ACCT1101 Lecture Notes

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Robert Ferguson

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Accounting for Decision Making 1 ACCT1101Lecture One Define accounting Accounting is concerned with the collection analysis and communication of economic information Accounting fulfils two roles stewardship and decision usefulness It is used to provide information for decision making for the users Discuss the role of accounting information Accounting information is useful to those who need to make decisions and plans about businesses and for those who control those businesses List the main user groups for a business entity There are several main user groups that are interested in accounting information owners customers competitors employees government community representatives investment analysts suppliers leaders and managers Summarise the different uses that can be made of accounting information Accounting information can be used to create budgets manage performance make business or investment decisions and assess long term solvencyExplain the different procedures involved in the accounting information system There is four sequential stages of accounting information identification recording analysis and reporting The first two stages are concerned with preparation and the last two stages are concerned with using the information collected Relate the steps in the planning process The planning process begins with setting the mission of the business setting objectives of the business setting long term plans and setting detailed short term plans or budgetsDiscuss the nature of control in the decisionmaking process Control is the process of making planned events actually occurs by minimizing the variance between plans and actual performance The controlling process begins after the planning process with collecting information on actual performance responding to divergence between plans and actual exercise control last revise plans and budgets if necessary Discuss some alternative business objectives Objectives are specific ways in which a business plans to achieve its goals over a period of time There are several business objectives maximisation of sales revenue maximisation of profits maximisation of return on capital employment survival long term stability growth satisficisng achieving sustainable development maximisation fo wealth and maximisation of positive cash flow Compare and contrast financial and management accounting Management accounting is concerned with providing managers with information required for daytoday running of the business Financial accounting is concerned with providing the other users with useful information Management accounting highlights internal use specific purpose and detailed documentation Conversely financial management focuses on external use general purpose and broad overview periodic and objective data that follows accounting standards Provide an overview of the main financial reports There are four main financial statements statement of financial position income statement statement of changes in owners equity and statement of cash flows The statement of financial position or balance sheet shows an overall net Accounting for Decision Making 2 ACCT1101financial position at the period end of assets liabilities and equity Income statement or statement of comprehensive income measures and reports how much profit has been generated in a period These financial reports are interrelatedthe statement of financial performance and statement of cash flows are concerned with measuring flows of wealth over time the statement of financial position is concerned with measuring the stock of wealth at a particular time and the statement of changes in equity represents a summary of how ownership interest has changed over time Discuss the regulatory environment of accounting There are four main factors influencing the form and content of financial statements conventional accounting practice conceptual framework accounting standards and company statutory law The conventional accounting practice include the business entity money measurement historic cost continuity dual aspect prudence and stable monetary unit objectivity accounting period realisation and matching conventions that accounting rules are based upon There are certain characteristics of accounting concepts including relevance understandability reliability comparability materiality and timeliness There are numerous standards that directly affect recording and reporting of assets liabilities equity revenue expenses and disclosures of statements The Companies Act covers all aspects of law relating to companies in Australia Discuss the recent crisis of accounting Enron The information in Enrons financial statements did not convey a realistic picture and the decision based on this information had disastrous consequences Lecture Two Discuss the nature of sole proprietorships Business entities may be structured as sole proprietorship partnership and companies an accounting entity is an economic unit that controls resources and engages in economic activity Sole proprietorships one person business have no separate legal entity limited life unlimited liability minimum reporting regulations limited access to funds and low establishment costs Advantages include simple and inexpensive to establish and operate minimal financial reporting regulations combine ownership and management and timely decision making however relatively low profits Discuss the nature of partnerships Partnerships may be described as the relationship between two or more persons carrying on a business with the aim of generating financial profit It has no separate legal entity limited life unlimited liability mutual agency coownership of assets coownership of profits limited membership and increased regulation Discuss the nature of companies A limited company is an artificial legal person which has an identity separate from that of those who own and manage it Ownership interest is broken down into shares hence shareholders are the owners who have invested in the business It is a separate legal entity unlimited perpetual life limited liability company ownership of assets company profits belong to the shareholders extensive membership separation of ownership and management and extensive regulations Advantages include separation of ownership and management perpetual existence separate legal entity owners have limited liability greater access to ownership funding potentially greater access to debt funding potential taxation advantages and potential increases in share values when listed on the ASX Australian Stock Exchange Disadvantages include extensive
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