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Introduction to accounting and the Conceptual Framework.docx

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Monash University
John Gerrand

Week 1 - Chapter, Accounting in action Accounting Accounting is an information system that identifies records and communicates the economic events of an entity to interested users. 1. Identify- involves selecting the economic activities relevant/relate to a particular entity 2. Record- keeping record of economic activities to provide history of the entity‟s financial activities. It is important to realise, the activities must be kept in a systematic, chronological order and measured only in dollars and cents. 3. Communicate- financial information must be presented in financial reports or statements in a meaningful manner and must be in a standardised way for all accountants. Further the information must be able to communicate and allow accountant‟s to analyse and interpret the reported information. Why is accounting important and its role? Accounting is important because:  Accounting information conveys information about business performance to others.  Decisions are made based on the information provided.  Poor accounting practices by businesses can produce information that is inaccurate or misleading.  This can lead to corporate collapses and financial ruin for many people involved. Thus the role of accounting is  To assist people in making decisions about the allocation of scarce resources.  Accounting measures business activity, and processes it into reports to enable communication of the information to users who are internal or external to the entity. Who uses accounting data? There are two types of user for accounting data – internal and external data. Internal users – are managers who plan, organise and run a business. They need internal reports such as investment centre performance evaluations, contribution margin statements and cash budgets. Reports: investment centre performance evaluations, contribution margin statements and cash budgets. Users: marketing managers, production supervisors, chief financial officers and other employees etc… External users- are users who are outside the company but still make contribution to the company as a whole. Users: Investors Shareholders (use information to make decisions to buy, hold or sell shares) Creditors e.g. Suppliers, bankers (use information to evaluate risks of giving credit and lending money) Government and regulatory bodies e.g. ATO, ASIC (use information to determine an entity‟s compliance with rules and regulations) The role of corporate governance in enhancing the quality of financial reporting Corporate governance is a system in which entities are directed, controlled, managed and administered. It influences how the objectives of a company are set and achieved, how risk is monitored and assessed, and how the performance of the entity is optimised. What is the purpose of corporate governance? The purpose of corporate governance is  To primarily, protect investors, shareholders and enhance the perception, reputation and prosperity of the entity.  Governance is largely about the decision-making process of the entity, ensuring that the goals and hence decisions made by management are aligned with those of shareholders.  Corporate failures and collapses are costly, and impact employees, creditors, investors and others. Therefore, good corporate governance prevents this from happening.  Having good corporate governance encourages entities to create value and provide accountability with the ultimate aim of improving the entity‟s performance and attracting additional investment. The building blocks of accounting Ethics- a fundamental business concept Ethics the standards of conduct by which person‟s actions are judged as right or wrong, honest or dishonest, fair or not fair. Why is ethics important? If you cannot depend on honesty of individuals you deal with, effective communication and economic activity is impossible and information has no credibility. The importance of sustainability reporting Sustainability reporting or corporate social responsibility reporting is the reporting and management of non-financial performance to interested stakeholders. Stakeholders want more than just financial statements. Users of such information are interested in knowing that when an entity is conducting its business activity in the provision of goods and services, they do not cause unwanted harm or disadvantage to the community. Sustainability reporting has three components but commonly known as triple bottom line:  Social bottom line- indicates how the entity deals with issues such as employee working conditions and safety and security and the entity‟s support and contribution to community services  Environmental bottom line- looks at how an entity‟s products or operations impact on the environment.  Economic bottom line- looks at the entity‟s profitability and business strategy What are the advantages and disadvantages? Advantages Disadvantages  There is a growing number of  Difficult to objectively quantify in investors who look at the entity‟s dollar terms impact on the environment- help  Can be time consuming to collect decide before investing information  Offers opportunities to manage risk and create value in a number of ways- increasing loyalty from employees, customers and investors through brand and reputation  Increased socially responsible investors  Can help decrease costs if environmental damage were to occur History of regulation As new transactions developed and became a part of businesses accountants developed rules and practices for recording them, these rules and practices became to be known as Generally Accepted Accounting Principle. Generally Accepted Accounting Principle accounting rules that indicate how to report economic events. As entities grew in size and complexity, more formal rules for accounting were required and GAAP were gradually known as accounting standards. Australia has adopted standards that are consistent with those produced by the International Accounting Standards Board (IASB). The current trend in accounting standard setting is to follow global standards. IASB is promoting this global convergence. Australia's accounting standards are consistent with these global developments While these accounting standards provide „rules‟ for dealing with various accounting issues, the accounting standards were only established on problem-to-problem basis, thus eventually lead to inconsistency in rules and regulations. Therefore, the conceptual frame work was developed. Conceptual Framework Conceptual framework is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards. What is the purpose of the conceptual framework?  Develop standards that are consistent and logically formulated  Provide guidance to accountants in areas where no standards exist  Enable users of financial statements to understand better the standards developed In essence, the conceptual framework attempts to de
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