Ch 1 Intro to Accounting

8/3/2019 Ch 1 Intro to Accounting

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CONTENTS

The Accounting Process

Accounting Information and Its Role inDecision Making

Financial and Management Accounting

Limitation of Accounting Information

Changes in AccountingCareers in Accounting

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THE ACCOUNTING PROCESS

IDENTIFYING

COMMUNICATING

MEASURING

ORGANIZATION

ECONOMICINFORMATION

VARIETY OFUSERS

BUSINESS TRANSACTIO

N

DECISION MAKING

ANALYZING, RECORDINGAND CLASSIFYINGBUSINESS TRANSACTION

RELEVANT INFORMATIONTHRU ACCOUNTINGREPORTS

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THE ACCOUNTING PROCESS

IDENTIFYING MEASURING COMMUNICATING

DECISIONMAKIN

Transaction thataffect the entitys

financial positionare taken intoconsideration.They must beable to bereliably

measured andrecorded.

This stageincludes theanalysis,recording andclassifying ofbusinesstransaction.Identifies how

transactionsaffect the entitys

position, andgroup togethersimilar items e.g.

income andex enses.

Accountinginformationcommunicatedthru variousaccountingreports e.g.incomestatement,

balance sheetand statementsof cash flow.

Accountinginformation usedfor investmentdecision,make/buydecision,decisions tosupply company

with goods,decision to lendcredit, etc.

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ACCOUNTING INFORMATION AND ITS ROLE IN

DECISION MAKING

Accounting information is designed to meet the needs ofboth internal and external users

Internal users: The management of the entity

budgetingsetting pricesforecasting profitsdetermining the appropriate sales mix

assessing the performance of employeesdetermining how many overtime hours are required,determining the capacity of the plantinvesting the resources of the plant

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ACCOUNTING INFORMATION AND ITS ROLE IN

DECISION MAKING

External users Accounting info and decision making

Employees Info concerning job security, potential bonus,increment

Investors Info on future profitability, future cash flows and

possibility of capital growth

Suppliers Info on ability to pay credit purchases

Banks Info on ability to service loan

Consumers Info on continuity of company and ability to

provide goods and servicesTaxation authorities Info to determine the amount of tax payable

Regulatory bodies Info to determine if the firm is abiding byregulations, e.g. Companies Act 1957, SecuritiesAct, etc.

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FINANCIAL AND MANAGEMENT ACCOUNTING

Financial Accounting Management AccountingRegulations Bound by GAAP* which

are represented byaccounting standards,Companies Act and other

relevant rules

Much less formal and thereare no rules as such whichapply

Timeliness Information is oftenoutdated by the time thereport is distributed to theusers

Much more up-to-date

Level of detail More concise as it doesnot contain excessivedetail

Much more detailed andcan be tailored to suit theneeds of the user

Main users Prepared to suit a varietyof users

Note: *Generally Accepted Accounting Principles (GAAP) provides accountingstandards for preparing accounting reports 8


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LIMITATION OF ACCOUNTING INFORMATION

Time Lag:

There is significant delay from the end of thefinancial year until the info reaches users in the

form of financial reportThe internet has assisted in decreasing the time

lag: however, there is often a time period ofthree months from the end of the financial yearuntil the publishing of the financial report

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Historical Information:

Despite one of the major roles of accounting infobeing to make an assessment as to the future

performance of the entity, the info in financialreports is based on past transactions andtherefore does not provide forecast info.

However, often a review of the past is the bestguide to the future performance

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Subjectivity of information:

Even though the preparation of reports is basedon GAAP, there is much subjectivity in the

inclusion of items to be reported and the choiceof policies to be adopted.

Different practices in different countries alsoresulted in difficulties in comparing financialreports on companies based in differentcountries

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POTENTIAL COSTS OF PROVIDING ACCOUNTING

INFORMATION

Information costs

Various costs involved in gathering, summarizingand producing the financial reports

Release of competitive information

The info could be used by the competitors tostrengthen their market position

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CHANGES IN ACCOUNTING

Entities become larger, more diversified andmultinational, thus require accountants to bemore well-verse of current accounting standards

including knowledge of international accountingstandards

Entity liquidation has become a morewidespread issue, with far-reaching

consequences, e.g. Enron, the 7th

largest entityin the U.S. and Arthur Andersen, a 100-year-oldaccounting entity, which is also among the big-five accounting entities

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In the years leading up to its bankruptcy, Enronhad been reporting inflated profits andunderstating liabilities. Arthur Andersen, in its

position of auditor, had checked Enronsaccount and reassured investors and creditorsthat the accounts did accurately reflect thefinancial performance and position of the entity.

This resulted in a large numbers of investorsand creditors seeking damages in the law courtsfrom Arthur Andersen

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In local scene, Transmile Group Berhad, a companyinvolved in air-freight services had been under probein early 2008 due to financial irregularities

The dramatic exposure of Transmile came to light in

mid-2007, when auditors discovered fake receivablessitting on Transmiles books From a market cap of RM3.89bil at its high of

RM14.40 on Jan 3, 2007, the company has now beenreduced to a dismal market cap of RM155.32mil

Since then, Transmile shareholders have collectivelylost billions. Not surprisingly too, Transmile has beenannouncing losses in its quarterly earnings since

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Corporate Governance and Ethics

Recent corporate collapses have resulted inmany questions being raised about the integrity

and ethics of the accounting profession, the roleof corporate governance in entities and thequality of financial reporting

Simple definition of ethics is what is good or

bad, having to do with moral duty and obligation

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Corporate Governance and Ethics Maintaining ethics in an entity means complying with

the rules and policies of the entity, and havingawareness of the different needs of the stakeholders

in the entity Increasing expectations from stakeholders forcing

companies to address ethics effectively

Corporate governance structure in an entity specifies

the distribution of rights and responsibilities amongdifferent participants in the entity, e.g. BOD,managers, shareholders, etc

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PROFESSIONAL ASSOCIATION

Malaysian Institute of Certified Public Accountant(MICPA), previously known as MACPAVision

To be the premier business qualification in Malaysia,

comparable to the best in the world.Mission To enhance the value and distinctiveness of the Certified

Public Accountant (CPA) qualification

To promote high standards of professional conduct and

technical competence of members to safeguard publicinterest

To provide quality professional education and trainingthereby creating a competitive advantage for members

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PROFESSIONAL ASSOCIATION

Malaysian Institute of Accountant (MIA) MIA is a statutory body established under the

Accountants Act, 1967 to regulate and develop theaccountancy profession in Malaysia. To date, MIA

has close to 25,000 members. MIAs responsibilities include education and quality

assurance as well as enforcement which are carriedout to ensure that the credibility of the profession is

maintained and that public interest is continuouslyupheld.

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STUDY QUESTION

1. What is the accounting process?

2. What is the difference between accounting andbookkeeping?

3. How does accounting assist in decision makingby various users?

4. What are the differences betweenmanagement accounting and financial

accounting?5. What re some of the limitations of accounting

information?

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Ch 1 Intro to Accounting

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