TBS 901

Module 1

Introduction
and
Overview

1-1
 “people united for a common
purpose”
Organisations
Goals
Types
•  Growth
•  Manufacturers
•  Profit
•  Retailers
•  Quality
•  Service Industries
•  Leadership
•  Nonprofits
Information Needs
•  Government
•  Financial
•  Production
•  Personnel
•  Environmental
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•  Legal
 Managing Resources, Activities
and People

An organisation . . . Directing

Decision
Making
acquires resources
Organised set
of activities
Planning

Controlling
hires people
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 Planning and control cycle

Formulating long-
and short-term
plans (Planning)

Comparing actual Implementing the

to planned Decision plans (Directing
performance Making and Motivating)
(Controlling)

Measuring
performance
1-4 (Controlling)
 Nature of Accounting 1
•  Accounting is a service activity.
•  Function is to provide useful financial info
for economic decision making.
•  Most economic activity involves decisions
about how to allocate available resources
effectively among alternative needs.
•  Often called “the language of business”.
•  Accounting terminology & symbols have
been developed to communicate financial
info effectively.
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 Nature of Accounting 2

•  The identification, measurement, and

communication of financial information
about economic entities to interested
parties.
•  Accountants serve as “preparers” to
external and internal users.

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 Nature of Accounting 3

•  Follows separate entity concept. Assumes

business is separate & distinct from owners.
•  Has a standard unit of measure.
•  Has become increasingly important with the
separation of ownership and control in a
corporation - must be an independent,
reliable means of reporting to owners since
they are not usually involved in the normal
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operations of the large corporation.
Environmental Factors Impacting
Accounting
•  Social structure will affect perceived needs,
acceptable goals, methods, etc
•  Economic structure will affect reporting and
flow of resources
•  Legal - laws and regulations will affect
acceptable accounting theory.
•  Political environment influences accounting
•  Religious - basic values of society & individuals
1-8 will help determine allocation of resources 5
 Accounting: reactive rather than
proactive

•  Since accounting can not experiment with

individual firms or the economy as a
whole, problems are addressed as they
develop rather than anticipating them.
•  With increased emphasis on research and
early analysis of possible areas of
concern, problems can be addressed in a
more timely manner.
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 The Accounting Process

Identification Measurement Recording

Quantification Recording;
Transactions in money classification;
terms summarisation

Communication

Analysis and Accounting

interpretation reports

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 Stakeholder Groups

User Group Examples of Decisions

Investors - buy/hold/sell shares
Analysts - professional advice
Creditors - levels and terms of credit
Employees - wages claims
Suppliers - what trade to do, terms
Customers - quality, service
Government - taxation, environment
Public - economic and social impact
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 Desirable Characteristics of
Accounting Information

1. Understandable
- figures, graphs, commentaries
- accounting language often
regarded as a “code”
- may be difficult for inexperienced
users to understand

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 Desirable Characteristics of
Accounting Information

2. Objective
- unbiased, verifiable
- neutral
- must not favour any particular
interest group
- must not influence the making of
a decision or judgement in order
to achieve a predetermined
outcome
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 Desirable Characteristics of
Accounting Information

3. Comparable
- able to be compared and
contrasted with information from
elsewhere
- readers need to be able to compare
with:
* expectations
* previous performance
* performance of other organisations

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 Desirable Characteristics of
Accounting Information

4. Realistic
- must reflect the world and the
organisation as they are
- different views of reality
(economic v legal)
- economic form generally favoured
by accounting profession
- legal form may not necessarily be
consistent with the substance of
transactions and events
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 Desirable Characteristics of
Accounting Information
5. Relevant
- make informed decisions
- different decisions may require different
information
- ideally, all decisions require information
about future consequences of decision
“Information has the quality of relevance if it
influences the economic decisions of users by
helping them to evaluate past, present or future
events or by confirming, or correcting their past
evaluations”
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UK Accounting Standards Board
 Desirable Characteristics of
Accounting Information

6. Reliable
- readers must have confidence in
the information provided
- confidence can be reinforced by
perception of comprehensive
audit
- expectations gap can result in
possible misperceptions

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 Desirable Characteristics of
Accounting Information
7. Consistent
- crucial to comparability
- must be consistent in scope and
methods of preparation and
presentation
- changing circumstances may
sometimes require a break from
consistency to achieve realism
- impact of such changes should
be disclosed
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 Desirable Characteristics of
Accounting Information
8. Timely
- stale news is irrelevant
- financial statements should be
published as quickly as is
consistent with the need for them
to be relevant and reliable

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 Desirable Characteristics of
Accounting Information
9. Prudent
- degree of caution
- financial statements contain
information about both completed
and uncompleted transactions
eg credit sales/debtors
- risks and uncertainties need to
be adequately considered

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 Desirable Characteristics of
Accounting Information
10. Economy vs Presentation
- cost v benefits
- preparation and audit of
statements is a costly process
- should be an attempt to ensure
that benefits exceed costs

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 Desirable Characteristics of
Accounting Information
11. Materiality
- recognises the impracticality of
reporting and recording every detail of
an organisation’s activities
- amt and extent of aggregation impacts
on the usefulness and accuracy of
information
- information is material if its omission
or misstatement could influence the
decisions taken by users

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 Desirable Characteristics of
Accounting Information
12. Usefulness
- ultimate yardstick
- not useful, not worth preparing
- “Are better decisions made
because of the existence and
use of the financial statements?’

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 Challenges Facing
Accounting 1

•  Non-financial measurement:
Necessary to adequately assess
performance, liquidity and stability.
•  Forward-looking information:
Accounting relies on past events
(historical costs) rather than expected or
projected values or events. However, some
consideration of tomorrow will enhance
the usefulness of accounting information.
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 Challenges Facing
Accounting 2
•  Soft-assets:
Human resource accounting, valuing a
trained, dedicated work force, the
entrepreneurial spirit, are not presently
valued on the financial statements today.
•  Timeliness:
Audited financial statements provided
annually. Little or no real-time financial
statement information has been available.
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 Accounting Information Systems
Financial accounting
•  maintaining accounting records
•  reporting past performance
•  satisfying external users
Management accounting
•  future orientated
•  assisting internal managers in planning,
decisonmaking, control
•  cash rather than profit orientated
Financial management
•  securing necessary finance
1-26 •  minimising “cost of capital”
 Interactions in Accounting and
Finance

D: Data collection, A: Efficient

accounting Management and effective
records, Accounting use of capital
information
exchange
D A
C
Financial B Financial
B: Profit
Accounting Management C: Taxation,
measurement, cash flow,
asset values, current and
details and impact future
of financial reports operations
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 Mgt v Financial Accounting 1

Accounting System
(accumulates financial and
management accounting data)

Management Accounting Financial Accounting

Information for decision Published financial
making, & control of an statements and other
organisation's operations. financial reports.

Internal External
Users Users
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 Mgt v Financial Accounting 2

Mgt Accounting Fin’l Accounting

Users Managers within Interested outside
firm parties
Required - AASB,
Regulation Not required
Co. Law, tax law

Sources of Basic accounting Almost exclusively

data system plus from basic
various other accounting
sources system

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 Mgt v Financial Accounting 3

Mgt Accounting Fin’l Accounting

Time focus Future emphasis Historical
perspective
Subject Focuses on Primary focus is
specific projects on the whole
and processes organisation
Verifiability v Emphasis on Emphasis on
relevance relevance for verifiability
planning/control
Precision v Emphasis on Emphasis on
timeliness timeliness precision
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 The Changing Business
Environment

A more competitive
environment emphasising:
How has the business   Higher quality products
environment changed   Lower prices and costs
in the past twenty   Increased production
years?   Meeting and anticipating
customer needs
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 Expanding Role of Financial
Management
Increasing complexity and
size of organisations
Regulatory
environment
What factors have Increased
increased the need for emphasis
financial management on quality
information?
World-wide
competition
Rapid development and
implementation of technology
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 Functions of Mgt Accounting 1
1  Planning
–  Goal identification
–  Optimal resource flows
–  Measure achievements
2  Control
–  Measure actual v budgeted
–  Cost, sales and budget reports
3  Decision making
–  Provide information
–  Provide advice and participate
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 Functions of Mgt Accounting 2
4  Capital projects
–  Planning and monitoring programs
–  Reconcile program with corporate plans
–  Prepare medium and long term budgets
5  Performance evaluation
–  How to include financial measures
6  Costs for financial accountants
–  For annual and other external reports
7  Wider roles
–  Economic and strategic reviews
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 Private Sector or Public Sector

•  Traditionally profit orientation v service

orientation
•  Today public sector is becoming
increasingly “corporatised”
•  Business-style management, contracting,
control and accounting methods
•  Breakeven replaced with desire for surplus
•  Internal servicing replaced by
decentralisation and transfer pricing
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 TBS 901
Module 1

Introduction
and
Overview

1-36