Download University of Tasmania 28 Users of accounting information The

BFA103
Accounting
& Financial
Decision Making
Version: 2.0
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Provider Code: 00586B
My Contact Details
 Steve Allen
 64304578
 0408358211
 [email protected]
 @UTASCCC
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Handouts today
1. Unit outline
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Week 1
Module 1: Financial accounting
Topic 1: The role of accounting in
business
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Reading and Independent Study
 Read
 Prepare answers to Discussion Questions
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Learning objectives
After studying this topic you should be able to:
• Explain the term “business”, and identify the role of
accounting in business
• Distinguish between the sole proprietorship and the
company form of business organisation
• Identify the various groups of people who use
accounting information, and discuss how their
information needs differ
• Identify the characteristics that accounting
information should have if user needs are to be
satisfied
• Distinguish between financial and management
accounting
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What is a business?
• A business is one person, or a group of people,
working to provide goods or services to
customers
• All businesses, in one way or another, aim to
transform resources from one form to a
different, more valuable form to meet the needs
of its customers – by doing so, businesses are
said to add value, and therefore contribute to
society
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Why create a business?
Some possible business objectives:
• Maximise profit
• In the shorter term, maximise sales and grow market
share (to improve profits in the future)
• Maximise the wealth or value of the business (perhaps
with a view to selling it in the future)
• Maximise the return on investment of the owners
• Provide a fair return to all stakeholders
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Types of business
Businesses vary according to:
Type of
Activity
Type of
Ownership
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• Service provider
• Retailer
• Manufacturer
• Sole proprietorship
• Partnership
• Company
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Types of business
Types of Ownership
Sole
proprietorship
Partnership
Company
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• Business is owned and usually
managed by one person
• Two or more people agree to conduct
business together
• Shareholders are the owners
• Business is managed by a board of
directors elected by sharesholders
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Types of business
Some differences between a sole proprietorship and a
company:
Separate
Legal Entity
Separation of
ownership
and
management
Greater
finance
options
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Limited
Liability
Subject to
more
regulation
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Types of business
Some differences between a sole proprietorship and a
company:
1. A company is a legal (and taxable) entity separate
from its shareholders. It has a perpetual life
independent of its shareholders and managers. A
sole proprietorship has no legal status, does not pay
tax, and has a life that is limited to the period of
involvement of its owner
2. Shareholders can not be required to meet the debts
of a company from personal assets (limited liability)
whereas a sole proprietor has unlimited liability
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Types of business
3. Companies are more expensive than sole
proprietorships to establish and a subject to more
regulation
4. The number of shareholders in a company may be
large, and so the amount of money that can be raised
to finance the operations of the business is much
greater
5. With large companies, there will be a separation of
ownership and management, with most shareholders
not participating in the day-to-day running of a
company
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The role of accounting in business
• To identify important economic events in the life of a
business, to record and analyse those events, and
then to communicate information about them in
financial statements
• Not all events affecting a business will be recorded in
an accounting system. Accountants focus on
transactions (exchanges of resources with other
entities that can be measured in $ terms, for example,
the sale of inventory). An interview with a prospective
employee may be an important event for a business
but it is not a transaction.
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The role of accounting in business
• Not all events affecting a business will be recorded in
an accounting system. Accountants focus on
transactions (exchanges of resources with other
entities that can be measured in $ terms, for example,
the sale of inventory). An interview with a prospective
employee may be an important event for a business
but it is not a transaction.
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The role of accounting in business
Your problem – which, if any of the following events
would be considered a transaction, and need to be
recorded in an accounting system?
1. Applied to a bank for a bank overdraft
2. Received notification that the overdraft had been
approved
3. Drawing on the bank overdraft, made a payment to a
supplier by cheque
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The role of accounting in business
Your problem – which, if any of the following events
would be considered a transaction, and need to be
recorded in an accounting system
1. Applied to a bank for a bank overdraft
2. Received notification that the overdraft had been
approved
3. Drawing on the bank overdraft, made a payment to a
supplier by cheque
Answer – only the 3rd event involves an exchange of
resources and would need to be recorded
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The role of accounting in business
• The information in the financial statements needs to
be useful for people who have an interest in the
business (“stakeholders”), and who have to make
decisions about how to allocate scarce resources
• The information in the financial statements may also
plays a stewardship role by ensuring that the
managers of a business are held accountable for their
decisions. For example, have they taken measures to
protect the resources of the business, and have they
used those resources to create a satisfactory return
for the owners?
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What makes information useful?
If accounting information is to be useful to users of
accounting reports, and is to assist them to make
decisions then it is worth asking the question:
“What is it about information that actually makes it
useful?”
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What makes information useful?
If accounting information is to be useful then it needs to
be:
• relevant – will make a difference to the decision being
considered by the user
• reliable - free of significant error or bias, accurately
represents what it purports to represent
• comparable – for example, with information from
previous years or other businesses
• Verifiable – can be measured objectively
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What makes information useful?
If accounting information is to be useful then it needs to
be:
• Timely – communicated to users in an efficient
manner
• Understandable (at least by someone with a
reasonable knowledge of accounting)
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What makes information useful?
• In some cases, information may be useful but not
have all these qualities.
• Trade-offs between the qualities may be unavoidable.
For example, a business might change an accounting
technique to make the information more reliable, but
in doing so, make comparisons with previous years
difficult.
• A question for you – can you think of another situation
in which a trade-off between two of these qualities
might be required?
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What makes information useful?
Note that the creation of information always has a cost,
and the benefits from producing some information, in
other words, its usefulness, must be weighed against its
cost
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Users of accounting information
External Users
Internal Users
Owners
Managers
Potential investors
Lenders
Government
Employees
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Users of accounting information
The people who need to use accounting information can
be divided into 2 groups:
1. Internal – managers who must oversee the day-to-day
operations of a business, and who will require
accounting information to assist them in planning for
the future, and in controlling the activities of the
business.
Management accounting provides information for the
managers of a business to be used for internal decisionmaking
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Users of accounting information
2. External - people outside a business including
recipients of goods and services (customers),
resource providers (suppliers of resources including
employees, lenders of finance, shareholders), and
those who perform a review or oversight function
(government agencies, investment analysts)
Financial accounting provides information to facilitate
the decision-making of people external to a business
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Users of accounting information
General Purpose
Financial Reports for
External Users
• Very heavily regulated
if a company by the
Corporations Act 1991
Internal Reports
• Any type of report that
will help managers to
make decisions about
the business
• Not regulated at all
Income
Statement
Any type of report
that will help
managers.
Balance Sheet
Cash Flow
Statement
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Examples include:
budgets,
forecasts,
formatted income
statements etc.
Structure of the unit
The unit comprises 3 modules
Module 1 Financial accounting (5 Topics)
When you complete this module, you should be able to
examine the published financial statements of a
company and understand what they reveal to us. You
should be able to identify the main components of these
statements, and explain the general principles
underlying their preparation
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Structure of the unit
Module 2 Analysis of financial statements (2 Topics)
When you complete this module, you should be able to
analyse the published financial statements of a company
by undertaking a variety of ratio calculations and then
interpreting the significance of these calculations. You
should also be able to identify various limitations of this
form of analysis.
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Structure of the unit
Module 3 Internal decision making (4 Topics)
When you complete this module, you should be able to
demonstrate how managers use accounting and other
financial information in a variety of internal decisionmaking contexts; for example, cash budgeting, costvolume-profit analysis, and capital investment
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Next lecture
Module 1, Topic 2
Income statement and balance sheet
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