Session 01 Accounting and organisations
Transcript of Session 01 Accounting and organisations
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Accounting Foundations: Information for Decisions
Chapter 1Accounting and organisations
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Accounting Scandals
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• Your perception
of Accounting
• What do you think a balance sheet tells a reader?
• What does the income statement tell a reader?
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1. What role does Accounting serve?Basic: to help people in organisations make decisions about economic activities
2. Does Accounting have economic consequences?Yes: it affects organisation plans, employment, future value (like share prices)
3. Are Ethics important in Accounting?Very important. Unethical accounting practices can ruin the fortunes of employees, suppliers and investors
Initial questions
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Transactions
Identification
Quantification
in $ terms
Measurement
Recording
classification
summarisation
Recording
Accounting
Reports,
Analysis,
Interpretation
and advice
Communication
The Nature of Accounting
Value - low Value - high
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• Definitions of Accounting?• “The process of identifying, measuring, and
communicating economic information to permit informed judgements and decisions by users of the information” (American Accounting Association 1966)
• “Accounting is the art of being excruciatingly exact about a lot of arbitrary assumptions” (Austin Donnelly, about 1975)
Correct - but implies a deterministic process – i.e. if do this the outcome is valid
Insight?
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3 May 20237
Alternative definitions of Accounting"Systematic method of converting organisational
activity into numbers in order to provide one explanation of what has occurred“ ?
• “Accounting is a way of making the invisible (performance, value) visible (profit, cost, value).”
• “Accounting is story telling with numbers”
• Insight?
Insight?
Insight?
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Purpose of Accounting• Individual Level
– planning– controlling– decision support
• Organisation Level– planning– controlling– decision support– external reporting – why?
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Questions
• Who are the stakeholders affected by managerial choices around accounting and financial reporting practices?
• • What purposes should drive the manager’s
decisions around accounting and financial reporting practices?
Accounting & Financial
Management
Unit 2
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1-10Exhibit 4Exhibit 4 Transformation of
resources into goods and services
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If the transformation of resources meets a need of
society, it creates value because more people are
better off after the transformation than before.
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Creating value
A market is any location or process that permits resources
to be bought and sold.
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Creating value
Accounting measures the increase in value created by a
transformation as the difference between the total price of goods
and service sold in a market and the total costs of resources
consumed in developing, producing, and selling the goods
and services.
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(A)Sales price of one box of biscuits
(B)Total cost of resources
consumed to produce and
make one box of biscuits available
(A) – (B)Value Added
$3.50 $3.00 $0.50– =
Exhibit 5Exhibit 5 Value added by transforming resources
}
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Profit is the difference between the price a seller receives for
goods or services and the total cost to the seller of all resources
consumed in developing, producing, and selling these goods
or services during a particular period.
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Mum’s Biscuits Pty LtdProfit Earnedfor January
Resources created from selling biscuits $11 400Resources consumed:
Cost of merchandise inventory sold $7600Wages 1000Rent 600Supplies 300Utilities 200 Total cost of resources consumed 9700
Profit earned $ 1700
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Risk Accounting involves risk. It will be used to calculate the amount of profit a business will earn.
It relies on a number of assumptions and constraints which, if they don’t turn out to be valid, may mean that the profit calculation is misleading
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The Accounting Game!• Assumptions
– Entity– Monetary unit– Going concern– Period– Realisation– Matching– Prudence / conservatism
• Characteristics– Relevance– Reliable– Comparable– Understandable
• Constraints– Timely– Materiality– Benefit versus Cost
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Key: return on their investments from profits earned by that business.
ROI = ProfitAmount invested
The role of accounting in business organisations
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If Megan and Ryan invested $10 000 to start Mum’s Biscuits
Pty Ltd and earned a $1700 profit, what would be the return on
investment?
ROI = ProfitAmount Invested
$1700$10 000
=17%
The role of accounting in business organisations
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An effective businessAn efficient business
The role of effectiveness and efficiency
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Choice of Accounting Systems• Must consider
– organisational goals– organisational structure– size of the organisation– information needs of management
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Choice of Accounting Systems• Computer-based:
– Packages• Ledger - MYOB
– Data base• Microsoft Access• Enterprise resource planning (erp) - SAP
– Analysis• Excel
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Economic Consequences1. Management’s accounting policies
affect the numbers that appear in financial statements.
2. Financial statements affect wealth of owners / lenders/ managers / society via:
– management compensation plans– debt contracts– political costs
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Economic ConsequencesManagement Compensation• Jodee Rich and Brad Keeling: each
collected a $7.5 million pay packet in 2000-01 from One-Tel, based on company market capitalisation, not profit.
Political cost• Depreciation of railway rolling stock in
nineteenth century – to justify ticket prices
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Environmental Considerations• Economic
– e.g. interest rates, currency translation rates, expectations (boom, etc), obsolescence.
• Regulatory– Company regulations– Accounting Standards – Accounting
Policies
• Social and Environmental– (un)employment, pollution, health issues
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Management selection of accounting policies
Management selection is a function of:
1. Need to provide information for economic decision-making.
2. Desire to influence economic consequences.
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Values informing SelectionSelf interest
wealth, power, fame, authority(Pre-conventional ethical reasoning – Kohlberg)
Concern for othersfairness, justice, trust in social institutions(conventional ethical reasoning)
Doing what is rightdo the social institutions still represent the best way to do what is right?(post-conventional ethical reasoning)
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What is “Ethics”?
The central question of ethics is: "what should you do?"
Morality – how we actually behave. Answers the question “How?”
Ethics – theoretical reflection on that behaviour. “Why did s/he behave so badly/well?” What values made her/him behave that way? Answers the question “Why?”
Tend to get confused – but are linked.