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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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LIMITATION OF ACCOUNTING INFORMATION
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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LIMITATION OF ACCOUNTING INFORMATION
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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CHANGES IN ACCOUNTING
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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CHANGES IN ACCOUNTING
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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CHANGES IN ACCOUNTING
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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CHANGES IN ACCOUNTING
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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