Accounting Information For Decision Making

Chapter 1
Accounting
Information for
Decision Making
Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Introduction
The primary objective of accounting is to provide
information that is useful in making good
decisions, and as a result of good decisions,
societal prosperity and welfare is maximized.
Accounting is sometimes called the “language

of business.”
1-2
Primary Goals
In order to develop your ability to understand and
use accounting information, you need to
understand the following:
The nature of economic activities that
accounting information describes.
The assumptions and measurement techniques
involved in developing accounting information.
The information that is most relevant for making
various types of decisions.
1-3
Types of Accounting Information:
Financial
1. Financial Accounting
• Information describes the financial
resources, obligations, and activities of an
economic entity.
• Assists external users such as investors
and creditors in the decision-making
process.
• Is often called “general-purpose”
accounting information.
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Types of Accounting Information:
Management
2. Management Accounting
• Involves the development and
interpretation of accounting information
for management.
• Information can be specifically tailored to
management’s needs in order to assist in
the decision-making process.
• Reports are only provided to internal users.
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Types of Accounting Information: Tax
3. Tax Accounting
• Information must conform with income tax
reporting requirements.
• Laws and regulations are often different
from those underlying the preparation of
financial accounting information.
KEY POINT
Because the focus of this text is introductory accounting, and because
tax accounting is quite complex, coverage of tax accounting subjects
is deferred to subsequent accounting courses.
1-6
Information Systems
An information system consists of the
personnel, procedures, technology, and
records used by an organization (1) to
develop information and (2) to
communicate this information to decision
makers.
1-7
Accounting as an Information System
1-8
Basic Functions of an Information
System
Every accounting system performs the following
basic functions:
1. Interpret and record the effects of business
transactions.
2. Classify the effects of similar transactions to
compute totals to be used in reports.
3. Summarize and communicate the information
contained in the system to decision makers.
1-9
Components of Internal Control
Control
Environment
Risk
Assessment
Control
Activities
Information and
Communication
Monitoring
1-10
Control Environment
Setsthe tone for the organization.
Organizational commitment to ethical values.
Independence of the board of directors.
Appropriate assignment of responsibility.
Development and retention of competent
employees.
Accountability at all levels.
1-11
Risk Assessment
Identifying, analyzing, and managing risks that
pose a threat to the achievement of
organizational goals.
Involves the identification of risks and the
implementation of risk mitigation techniques.
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Control Activities
Policiesand procedures established by
management to address risks.
Examples include:
◦ Approvals
◦ Reconciliations
◦ Reviews
◦ Segregation of duties
◦ Safeguarding assets
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Information and Communication
Developing information systems to capture and
communicate operational, financial, and
compliance-related information.
Capturing both internal and external
information.
1-14
Information and Communication
(cont.)
Facilitates the flow of information:
◦ Downstream (from management to
employees)
◦ Upstream (from employees to management)
◦ Across the organization
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Monitoring
Evaluate the effectiveness of internal controls.
Accomplish through ongoing management and
supervisory activities.
KEY POINT
The New York Stock Exchange (NYSE) requires all listed

companies to maintain an internal audit function.
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External Users of Accounting
Information
Examples include:
 Owners  Suppliers
 Creditors  Customers
 Potential investors  Trade associations
 Labor unions  General public
 Governmental
agencies
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Objectives of External Financial
Reporting
1-18
Primary Financial Statements
Balance sheet: shows where the company stands
in financial terms on a specific date; also called
the statement of financial position.
Income statement: shows the details of a

company’s profit-related activities over a period
of time.
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Primary Financial Statements (cont.)
Statement of cash flows: shows the details of a
company’s activities involving cash during a
period of time.
NOTE
You will learn more about each of these financial

statements in future chapters.
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Characteristics of Externally Reported
Information
1. Financial Reporting—A Means
a. A means to an end; not an end in and of
itself.
b. Improves the quality of decision making for
outside users.
c. Helps to create prosperous society.
2. Financial Reporting vs. Financial Statements
a. Financial statements are a subset of the
broader concept of financial reporting.
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Characteristics (cont.): Historical
b. Financial reporting also includes other
communications to external parties including
press releases, disclosures, and other open
communications.
3. Historical in Nature
a. Financial statements report events for an
accounting period that has already occurred.
b. Focuses on the past more than the future.
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Characteristics (cont.): Inexact
4. Inexact and Approximate Measures
a. Accounting information is often based on
estimates, judgments, and assumptions about
the past and the future.
b. This characteristic is often misunderstood.
5. General-Purpose Assumption
a. Information is not tailored for a specific user.
b. The same financial reporting package is
available for multiple user groups.
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Characteristics (cont.): Explanation
6. Explanation
a. Value is enhanced by management
explanations.
b. Qualitative information assists in
interpreting the financial reports.
1-24
Users of Internal Accounting
Information
Examples include:
Board of directors
Chief executive officer (CEO)
Chief financial officer (CFO)
Vice presidents
Business unit managers
Plant managers
Store managers
Line supervisors
1-25
Simple Organizational Chart
1-26
Objectives of Management Accounting
Information
Help management achieve the organization’s
mission and goals.
Evaluate and reward decision-making
performance.
KEY POINT
Many companies have a reward system linked to

performance as measured by the accounting system.
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Characteristics of Management
Accounting Information
1. Timeliness
a. Timely information is needed for planning
and controlling business activities.
b. Management can save money and make
better decisions by being able to act quickly.
2. Identity of Decision Maker
a. The right people need the right information
to make decisions and correct problems.
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Characteristics (cont.): Future Oriented
3. Future Oriented
a. Purpose of generating management
information is to affect the future.
b. Motivate management to make future
decisions to achieve the organization’s goals.
4. Efficiency and Effectiveness
a. Measures the efficiency and effectiveness of
resource usage.
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Characteristics (cont.): A Means
5. A Means
a. A means to an end; not an end in and of
itself.
b. Ultimate objective is to design and use an
accounting system that helps management
achieve the goals and objectives of the
enterprise.
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Integrity of Accounting Information
Integrity refers to the following qualities:
Complete
Unbroken
Unimpaired
Sound
Honest
Sincere
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Enhancing Integrity
The integrity of accounting information is
enhanced in three primary ways:
1. Institutional features
2. Professional accounting organizations
3. Personal competence, judgment, and ethical
behavior
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Integrity: GAAP
1. Institutional Features
a. Generally Accepted Accounting Principles
(GAAP)
1) Provides the general framework for
determining what information is included
in the financial statements and how this
information is prepared and presented.
2) Originates from a combination of tradition,
experience, and official decree.
3) May change over time.
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Integrity: SEC
b. Securities and Exchange Commission (SEC)
1) Governmental agency with the legal power to
establish accounting principles and financial
reporting requirements for publicly owned
corporations.
2) Delegates standard setting responsibility to the
FASB (discussed on next slide).
3) Reviews the financial statements of publicly
owned corporations.
4) May initiate legal action against companies.
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Integrity: FASB
c. Financial Accounting Standards Board
(FASB)
1) Independent rule-making body.
2) Recognized as the most authoritative
source of GAAP.
3) Maintains the Accounting Standards
Codification which includes all standards
and represents an official expression of
GAAP.
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Integrity: IASB
d. International Accounting Standards Board
(IASB)
1) London-based panel of elite professionals with
expert knowledge of accounting methods used
in the most vibrant capital markets.
2) Issues International Financial Reporting
Standards (IFRS).
3) More than 100 countries, including those in
the European Union, require companies to
follow IASB standards.
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Integrity: IASB (cont.)
d. International Accounting Standards Board
(IASB)
4) The SEC accepts financial statements
prepared using IASB standards from foreign
companies that are cross-listed on a U.S. stock
exchange.
5) The AICPA, which maintains jurisdiction over
private company reporting, accepts either
FASB standards or IASB standards as
authoritative sources of accounting principles.
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Case in Point: IFRS
If the United States moves to IFRS, it likely would
require significant changes to accounting systems,
controls, and procedures. For example, IFRS requires
that an entity account for similar transactions in an
identical manner regardless of where the transaction
occurs in the entity, a requirement that does not exist
under U.S. GAAP. Therefore, if IFRS becomes
mandatory for U.S. public companies, companies
would have to develop a listing of all of their
transactions and how they are accounted for
throughout the entity.
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Integrity: PCAOB
e. Public Company Accounting Oversight
Board (PCAOB)
1) Board created by the Sarbanes-Oxley Act of
2002.
2) Charged with oversight of the public
accounting profession.
3) Sets auditing standards for audits of publicly
traded companies.
4) Inspects the quality of audits.
5) Conducts investigations and administers
penalties.
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Integrity: Audits
f. Financial Statement Audits
1) An examination of a company’s financial
statements, designed to determine the
fairness of the statements.
2) Must be conducted by an independent
certified public accountant (CPA).
3) Financial statements are judged based on
the standards of GAAP.
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Key Point
For the auditor to reach the conclusion that the
financial statements are fair representations of a
company’s financial position, results of
operations, and cash flows, the statements must
comply in all important ways with generally
accepted accounting principles.
1-41
Integrity: Legislation
g. Legislation
1) Congress passed the Sarbanes-Oxley Act in 2002.
2) Auditors are prohibited from providing certain
nonaudit services to their audit clients to preserve
objectivity.
3) Board of directors and audit committees are
tasked with additional oversight responsibilities.
4) Chief executive officers (CEOs) and chief
financial officers (CFOs) must certify the fairness
of the company’s financial statements.
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Integrity: AICPA
2. Professional Organizations
Several professional accounting organizations play an
active role in improving the quality of accounting
information that is used by investors, creditors,
management, and others.
a. American Institute of CPAs (AICPA)
1) Mission is to provide members with the most
relevant knowledge.
2) Conducts research and works closely with the
FASB in the establishment and interpretation
of GAAP.
1-43
Integrity: IMA
b. Institute of Management Accountants (IMA)
1) Provides a forum for research, practice
development, education, knowledge sharing,
and the advocacy of the highest ethical and
best business practices in management
accounting and finance.
2) Influences concepts and ethical practices for
management accounting and financial
management.
3) Offers the Certified Management Accountant
(CMA) designation.
1-44
Integrity: IIA
c. Institute of Internal Auditors (IIA)
1) Primary international professional
association dedicated to the promotion and
development of the practice of internal
auditing.
2) Offers professional development through
conferences and seminars.
3) Provides audit specialty services and
industry-specific auditing programs as well
as quality assurance review and
benchmarking services.
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Integrity: AAA
d. American Accounting Association (AAA)
1) Mission is to further the discipline and
profession of accounting through
education, research, and service.
2) Made up primarily of accounting educators
who focus on improving the quality of
accounting education.
1-46
Integrity: COSO
e. Committee of Sponsoring Organizations of
the Treadway Commission (COSO)
1) Private-sector organization dedicated to
providing thought leadership through the
development of comprehensive frameworks
and guidance on enterprise risk management,
internal control, and fraud deterrence designed
to improve organizational performance and
governance and to reduce the extent of fraud
in organizations.
2) Best known for its work in developing the
standards for evaluating internal control.
1-47
Integrity: Competence
3. Competence, Judgment, and Ethical Behavior
To illustrate the importance of competence,
professional judgment, and ethical behavior in the
preparation of financial statements, consider the
following complex issues that must be addressed by
the accountant:
 At what point should an enterprise account for
transactions that continue over a long period of
time, such as a long-term contract to construct an
interstate highway?
1-48
Integrity: Competence (cont.)
 What constitutes adequate disclosure of information
that would be expected by a reasonably informed user
of financial statements?
 At what point are a company’s financial problems
sufficient to question whether it will be able to remain
in business for the foreseeable future, and when
should that information be communicated to users of
its financial statements?
 When have efforts by management to improve (that is,
“window dress”) its financial statements crossed a line
that is inappropriate, making the financial statements
actually misleading to investors and creditors?
1-49
Integrity: CPA
Certification in a given area signals a level of
competence to financial users and decision
makers.
1. Certified Public Accountant (CPA)
a. Licensed by the state.
b. Must have completed 150 semester hours of
college work with a major in accounting.
c. Must pass the CPA exam.
d. Must have adequate professional experience.
e. Must spend at least 40 hours of continuing
professional education each year.
1-50
Integrity: CMA and CIA
2. Certified Management Accountant (CMA)
a. Issued by the IMA.
b. Signifies professional competence in the area of
managerial accounting.
c. Requirements are similar to those of the CPA.
3. Certified Internal Auditor (CIA)
a. Issued by the IIA.
b. Signifies professional competence in the area of
internal auditing.
c. Requirements are similar to those of the CPA.
1-51
Your Turn
You are a professional accountant working for a public
accounting firm and find yourself in a difficult situation.
You have discovered some irregularities in the financial
records of your firm’s client. You are uncertain whether
these irregularities are the result of carelessness on the part
of the company’s employees or represent intentional steps
taken to cover up questionable activities. You approach
your superior about this and she indicates that you should
ignore it. Her response is, “These things happen all of the
time and usually are pretty minor. We are on a very tight
time schedule to complete this engagement, so let’s just
keep our eyes on our goal of finishing our work by the end
of the month.” What would you do?
1-52
Integrity: AICPA Code of Conduct
Excerpts from key parts of the AICPA Code of
Professional Conduct:
I. Responsibilities
In carrying out their responsibilities as professionals,
members should exercise sensitive professional and
moral judgments in all their activities.
II. The Public Interest
Members should accept the obligation to act in a way
that will serve the public interest, honor the public
trust, and demonstrate commitment to
professionalism.
1-53
Integrity: AICPA Code (cont.)
III. Integrity
To maintain and broaden public confidence, members
should perform all professional responsibilities with
the highest sense of integrity.
IV. Objectivity and Independence
A member should maintain objectivity and be free of
conflicts of interest in discharging professional
responsibilities. A member in public practice should
be independent in fact and appearance when
providing auditing and other attestation services.
1-54
Integrity: AICPA Code (concluded)
V. Due Care
A member should observe the profession’s technical
and ethical standards, strive continually to improve
competence and the quality of services, and discharge
professional responsibility to the best of the member’s
ability.
VI. Scope and Nature of Services
A member in public practice should observe the
Principles of the Code of Professional Conduct in
determining the scope and nature of services to be
provided.
1-55
Careers in Accounting
Accountants tend to specialize in specific fields,
as do the members of other professions. Career
opportunities in accounting may be divided into
four broad areas:
1. Public accounting
2. Management accounting
3. Governmental accounting
4. Accounting education
1-56
What about Bookkeeping?
Bookkeeping is the clerical side of
accounting—the recording of routine
transactions and day-to-day record
keeping.
Professional accountants are involved
more with the interpretation and use of
accounting information than with its
actual preparation.
1-57
Accounting as a Stepping-Stone
An accounting background is invaluable
for key positions in management or
administration, because top management
works continuously with issues defined
and described in accounting terms and
concepts.
1-58
I’m Not an Accounting Major
Accounting is the language of business, and
trying to run a business without
understanding accounting information is
analogous to trying to play sports without
understanding the rules.
Accounting knowledge is helpful in many
aspects of your personal life as well,
including personal budgeting, retirement and
college planning, lease versus buy decisions,
and evaluation of loan terms and investment
opportunities.
1-59
Ethics, Fraud, & Corporate Governance
Corporate governance entails corporate
structures and processes for overseeing the
company’s affairs to ensure that the company
is being managed with the best interests of
shareholders in mind.
Dennis Kozlowski, the former CEO of Tyco, was sentenced

to 8 1/3 to 25 years in prison for his conviction for
conspiracy, securities fraud, and falsifying records.
1-60
Learning Objective Summary LO1-1
LO1-1: Discuss accounting as the language of
business and the role of accounting information in
making economic decisions. Accounting is the means by
which information about an enterprise is communicated and is
sometimes referred to as the language of business. Many different
users have need for accounting information in order to make
important decisions. These users include investors, creditors,
management, governmental agencies, labor unions, and others.
Because the primary role of accounting information is to provide
useful information for decision-making purposes, it is sometimes
referred to as a means to an end, with the end being the decision
that is helped by the availability of accounting information.
1-61
LO1-2: Discuss the significance of information systems
in generating reliable accounting information and
understand the five components of internal control.
Information systems are critical to the production of quality
accounting information on a timely basis and the communication of
that information to decision makers. While there are different types of
information systems, they all have one characteristic in common—to
meet the organization’s needs for accounting information as efficiently
as possible. Per the COSO framework, the five elements of internal
control are: (1) control environment, (2) risk assessment, (3) control
activities, (4) information and communication, and (5) monitoring
activities.
1-62
LO1-3: 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 primary objectives
of financial accounting are to provide information that is useful in
making investment and credit decisions; in assessing the amount,
timing, and uncertainty of future cash flows; and in learning about the
enterprise’s economic resources, claims to resources, and changes in
claims to resources. Some of the most important characteristics of
financial accounting information are it is a means to an end, it is
historical in nature, it results from inexact and approximate measures
of business activity, and it is based on a general-purpose assumption.
1-63
LO1-4: Explain the importance of accounting
information for internal parties—primarily
management—in terms of the objectives and the
characteristics of that information. Accounting information
is useful to the enterprise in achieving its goals, objectives, and
mission; assessing past performance and future directions; and
evaluating and rewarding decision-making performance. Some of the
important characteristics of internal accounting information are its
timeliness, its relationship to decision-making authority, its future
orientation, its relationship to measuring efficiency and effectiveness,
and the fact that it is a means to an end.
1-64
LO1-5: Discuss elements of the system of external and
internal financial reporting that create integrity in the
reported information. Integrity of financial reporting is
important because of the reliance that is placed on financial
information by users both outside and inside the reporting
organization. Important dimensions of financial reporting that work
together to ensure integrity in information are institutional features
(accounting principles, internal structure, audits, and legislation);
professional organizations (the AICPA, IMA, IIA, AAA); and the
competence, judgment, and ethical behavior of individual
accountants.
1-65
LO1-6: Identify and discuss several professional
organizations that play important roles in preparing
and communicating accounting information. The FASB,
IASB, PCAOB, and SEC are important organizations in terms of
standard setting in the United States. The FASB and IASB are private-
sector organizations that establish accounting standards for public and
private companies. The PCAOB oversees public accounting firms,
including setting standards for audits of public companies. The SEC is
a governmental entity that oversees U.S. public companies and the
capital markets.
1-66
LO1-7: Discuss the importance of personal competence,
professional judgment, and ethical behavior on the part
of accounting professionals. Personal competence and
professional judgment are, perhaps, the most important factors in
ensuring the integrity of financial information. Competence is
demonstrated by one’s education and professional certification (CPA,
CMA, CIA). Professional judgment is important because accounting
information is often based on inexact measurements and assumptions
are required. Ethical behavior refers to the quality of accountants being
motivated to “do the right thing.”
1-67
LO1-8: Describe various career opportunities in
accounting. Accounting opens the door to many career
opportunities. Public accounting is the segment of the profession
where professionals offer audit, tax, and consulting services.
Management, or managerial, accounting refers to that segment of the
accounting profession where professional accountants work for
individual companies in a wide variety of capacities. Many
accountants work for governmental agencies. Some accountants
choose education as a career and work to prepare students for future
careers in one of the other segments of the accounting profession.
While keeping detailed records (that is, bookkeeping) is a part of
accounting, it is not a distinguishing characteristic of a career in
accounting; in fact, many accounting careers involve little or no
bookkeeping. Accounting skills are important to non-accounting
majors and to all students in their personal lives.
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End of Chapter 1
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Accounting Information For Decision Making

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Chapter 1

Accounting is sometimes called the “language

The New York Stock Exchange (NYSE) requires all listed

Income statement: shows the details of a

You will learn more about each of these financial

Many companies have a reward system linked to

Dennis Kozlowski, the former CEO of Tyco, was sentenced

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