PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.1

ACCOUNTINGACCOUNTINGFinancial and Organisational Financial and Organisational

Decision MakingDecision Making

Chapter 1

The accounting environmentSlides written and designed by

Tony Van Eekelen

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.2

Learning ObjectivesLearning Objectives

• In this chapter you will be introduced to – the nature of accounting– the different roles and uses of accounting

information– who regulates accounting and why– the role of accounting in economic decision

making– the users of accounting information

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.3

Learning ObjectivesLearning Objectives

– the types of entities that use accounting information

– how the international environment affects accounting

– how pervasive accounting is in society

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.4

Accounting definedAccounting defined

• “Recording, classifying and reporting”– bookkeeping

• Modern definition– interpretation and analysis of accounting reports

– the design and operations of computer-based systems

– the planning and control of business activities

– the understanding of complex accounting regulations

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.5

Accounting defined - continuedAccounting defined - continued

• American Accounting Association– “the process of identifying, measuring and

communicating economic information to permit informed judgments and decisions by users of the information”

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.6

UsersUsers

• Owners or shareholders of a business entity

• People who have lent money to the entity

• Employees

• Government regulatory agencies– ATO

• Social and political interest groups

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.7

Key financial statementsKey financial statements

Profit and Loss Statement

Balance Sheet

Cash Flow Statement

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.8

Profit and Loss StatementProfit and Loss Statement

• Reports – revenues– expenses– and profit that have been made during a given

period.

• Indicates the financial performance of the entity

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.9

Balance SheetBalance Sheet

• Reports– assets controlled by the entity– debts– and the owner’s claim on the entity

• Indicates the financial position of the entity

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.10

Reading the financial statements Reading the financial statements

• Assets– in order of liquidity– items which generate revenue for the entity

• Liabilities– debts incurred by the entity– first claim on assets

• Owner’s equity– net assets = assets less liabilities

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.11

Reading the financial statementsReading the financial statements

Balance sheet– Assets = Liabilities + Owners’ equity

Profit and Loss Statement– Revenue Less Expenses

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.12

What are accounting entities?What are accounting entities?

• Separate from owners

• Users of accounting information have an interest

• Many forms– individuals, company, a professional practice,– club, government department, small business

enterprise

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.13

Sole proprietorshipsSole proprietorships

• Owned by one person

• Owner’s contribution = capital

• Unincorporated

• Owner liable for entity’s debts

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.14

PartnershipsPartnerships

• Unincorporated

• Max - 20 partners

• Personally liable for any debts

• Partnership agreement– salaries, profit sharing, contributions, interest…– Partnership Act

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.15

Shareholders in companiesShareholders in companies

• Incorporated as companies

• Limited by share capital - limited liability

• Companies are separate legal entities

• Proprietary Limited - Pty Ltd– privately owned– 1 to 50 shareholders– transfer of ownership restricted

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.16

Public CompaniesPublic Companies

• No maximum number of shareholders

• Most listed on stock exchange

• Director’s appointment on behalf of shareholders - stewardship

• Annual general meeting– election of directors– auditor appointed– determination of dividend

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.17

Public CompaniesPublic Companies

• Annual reports– true and fair– and not disguised to mislead the shareholders

• Decisions?– dividends?– directors appointment?

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.18

Public Sector ProprietorshipsPublic Sector Proprietorships• Public sector

– Federal and state governments– councils and all associated structures

• Unique reasons for reports– owners - taxpayers– not necessarily a profit motive

• Past reports were cash based• Due to accountability need for more sophisticated

reports

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.19

The environment of accountingThe environment of accounting

Society

Regulatoryenvironment

Economic decisionmaking environment

International environment

Figure 1.1

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.20

The regulatory environmentThe regulatory environment

• Form the rules and principles that govern the structure, content, audit and disclosure of financial information

• Three main sources– Company legislation– Stock Exchange listing requirements– Accounting standards

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.21

Requirements of companies legislationRequirements of companies legislation

• Corporations Law– passed by Federal Parliament– formation, conduct, administration and winding

up of companies

• Directors must present audited profit and loss and balance sheet at AGM

• Disclosure requirements in Schedule 5

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.22

Stock exchange listing requirementsStock exchange listing requirements

• Australian Stock Exchange - ASX– non-profit, private sector body

• Strict and comprehensive listing requirements

• Main emphasis is on financial disclosure

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.23

Accounting StandardsAccounting Standards

• Detailed rules relating to an entity’s accounting records

• Australian Accounting Standards Board– AASB

• Public Sector Accounting Standards Board– PSASB

• AASB issues Approved Australian Accounting Standards

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.24

Accounting StandardsAccounting Standards

• Accounting standards apply to publicly listed companies, public sector entities and not-for-profit entities

• Standards deal with disclosure and measurement in the financial statements

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.25

The economic decision making environmentThe economic decision making environmentF ig u re 1 .2 Th e re la tion sh ip b e tw een fin an c ia l

s ta tem en ts , econ om ic d ec is ion s an d u sers

U S E R S O F A C C O U N TIN GIN F O R M A TIO N

eg ow n ers , len d ers

D E C IS IO N R E Q U IR E Deg w h eth er to in ves t o r

len d m on ey to th e en tity

R E L E V A N T F IN A N C IA L S TA TE M E N TSeg m easu res o f ris k , re tu rn(p ro fit), resou rces ow n ed ,re levan t to u ser d ec is ion s

E C O N O M IC E V E N TSeg fin an c ia l tran sac tion s

con cern in g th e en tity

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.26

The economic decision making environmentThe economic decision making environment

• Investors– shareholders/owners– return = dividends + capital gain– risk vs. return problem

• Lenders– creditors

• short term• long term

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.27

The economic decision making environmentThe economic decision making environment

• Other external users– taxation– ratepayers– social interest groups– employees– government bodies

• economic analysis

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.28

The international accounting environmentThe international accounting environment

• Due to globalisation the need for an understanding of other nations accounting regulations and requirements

• Four factors for differences– state of economic development– state of business complexity– share of political persuasion– reliance on particular system of law

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.29

The international accounting environmentThe international accounting environment

• Four (4) models– British-American Model– Continental Model– South American Model– Mixed Economy Model

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.30

Accounting and SocietyAccounting and Society

• The regulatory environment and society– accounting is the road map of the corporation – accounting can analyse the management's

performance– provides information for decision making

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.31

Accounting and SocietyAccounting and Society

• Social equity function– employee/employer wage relations– public interest – financial distress indicators– user pays services– redistribution of wealth

Chapter 1: The accounting environment

PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.32

Decision Making and SocietyDecision Making and Society

• The efficient use of scarce resources

• Accounting information discloses use

• Provides allocative efficiency

International Environment and Society

• Influence on foreign investment