Financial Accounting
The Basis for Business Decisions
THIRTEENTH EDITION
Williams
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Haka
Bettner
Carcello
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Chapter
1
Accounting
Information for Decision Making
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Learning Objective
To discuss accounting
as the language of
business and the role of
accounting information
in making economic
decisions.
LO1
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Financial Reporting
What is Financial Reporting ?
Financial Reporting is way of recording, analyzing and
summarizing financial data.
Financial data is the name given to the actual
transactions carried out by a business.
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Business &
Types of Business
What is business?
Businesses of whatever sizes or nature exist to make a profit.
Commercial or Industrial concern deals in manufacture and
resale of goods ad services.
Organizations which uses economic resources to create
goods and services
Organization providing jobs for people
Invests money in resources to generate more for owners.
(Profit)
Measuring Profit, Revenues and Expenses Etc.
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Types of Business
Types of Business
Sole Proprietor (Sole Traders)
Partnerships
Corporations (Limited Liability Companies)
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The
accounting
process
Economic
activities
Actions
(decisions)
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Accounting
“links” decision
makers with
economic
activities  and
with the results of
their decisions.
Accounting
information
Decision
makers
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Types of Accounting Information
Financial
Tax
Managerial
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Learning Objective
To discuss the significance of
accounting systems in generating
reliable accounting information,
and understand the five
components of internal control
per COSO’s Internal Control—
Integrated Framework.
LO2
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Accounting Systems
An accounting system consists of the personnel,
procedures, technology, and records used by an
organization to develop accounting information
and to communicate this information to decision
makers.
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Information System
Information
Users
Investors
Creditors
Managers
Owners
Customers
Employees
Regulators
-SEC
-IRS
-FTC
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Financial
Information
Provided
Profitability
Financial
position
Cash flows
Decisions
Supported
Performance
evaluations
Stock
investments
Tax strategies
Labor relations
Resource
allocations
Lending
decisions
Borrowing
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Basic Functions of an Accounting
System
 Interpret
and record
business
transactions.
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 Classify
similar
transactions
into useful
reports.
 Summarize
and
communicate
information to
decision
makers.
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External Users of Accounting
Information
•Owners
•Creditors
•Potential investors
•Labor unions
•Governmental agencies
•Suppliers
•Customers
•Trade associations
•General public
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Objectives of External Financial
Reporting
Balance Sheet
Income Statement
Statement of Cash Flows
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The primary
financial
statements.
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Users of Internal Accounting
Information
 Board of directors
 Chief executive officer






(CEO)
Chief financial officer (CFO)
Vice presidents
Business unit managers
Plant managers
Store managers
Line supervisors
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Owners
Board of
Directors
Chief Executive
Officer
(CEO)
V.P
Ethics
Business
Unit
Managers
V.P.
Human
Resources
Plant
Managers
Plant
Managers
Plant
Accountants
Plant
Accountants
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Typical
Simple
Organization
Chart
V.P.
Information
Services
Chief
Financial
Officer (CFO)
Controller
Treasurer
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Objectives of Management
Accounting Information
To help achieve
goals and missions
To help evaluate
and reward
decision makers
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The Regulatory System

A number of factors have shaped the development of
financial accounting, few are:
 National
/ Local legislation
 Accounting Concepts and Individual judgement
 Accounting Standards (IASs and IFRSs)
• National and International Standards
International Influences – SAC, IFRIC, IASCF
 Generally Accepted Accounting Principles (GAAP)
 Fair presentation
 Other
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Introduction to Accounting
Principles and GAAP

There are general rules and concepts that govern the field of
accounting. These general rules—referred to as basic
accounting principles and guidelines—form the groundwork
on which more detailed, complicated, and legalistic accounting
rules are based.

For example, the Financial Accounting Standards Board
(FASB) uses the basic accounting principles and guidelines as
a basis for their own detailed and comprehensive set of
accounting rules and standards.

Both the company's management and the independent
accountants must certify that the financial statements and the
related notes to the financial statements have been prepared
in accordance with GAAP.
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Basic Accounting Principles and
Guidelines

Since GAAP is founded on the basic accounting
principles and guidelines, we can better understand
GAAP if we understand those accounting principles.

Following are the ten main accounting principles and
guidelines together with a highly condensed explanation
of each.
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Basic Accounting Principles
1.


Business Entity Assumption
The accountant keeps all of the business transactions of
a sole proprietorship separate from the business owner's
personal transactions. For legal purposes, a sole
proprietorship and its owner are considered to be one
entity, but for accounting purposes they are considered
to be two separate entities.
Owner is separate from business
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Basic Accounting Principles
2.
Stable Dollar Assumption

Economic activity is measured in U.S. dollars, and only
transactions that can be expressed in U.S. dollars are
recorded.
 This principle assumes that the dollar units being used as
the basis for recording economic events is stable and that
no price-level fluctuations are large enough to have a
material effect.
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Basic Accounting Principles
3.
Time Period Assumption

This accounting principle assumes that it is possible to
report the complex and ongoing activities of a business in
relatively short, distinct time intervals. The shorter the time
interval, the more likely the need for the accountant to
estimate amounts relevant to that period.

Complete financial statements are prepared at regular
intervals - normally a year.
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Basic Accounting Principles
4.
Cost Principle

From an accountant's point of view, the term "cost" refers
to the amount spent when an item was originally obtained,
whether that purchase happened last year or thirty years
ago. For this reason, the amounts shown on financial
statements are referred to as historical cost amounts.

Because of this accounting principle asset amounts are not
adjusted upward for inflation. In fact, as a general rule,
asset amounts are not adjusted to reflect any type of
increase in value.
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Basic Accounting Principles
5.
Full Disclosure

If certain information is important to an investor or lender
using the financial statements, that information should be
disclosed within the statement or in the notes to the
statement. It is because of this basic accounting principle
that numerous pages of "footnotes" are often attached to
financial statements.

A company usually lists its significant accounting policies
as the first note to its financial statements.

Any events subsequent to the year-end but prior to
reporting should be described in the notes to the financial
statements.
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Basic Accounting Principles
6.

Going Concern Principle
This accounting principle assumes that a company will
continue to exist long enough to carry out its objectives
and commitments and will not liquidate in the
foreseeable future. If the company's financial situation is
such that the accountant believes the company will not
be able to continue on, the accountant is required to
disclose this assessment.
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Basic Accounting Principles
7.
Matching Principle

This accounting principle requires companies to use the
accrual basis of accounting. The matching principle
requires that expenses be matched with revenues. For
example, sales commissions expense should be reported
in the period when the sales were made (and not
reported in the period when the commissions were paid).
Wages to employees are reported as an expense in the
week when the employees worked and not in the week
when the employees are paid.

Record all the necessary expenses that are incurred for
generating Revenue of one accounting period
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Basic Accounting Principles
8.

Realisation Principle
Under the accrual basis of accounting (as opposed to
the cash basis of accounting), revenues are recognized
as soon as a product has been sold or a service has been
performed, regardless of when the money is actually
received. Under this basic accounting principle, a company
could earn and report $20,000 of revenue in its first month
of operation but receive $0 in actual cash in that month.
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What is GAAP?
9.
Materiality

Because of this basic accounting principle or guideline, an
accountant might be allowed to violate another accounting
principle if an amount is insignificant. Professional
judgment is needed to decide whether an amount is
insignificant or immaterial.

An item small enough in value as to have no effect on
decisions need not follow generally accepted accounting
principles
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Basic Accounting Principles
10. Conservatism

If a situation arises where there are two acceptable
alternatives for reporting an item, conservatism directs the
accountant to choose the alternative that will result in less
net income and/or less asset amount. Conservatism does
not direct accountants to be conservative. Accountants are
expected to be unbiased and objective.

Conservatism leads accountants to anticipate or disclose
losses, but it does not allow a similar action for gains. For
example, potential losses from lawsuits will be reported on
the financial statements or in the notes, but potential gains
will not be reported.
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Other Characteristics of
Accounting Information
When financial reports are generated by
professional accountants, we have certain
expectations of the information they present to us:
1. We expect the accounting information to be
reliable, verifiable, and objective.
2. We expect consistency in the accounting
information.
3. We expect comparability in the accounting
information.
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Learning Objective
To discuss elements of
the system of external
and internal financial
reporting that create
integrity in the reported
information.
LO5
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Integrity of Accounting Information
Institutional Features
Generally Accepted Accounting Principles (GAAP)
Financial Accounting Standards Board
International Accounting Standards Board
Securities and Exchange Commission
Public Company Accounting Oversight Board
Audits of Financial Statements
Legislation
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Learning Objective
To identify and discuss
several professional
organizations that play
important roles in
preparing and
communicating
accounting information.
LO6
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Integrity of Accounting Information
Professional Organizations
American Institute of Certified Public Accountants
Institute of Management Accountants
Institute of Internal Auditors
American Accounting Association
Committee of Sponsoring Organizations of the
Treadway Commission (COSO)
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Learning Objective
To discuss the
importance of personal
competence,
professional judgment,
and ethical behavior on
the part of accounting
professionals.
LO7
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Integrity of Accounting Information
Competence, Judgment and Ethical Behavior
Certified Public Accountants (CPAs)
Certificate in Management Accounting (CMA)
Certificate in Internal Auditing (CIA)
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Learning Objective
To discuss various
career opportunities in
accounting.
LO8
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Careers in Accounting
Public Accounting
Management Accounting
Governmental Accounting
Accounting Education
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End of Chapter 1
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