Professional Documents
Culture Documents
Fma 01
Fma 01
Financial &
& Managerial
Managerial Accounting
Accounting
MBA
MBA 771
771
CPU COLLEGE
CHAPTER
ACCOUNTING:
ONE Information for Decision Making
DISCUSSION POINTS:
Introduction
Accounting As An Information System
Business Goals, Activities, & Performance Measures
Financial & Management Accounting
Basic Functions of an Accounting System
Accounting Vs. Bookkeeping
Decision Makers: The Users of Accounting Information
Types of Business Organization
The Corporate Form of Business
Accounting Measurement
Financial Position and the Accounting Equation
Communication Through Financial Statements
Generally Accepted Accounting
Principles (GAAP)
1.1 Objectives:
i.Define accounting, identify business goals and activities, and
describe the role of accounting in making informed decisions.
ii.Identify the many users of accounting information in society
iii.Describe the corporate form of business organization
iv.Explain the importance of business transactions, money
measure, and separate entity to accounting measurement
v.Define financial position, state the accounting equation, and
show how they are affected by simple transactions.
vi.Identify the principal financial statements
vii.Understand the relationship of generally accepted accounting
principles (GAAP) to financial statements, and identify the
organizations that influence GAAP.
OBJECTIVE 1:
Accounting
“links” decision
Communication:
Economic makers with Accomplished by
Activities: economic Reporting
activities and
with the results of
their decisions.
Actions
(decisions) Decision
makers
3.
3. Business
Business Goals,
Goals,Activities,
Activities, &
& Performance
Performance
Measures
Measures
A business is an economic unit that aims to sell goods
and services to customers at prices that will provide an
adequate return to its owners.
Businesses, though diverse, have similar goals and
engage in similar activities.
(Business
(Business Goals,
Goals,Activities
Activities Cont’d)
Cont’d)
Business Goals
1.Profitability
A business must take in enough money to pay all the costs of
doing business, with enough left over as profit for the owners to
want to stay in business.
2. Liquidity
A business must have enough funds available to pay debts when
they are due.
(Business
(Business Goals,
Goals,Activities
Activities Cont’d)
Cont’d)
Business Goals Business Activities
Financing Operating
Profitability
Liquidity Investing
(Business
(Business Goals,
Goals,Activities
Activities Cont’d)
Cont’d)
Business Activities
1)Financing Activities:
Obtaining capital from owners and creditors
Repaying creditors and a return to owners.
2) Investing Activities:
Spending the capital it receives in ways that are productive and
will help the business achieve its objectives.
Buying and selling long-term assets to be used in the business.
3) Operating Activities:
Selling of goods and services to customers.
Employing managers and workers, buying and producing goods
and services, and paying taxes.
(Business
(Business Goals,
Goals,Activities
Activities Cont’d)
Cont’d)
Performance Measures
Indicate whether or not managers are achieving the business
goals and if they are managing business activities well.
Performance measures include:
Earned income or profit
Cash flow
Internal Users
Internal Users External Users
Purpose of Information
Help investors, creditors, and others make Help managers plan and control business operations
investment, credit, and other decisions.
Type of Report
Financial statements restricted by GAAP Internal reports not restricted by GAAP; determined by cost-
benefit analysis
Verification
Annual independent audit by CPAs No independent audit
Scope of Information
Summary reports primarily on the company as a Detailed reports on parts of the company
whole
Behavioral Implications
Concern about adequacy of disclosure Concern about how reports will affect employees behavior
Information
Information System
System
Cost
Cost&&Revenue
Revenue
Determination
Determination
Information
Information
Job
Jobcosting
costing Decision
DecisionSupport
Support
Users
Users
Process
Processcosting
costing
Investors
Investors
ABC
ABC
CVP
CVPanalysis
analysis
Creditors
Creditors
Sales
Sales
Performance
Performance
Managers Assets
Managers Assets&& evaluation
evaluation
Owners
Owners Liabilities
Liabilities
Incremental
Incremental
Customers
Customers
Plant
Plantand
and analysis
analysis
Employees
Employees equipment
equipment Budgeting
Budgeting
Regulatory
Regulatory
Loans
agencies Loans&&equity
equity
Capital
Capital
agencies
Receivables,
Receivables, allocation
-SEC allocation
-SEC payables
payables&&cash
-IRS cash Earnings
Earningsper
per
-IRS Cash share
CashFlows
Flows share
Ratio
Ratioanalysis
analysis
From
From
operations
operations
From
Fromfinancing
financing
5.
5. Basic
Basic Functions
Functions of
of an
anAccounting
Accounting System
System
Interpret
and record
business
transactions.
Payment
Car
(Basic
(Basic Functions
Functions of
of an
anAccounting
Accounting Cont’d)
Cont’d)
Interpret Classify
and record similar
business transactions
transactions. into useful Summarize
reports. and
communicate
information to
decision
makers.
6.
6.Accounting
Accounting Vs.
Vs. Bookkeeping
Bookkeeping
Accounting is the process of recording, summarizing,
reporting and interpreting economic data for use by many
groups within our economic and social system.
Accounting includes the design of an information system that
meets user’s needs.
In general, the primary goals of accounting are the analysis,
interpretation, and use of information.
Bookkeeping refers to the mechanical and repetitive aspect
of accounting and focuses on recording transactions and
keeping financial records.
Bookkeeping is a small part of accounting.
(Accounting
(Accounting Vs.
Vs. Bookkeeping
Bookkeeping Cont’d)
Cont’d)
Computers are used extensively in accounting as a tool for
the accountant.
A business’s many information needs are organized into a
Management Information System (MIS).
An MIS consists of various interconnected subsystems. The
Accounting Information System (AIS), which collect data,
process it & report useful information, is the most important
subsystem.
Discussion
Discussion Question
Question
Q. Define Financial & Managerial Accounting.
OBJECTIVE 2:
Decision Makers
(A)Management
Sole
Sole Partnership
Partnership Corporation
Corporation
Proprietorship
Proprietorship
(Types
(Types of
of Business
Business Organization
Organization Cont’d)
Cont’d)
There are three dominant forms of business ownerships.
(1) Sole Proprietorship: is a
(2) Partnership: A business unit owned by
business unit owned by one person.
two or more persons as co-owners of
The single person (owner) assumes
business for profit.
all the profit (or loss) resulting from
In a partnership form of business the
the business activities for himself.
owners also called the partners agreed to
share the net income (or loss) among
(3) Corporation: A corporation is themselves according to the agreements
an artificial person, created by law stated in the articles of a partnership.
and having a distinct existence
separate and apart from the natural
persons who are responsible for its
creation and operation.
(Types
(Types of
of Business
Business Organization
Organization Cont’d)
Cont’d)
OBJECTIVE 3:
OBJECTIVE 4:
1) What is measured?
2) When should the measurement be made?
3) What value should be placed on what is measured?
(Accounting
(Accounting Measurement
Measurement Cont’d)
Cont’d)
What is Measured?
1) Partnership
2) Ethiopian birr
3) Payment of an expense
4) Corporation
5) Sale of an asset
Q. How do sole proprietorships, partnerships, and
corporations differ?
11.
11. Financial
Financial Position
Position and
and the
theAccounting
Accounting
Equation
Equation
OBJECTIVE 5:
Assets -
Liabilities
Owners’ Equity (or Shareholders’ Equity)
(Financial
(Financial Position
Position and
and the
the Cont’d)
Cont’d)
Assets:
Assets are economic resources owned by a business that are
expected to benefit future operations.
Monetary items
Nonmonetary physical things
Liabilities:
Liabilities are the present obligations of a business to pay cash,
transfer assets, or provide services to other entities in the future.
(Financial
(Financial Position
Position and
and the
the Cont’d)
Cont’d)
Owners’/Stockholders’ Equity
Owners’ equity represents the claims by the owners of a
business to the assets of the business.
Owners’ equity is the residual equity that remains after
deducting liabilities from assets.
12.
12. Communication
Communication Through
Through Financial
Financial
Statements
Statements
OBJECTIVE 6
Revenues:
Commission Income birr xxxx
Expenses;
Rent Expense birr xxx
Wages xxx
Utilities xxx
Total Expenses xxx
Net Income (Loss) birr xxx
(Communication
(Communication Through,
Through, Cont’d)
Cont’d)
Balance Sheet
Income Statement
The primary
Statement of Cash Flows
financial
statements.
Review Question
Based
Basedonon Historical
Historical in
in
General
General Purpose
Purpose Nature
Nature
Assumption
Assumption
Results
Resultsfrom
fromInexact
Inexactand
and
Approximate
ApproximateMeasures
Measures
Discussion
Discussion Question
Question
Q. State the process by which accounting provides
information to users.
Ans.
1. Identify users.
2. Assess users’ information needs.
3. Design accounting information system to meet
users’ needs.
4. Record economic data about business activities
and events.
5. Prepare accounting reports for users.
Information about decision-making
authority, for decision-making support, and Objectives
for evaluating and rewarding decision-making of
performance.
Managerial
Reporting
Information useful in assessing
both the past performance and future
directions of the enterprise and information
from external and internal sources.
Timeliness
Timeliness
Identify
Identify
AAMeans
Meanstoto Decision-
Decision-
an
anEnd
End Making
Making
Authority
Authority
Measures
Measuresof of Oriented
Oriented
Efficiency
Efficiencyand
and Toward
Toward
Effectiveness
Effectiveness Future
Future
13.
13. Generally
GenerallyAccepted
AcceptedAccounting
Accounting
Principles
Principles (GAAP)
(GAAP)
OBJECTIVE 7
Understand the relationship of generally
accepted accounting principles (GAAP) to
financial statements, and identify the
organizations that influence GAAP.
(GAAP
(GAAPCont’d)
Cont’d)
Generally Accepted Accounting Principles (GAAP)
Encompass the conventions, rules, and procedures necessary to
define accepted accounting practices at a particular time.
Need for Standard Setting (GAAP)
If every firm could record and report its financial data as it saw
fit, comparisons among companies performance would be
difficult, if not impossible. Thus, accountants strictly follow the
GAAP in preparing reports. These reports allow investors and
other users to compare one company to another.
Use of GAAP also enhances understandability of financial
statements.
(GAAP
(GAAPCont’d)
Cont’d)