FA-SESSION-1 changed.ppt

Accounting as an Accounting as an Information SystemInformation System

AccountingAccounting provides a vital service provides a vital service by supplying the information decision by supplying the information decision makers need to make makers need to make reasoned reasoned choices among alternative uses of choices among alternative uses of scarce resources in the conduct of scarce resources in the conduct of business and economic activities.business and economic activities.

Accounting is a link between Accounting is a link between business activities and decision business activities and decision makersmakers• Accounting measures business activities Accounting measures business activities

by recording data about them for future by recording data about them for future use.use.

• The data are stored until needed and The data are stored until needed and then processed to become useful then processed to become useful informationinformation

Business GoalsBusiness Goals

1. Profitability.1. Profitability. A business must take in enough money A business must take in enough money to pay all the costs of doing business, to pay all the costs of doing business, withwith enough left over as profit for the owners enough left over as profit for the owners to want to stay in business. to want to stay in business.

2. Liquidity.2. Liquidity. A business must have enough cash A business must have enough cash available to pay debts when they are due.available to pay debts when they are due.

Business Goals and Business Goals and ActivitiesActivities

Business ActivitiesBusiness Activities

1.1. Financing Activities.Financing Activities. Obtaining capital from owners and Obtaining capital from owners and

creditors.creditors. Repaying creditors and a return to owners.Repaying creditors and a return to owners.

2.2. Investing Activities.Investing Activities. Spending the capital it receives in ways Spending the capital it receives in ways

that are productive and will help the that are productive and will help the business achieve its objectives.business achieve its objectives.

Buying and selling assets to be used in the Buying and selling assets to be used in the business.business.

3.3. Operating Activities.Operating Activities. Selling of goods and services to Selling of goods and services to

customers.customers. Employing managers and workers, Employing managers and workers,

buying and producing goods and buying and producing goods and services, and paying taxesservices, and paying taxes

Financial and Management Financial and Management AccountingAccounting

Accounting’s role of assisting Accounting’s role of assisting decision makers by measuring, decision makers by measuring, processing, and communicating processing, and communicating information is usually divided into information is usually divided into two categories:two categories:1.1. Management accounting.Management accounting.2.2. Financial accounting.Financial accounting.

The two may be distinguished by the The two may be distinguished by the principal users of their informationprincipal users of their information

Management AccountingManagement Accounting

Is oriented toward the needs of Is oriented toward the needs of internal decision makers.internal decision makers.

Provides managers and employees Provides managers and employees with information regarding how they with information regarding how they have done in the past and what they have done in the past and what they can expect in the futurecan expect in the future

Financial AccountingFinancial Accounting

Is oriented toward the needs of Is oriented toward the needs of external decision makers.external decision makers.

Provides information in the form of Provides information in the form of financial statements so that external financial statements so that external decision makers can evaluate how decision makers can evaluate how well the business has achieved its well the business has achieved its goals.goals.

Financial statements report directly Financial statements report directly on the goals of profitability and on the goals of profitability and liquidity. liquidity. – Financial statements are used Financial statements are used

extensively both inside and outside a extensively both inside and outside a business to evaluate the business’s business to evaluate the business’s success.success.

Decision Makers: The Users Decision Makers: The Users of Accounting Informationof Accounting Information

ManagementManagement Requires financial information to carry out Requires financial information to carry out

its basic functions.its basic functions.

1. Financing the business.1. Financing the business.

2. Investing the resources of the business.2. Investing the resources of the business.

3. Producing goods and services.3. Producing goods and services.

4. Marketing goods and services.4. Marketing goods and services.

5. Managing employees.5. Managing employees.

6. Providing information to decision 6. Providing information to decision makers.makers.

Outside Users withOutside Users witha Direct Financial Interesta Direct Financial Interest

InvestorsInvestors CreditorsCreditors

People, Organizations, and People, Organizations, and Agencies with an Indirect Agencies with an Indirect

Financial InterestFinancial Interest Tax AuthoritiesTax Authorities Regulatory Agencies.Regulatory Agencies. Labor UnionsLabor Unions Customers.Customers. Economic PlannersEconomic Planners

An overview of Income An overview of Income statement and statement and BalancesheetBalancesheet

Income statement (statement of Income statement (statement of operations)operations)

A statement showing the revenues, A statement showing the revenues, expenses, and income (the expenses, and income (the difference between revenues and difference between revenues and expenses) of a corporation over expenses) of a corporation over some period of time.some period of time.

Balance sheetBalance sheet

Also called the statement of financial Also called the statement of financial condition, it is a summary of a condition, it is a summary of a company's assets, liabilities, and company's assets, liabilities, and owners' equity. owners' equity. The document distributed at the annual The document distributed at the annual meeting to shareholders of record who meeting to shareholders of record who wish to vote their shares in person. wish to vote their shares in person.

Preparation of Income Preparation of Income StatementStatement

The Income Statement normally shows The Income Statement normally shows whether the business is earning profits or whether the business is earning profits or sustaining losses. It communicates the sustaining losses. It communicates the financial performance of the business. The financial performance of the business. The structure of the income statement differs structure of the income statement differs with the nature of the business. The with the nature of the business. The business can either be a manufacturing, business can either be a manufacturing, merchandising/trading or service entity. merchandising/trading or service entity. Regardless of the structure, they however, Regardless of the structure, they however, communicate the same information.communicate the same information.

Factors to be considered in the Factors to be considered in the preparation of income statements preparation of income statements are:are:

Revenues/SalesRevenues/Sales This item carries the revenues/sales This item carries the revenues/sales generations of the company. Sales generations of the company. Sales consist of Cash Sales (cash is paid at consist of Cash Sales (cash is paid at the time of sale) or Credit Sales the time of sale) or Credit Sales (Cash paid later). (Cash paid later).