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financial accounting
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CHAPTER 1Decision Making and
the Role of Accounting
PowerPoint Presentation by Matthew Tilling
©2012 John Wiley & Sons Australia Ltd
2
YOUR JOURNEY INTO ACCOUNTING
• Accountants– Not ‘Bean Counter’ or ‘Number Crunchers’– Rather Problem Solvers and Decision Makers– Who work in a range of organisations– In a variety of roles
• Accounting– The language of business– More than just bookkeeping
3
THE DECISION-MAKING PROCESS
• Life is full of decisions• Decisions mean making choices– We must choose how to spend our time– We must choose how to spend our resources
• Decisions affect the future• Good decisions require good processes
4
STEPS IN DECISION MAKING
• What are we trying to achieve?Goals
• What information do we need?Information
• What are the consequences of different alternatives?Consequences
• Which course of action should we choose?Choose
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ECONOMIC DECISIONS
• Many decisions involve economic resources• Economic resources have a price as they are
scarce• Must also consider– Personal taste– Social factors– Environmental factors– Religious and/or moral factors– Government Policy
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THE NATURE OF ACCONTING
• Accounting is a service activity– Its function is to provide and interpret financial
information to aid decision making.• Accounting is used in a range of organisations– Business– Government– Charities– Not-for-profits
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THE ACCOUNTING ENVIRONMENT
• Accounting evolves as society and business changes.
• Some of these changes include– Rapid developments in information and
communication technologies– Increasing demand for a range of information
about organisational impact– Globalisation of business– Development of international regulations and
standards
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USERS OF ACCOUNTING INFORMATION
Internal Users• How much profit?• What should be produced?• What resources are
available?• How much does it cost?• How much do we owe?• What would happen if…?• Do we have enough cash?
External Users• Should I invest?• Can the business pay?• Can they repay?• Will they make a profit?• Are they acting ethically?• Is the business socially and
environmentally friendly?
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USING INFORMATION IN ECONOMIC DECISIONS
• Consider Darren, a hard-working editor, who is ready to take on a new career.
• He has the opportunity to start his own gardening business.
• Using the decision making process already outlined he needs to decide if this is the right decision for him.
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GOALS
• Darren wants to do something different to sitting behind a desk. So clearly a gardening business will meet this goal.
• He also wants to be financially secure. To establish this will require additional information
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GATHER INFORMATION
• First he will need a range of equipment:Second-hand van $22 000
Trailer 1 500
Rotary lawnmower 950
Cylinder mower 1 600
Chainsaw 1 150
Edger 600
Hedge trimmer 700
Blower 1 000
Shredder 1 400
Brushcutters 800
Gardening tools, ladders etc. 850
$32 550
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GATHER INFORMATION
• Estimated weekly running costsFuels and oils, repairs and maintenance $500Part-time employee (Sue) 300
$800
• Estimated client numbersLawn mowing and trimming 60Gardening, with shredding if required 12Tree-lopping and shredding 20
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GATHER INFORMATION
• Approximate charges per client
5 lawns mowed on each of 6 days $1 3501 garden on each of 6 days 540
$1 890
• Estimated weekly receipts
Lawn mowing $ 45Gardening $ 90Tree-lopping $ 135
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DETERMINE CONSEQUENCES
• Based on these estimates Darren would expect gross annual turnover for a 48 week year of $90 720.
• This is before including additional income from tree-lopping.
• After taking into account costs this should equate to a net weekly cash inflow of at least $1 040 before tax.
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CHOOSE
• With all these factors in mind Darren can now make an informed decision about his future.
• Would also include non-financial factors.
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ACCOUNTING INFORMATION AND DECISIONS
• Many decisions require significant amounts of financial information– Accounting information is very important
• Accountants report on the past– Still useful for making decisions about the future– Also useful for assessing past decisions
• Accountants also look to the future– Budgeting; strategy and planning
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MANAGEMENT AND FINANCIAL ACCOUNTING
MANAGEMENT ACCOUNTING FINANCIAL ACCOUNTING
• Internal Focus • External Focus
- Planning • Reporting Information
- Controlling - Performance
- Decision-making - Position
• Cost Behaviour • Financing and Investing
• Budgeting • Compliance
• Strategy • Highly Regulated
20
ACCOUNTING AS A PROFESSION AUSTRALIAN PERSPECTIVE
• Self-regulated profession– Similar to law and medicine
• Two major professional associations– CPA Australia (CPA)– Institute of Chartered Accountants Australia
(ICAA)• Membership requires– Tertiary qualification– Ongoing professional development
21
PUBLIC ACCOUNTING
• Accountants who offer their professional services to the public for a fee
• Four main areas with many specialties– Auditing and assurance services– Taxation services– Advisory services– Insolvency and administration
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ACCOUNTING IN COMMERCE AND INDUSTRY
• Accountants who are employed in business entities
• Many areas of interest– General accounting– Cost accounting– Accounting information systems– Budgeting– Taxation accounting– Internal auditing and audit committees
23
NOT-FOR-PROFIT ACCOUNTING
• Many accountants work in the not-for-profit area
• This requires a slightly different approach as profit is not the primary focus
• Includes a range of organisations– Government– NGO– Charities
24
TYPES OF BUSINESS ENTITIES
• Single proprietorship or sole trader– Owned by one person
• Partnership– Owned by two or more partners
• Company or corporation– Owned by shareholders– Separate legal entity– Limited liability
MANAGEMENT FUNCTIONS
Performing according to plan
Evaluating actual versus planned performance
Developing the organisational
structure
What to doHow to do it
DIRECTING
CONTROLLING ORGANISING
PLANNING
DECISIONMAKING
25
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ETHCS AND ACCOUNTANTS
• Ethics in business– Important in all business dealings
• Ethics and professional accounting bodies– Important for the standing of the profession
• Ethics in practice– Identify the ethical issue– Analyse key issues and stakeholders– Select appropriate course of action
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