost accounting Accounting information systems

Budgeting
Taxation accounting Internal auditing and audit committees

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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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ETHICS AND ACCOUNTING


Ethics in business
Ethics and professional accounting bodies Ethics in practice
evasion and manipulation
conflict of interest and insider information incompetence

breach of confidence

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Tutorial
Topic 1 Accounting for Decision Making Reading:
Hoggett & Edwards Chapter One

Questions:
Hoggett & Edwards Exercises 1.3, 1.4, 1.5, 1.9 & 1.12 Communication/Group Activity Ethical Issues: Ethical practices among friends
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