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Chapter 01 – Accounting: Information for Decision Making
1 ACCOUNTING: INFORMATION FOR DECISION MAKING
Chapter Summary
Our financial reporting system has changed greatly over the past 50 years and will
continue to change. The financial world is experiencing unparalleled challenges, such as
globalization, deregulation, and the widespread use of the World Wide Web. In the midst of these
changes is the accounting profession that must provide reliable and relevant information to users.
This chapter introduces accounting to the student as the means of providing the information to
support such decisions. Two broad types of accounting information, financial and internal are
introduced and discussed. The production and communication of information within an
accounting system is introduced at the outset of the chapter.
The focus then shifts to the various consumers of accounting information and the uses to
which they put that information. External users are discussed first with the natural emphasis
placed on the decision-making needs of investors and creditors. The needs of these users are
summarized in terms of their interest in cash flow prospects. The financial accounting process
communicates these prospects. The objectives of the reporting process are discussed in some
detail leading to a definitional listing of the financial statements. This segment of the chapter
concludes with an overview of the characteristics of externally reported accounting information.
The orientation of the chapter now shifts to decision-making by parties internal to an
organization and how internal accounting supports these decisions. Internal users are very
broadly defined as all employees of the organization. Employees are supported by the internal
accounting information system in three ways. First, the internal accounting system assigns
decision-making authority over the organization’s resources to employees. Second, the internal
accounting system provides the information required to make decisions regarding these resources.
Finally, employee performance is regularly evaluated and rewarded based on information supplied
by the internal accounting system. The characteristics of internal accounting information are
discussed at length. This discussion makes the student aware of the distinctions between financial
and internal accounting.
The main body of the chapter closes with a discussion of the sources of integrity of
accounting information. We introduce institutional features that contribute to the integrity of the
information including, accounting principles and standards, systems of internal control, and audits
of financial information. The roles played by organizations such as the AICPA, IMA, IIA, AAA,
and COSO are discussed. We close by emphasizing the critical importance of the competence,
judgment, and ethical behavior of professional accountants.
The chapter concludes with an overview of career opportunities offered by the accounting
profession. Opportunities in public, management, and government accounting are surveyed, as
are career paths in education. We take this opportunity to distinguish between accounting and
bookkeeping and to explain the minimal role played by bookkeeping activities.
Learning Objectives
1. Discuss accounting as the language of business and the role of accounting information in
making economic decisions.
2. Discuss the significance of accounting systems in generating reliable accounting information
and understand the five components of internal control.
Chapter 01 – Accounting: Information for Decision Making
3. Explain the importance of financial accounting information for external parties–primarily
investors and creditors–in terms of the objectives and the characteristics of that information.
4. Explain the importance of accounting information for internal parties–primarily management–
in terms of the objectives and the characteristics of that information.
5. Discuss elements of the system of external and internal financial reporting that create integrity
in the reported information.
6. Identify and discuss several professional organizations that play important roles in preparing
and communicating accounting information.
7. Discuss the importance of personal competence, professional judgment, and ethical behavior
on the part of accounting professionals.
8. Describe various career opportunities in accounting.
Brief Topical Outline
AAccounting information: a means to an end
1Accounting from a user's perspective
2Types of accounting information
aFinancial accounting – see Case in Point (page 6)
bManagement accounting
cTax accounting
BAccounting systems
1Determining information needs
2The cost of producing accounting information
3Basic functions of an accounting system
4Who designs and installs accounting systems?
5Components of internal control
CFinancial accounting information
1External users of accounting information
2Objectives of external ,nancial reporting
3Characteristics of externally reported information – see Your
Turn (page 11)
aFinancial reporting-a means
bFinancial reporting versus ,nancial statements
cHistorical in nature
dInexact and approximate measures
eGeneral-purpose assumption
fUsefulness enhanced via explanation
DManagement accounting information
1Users of internal accounting information – see Exhibit 1-5
2Objectives of management accounting information
Chapter 01 – Accounting: Information for Decision Making
3Characteristics of management accounting information
aImportance of timeliness
bIdentity of decision maker
cOriented toward the future
dMeasures of efficiency and e9ectiveness
eManagement accounting information - a means
EIntegrity of accounting information
1Institutional features
aStandards for the preparation of accounting information
bSecurities and Exchange Commission
cFinancial Accounting Standards Board
dInternational Accounting Standards Board – see Case in Point
(page 19)
ePublic Company Accounting Oversight Board
fAudits of ,nancial statements
gLegislation
2Professional organizations – AICPA, IMA, IIA, AAA, COSO
3Competence, judgment, and ethical behavior – see Ethics,
Fraud & Corporate Governance (page 27), Exhibit 1-6 (page
23) and Your Turn (page 23)
FCareers in accounting
1Public accounting
aThe CPA examination
2Management accounting
3Governmental accounting
aThe GAO
bThe IRS
cThe SEC
4Accounting education
5What about bookkeeping?
6Accounting as a stepping-stone – see Ethics, Fraud &
Corporate Governance (page 27)
7What about me? I'm not an accounting major
GConcluding remarks
Topical Coverage and Suggested assignment
Homework Assignment
(To Be Completed Prior to Class)
Class
Meetings
On Chapter
Topical
Outline
Coverage
Discussion
Questions Brief
Exercises
Exercises Problems Critical
Thinking
Cases
1 A - C 1, 2, 4 1, 3 1, 3, 4 n.a. 2
2 D - G 5, 9, 15 5, 6, 7, 8 7, 8, 9, 12 n.a. 4
Financial Accounting, 16e 1- 3
Chapter 01 – Accounting: Information for Decision Making
Comments and Observations
Teaching objectives for Chapter 1
Chapter 1 introduces students to the users of accounting information, both external and internal to
the organization. The objectives and characteristics of externally reported and internal accounting
information are explained and contrasted with one another. The sources of integrity of accounting
information are explained. Career opportunities in accounting are also discussed. In the class
meetings relating to this introductory chapter our primary teaching objectives are to:
1Explain the nature and requirements of the course.
2 Impress upon students the importance of keeping up with the coursework and completing
homework assignments on a timely basis. Impress upon students that accounting is a
cumulative knowledge subject. Students lost in Chapter 1 will likely have trouble the rest of
the semester.
3 Describe the general purpose of accounting and various uses of accounting information.
Explain the focus of this course relative to other accounting courses.
4 Provide an overview of external financial reporting.
5Explain the nature of internal accounting and the information needs of internal users of
accounting information.
6 Discuss the factors responsible for assuring the integrity of accounting information.
8Briefly describe some career opportunities in accounting and explain why an
understanding of accounting is useful to people other than professional
accountants.
9 General Comments
Getting started During the first class meeting, we find it worthwhile to spend a few minutes
acquainting the students with the textbook and its supplements, and explaining the nature of an
accounting course. For example, we show students that the text contains check figures to the
problems on the inside cover, and that a glossary of key terms, a self-test, and usually a
Demonstration Problem (with solution) appear at the end of each chapter.
We give a brief demonstration of the proper use of columnar paper and explain that all
homework problems should be prepared in pencil. If the partially filled-in working papers are
used (which we recommend), we show the students the worksheet for an extensive problem so
that they will appreciate the time savings inherent in this supplement. We also mention that all
two-page foldout work sheets are located at the back of the working paper booklet. We also
advise students of the availability of the Study Guide, which contains chapter summaries,
objective questions, and exercises for each chapter. The answers to the questions and exercises
appear following each chapter in the Study Guide.
Chapter 01 – Accounting: Information for Decision Making
It is the nature of accounting that new concepts tend to build upon those that have come
before. Therefore, we place a high priority on impressing the students with the importance of
getting right to work and of keeping up with the progress of the class. Our experience has shown
repeatedly that students who get off to a slow start or who fall behind early in the course will have
increasing difficulty as the course progresses. Therefore, we recommend assigning a heavy
homework load immediately.
"Accounting" is much more than crunching numbers In teaching accounting, it too often
happens that all available class time is spent demonstrating mechanical techniques and solving
quantitative problems. Many students, however, have very little understanding of the environment
in which accounting information is developed and used. Without this understanding, the relevance
of accounting procedures and computations may not be apparent.
We urge instructors to give appropriate classroom time to introducing this environment.
We favor in-class reviews of assignments emphasizing the use and interpretation of accounting
information. This is especially true of the Your Turn and Case in Point cases included within the
main body of the text. In addition, those problems that involve well-known companies introduce
elements of the business community with which the student is at least partially familiar.
We also encourage instructors to address the many nonquantitative aspects of
accounting, such as the information needs of decision-makers, accounting theory, systems design,
internal control, auditing, ethics, and issues involving professional judgment. If students are to
really "learn accounting," these topics deserve attention in both the classroom and in the textbook.
One of our major goals in this eleventh edition is to offer examples, text discussions, and
assignment materials that better illustrate what accounting "is all about."
In covering Chapter 1, we like to provide students with an overview of both the external
and internal reporting process. Exercises 3 and 10 provide a good framework for this discussion.
We also like to discuss Case 1 in class. The Internet assignment for this chapter provides an
excellent opportunity to introduce students to this important research tool that will be used
throughout the text.
Supplemental Exercises
Group Exercise
Have student groups interview senior accounting majors and/or graduate accounting
students and report on the career options their student colleagues are investigating.
Internet Exercise
Access the Microsoft web page www.microsoft.com and choose About Microsoft. Click
on Investor Relations and go to the Annual Report for 2009. In the Discussion and Analysis
section, review the rate of growth of Microsoft revenues. How does Microsoft seem to be doing
compared to the sales of other high tech products? Which accounting firm audited Microsoft in
2009? What impression does the auditor’s report convey?
Chapter 01 – Accounting: Information for Decision Making
CHAPTER 1 NAME #
10-MINUTE QUIZ A SECTION
Indicate the best answer for each question in the space provided.
1The best de,nition of an accounting system is:
aJournals, ledgers, and worksheets.
bManual or computer-based records used in developing
information about an entity for use by managers and also
persons outside the organization.
cThe personnel, procedures, devices, and records used by an
entity to develop accounting information and communicate this
information to decision makers.
dThe concepts, principles, and standards specifying the
information which should be included in ,nancial statements,
and how that information should be presented.
2Suppose a number of your friends have organized a company to
develop and sell a new software product. They have asked you to
loan them $7,000 to help get the company started, and have
promised to repay your $7,000 plus 10% interest in one year. Of the
following, which amount may be described as the return on your
investment?
a$7,000.
b$ 700.
c$7,700.
dSome other amount.
3Which of the following is generally not considered one of the general
purpose ,nancial statements issued by a corporation?
aIncome statement forecast for the coming year.
bBalance sheet.
cStatement of ,nancial position.
dStatement of cash Gows.
4All of the following are characteristics of management accounting,
except:
aReports are used primarily by insiders rather than by persons
outside of the business entity.
bIts purpose is to assist managers in planning and controlling
business operations.
cInformation must be developed in conformity with generally
accepted accounting principles or with income tax regulations.
dInformation may be tailored to assist in speci,c management
decisions.
5Which of the following is not an objective of ,nancial reporting?
aProvide information useful in assessing amount, timing, and
uncertainty of future cash Gows.
Chapter 01 – Accounting: Information for Decision Making
bProvide information useful in making investment and credit
decisions.
cProvide information about economic resources, claims to
resources, and changes in resources and claims.
dProvide information to guarantee the enterprise achieves its
goals, objectives, and mission.
Financial Accounting, 16e 1- 7
Chapter 01 – Accounting: Information for Decision Making
CHAPTER 1 NAME #
10-MINUTE QUIZ B SECTION
Match the organizations on the left with the descriptions on the right. Each
description should be used only once.
Organization Description
Financial Accounting Standards Board a. Government agency that
regulates
,nancial reporting by publicly-
held companies.
Securities and Exchange Commission b.......International organization
dedicated
to the advancement of internal
auditing.
American Accounting Association c. Private organization most directly
involved in the development and
issuance of accounting standards.
Institute of Internal Auditors d. Organization dedicated to the
advancement of accounting
education
and research.
American Institute of CPAs e. Organization most involved with the
ethical conduct of the accountants
working within a company.
Institute of Management Accountants f.. Organization which develops
formal
standards for auditing private
companies in
the United States.
Internal Revenue Service g. A government agency that handles
income tax returns of individuals and
businesses and performs an audit
function to verify the data presented.
International Accounting h. An organization which develops
Standards Board international accounting
standards.
Chapter 01 – Accounting: Information for Decision Making
_______Committee of Sponsoring Organizations i. An organization dedicated to
improving
,nancial reporting through ethics,
internal controls, and corporate
governance.
CHAPTER 1 NAME #
10-MINUTE QUIZ C SECTION
The following is a list of various characteristics of accounting information. In the
space provided identify each as a characteristic of either ,nancial or management
accounting information.
1. The information is summarized in a set of statements distributed to the
public.
2. The information is historical in nature. It reports the results of events and
transactions that have already occurred.
3. The timeliness of the information is more critical than its completeness.
4. To increase its usefulness to investors and creditors, the information is
usually accompanied by explanations from management.
5. The information is intended to be used for planning and control decisions.
CHAPTER 1 NAME #
10-MINUTE QUIZ D SECTION
Provide concise written answers to the following:
1. Investors and creditors are interested in a company’s “cash Gow prospects.”
What two speci,c concerns of investors and creditors are summarized by the
term “cash Gow prospects?”
Financial Accounting, 16e 1- 9
2. List three ,nancial statements that are used to communicate ,nancial
accounting information to interested external parties.
3. Provide a brief example to illustrate that externally reported ,nancial
accounting information must be based in part on estimates, judgments, and
assumptions.
4. BrieGy explain how generally accepted accounting principles enhance the
integrity of ,nancial accounting information.
5. SOLUTIONS TO 10 MINUTE QUIZZES
QUIZ A
Learning Objective: 01-02, 01-03, 01-04
QUIZ B
Financial Accounting Standards Board ...........c
Securities and Exchange Commission ...........a
International Accounting Standards Board.......h
Committee of Sponsoring Organizations i
Learning Objective: 01-06
QUIZ C
Learning Objective: 01-03, 01-04
QUIZ D
Chapter 01 – Accounting: Information for Decision Making
Assignment Guide to Chapter 1
Exercises Cases Net
1 – 16 1 2 3 4 5
Time estimate (in minutes) < 15 15 15 15 30 30
difficulty rating E E M E M M
Learning objective: 1, 16
1. Discuss accounting as the language of
business and the role of accounting
information in making economic
decisions.
2. Discuss the signiticance of accounting
systems in generating reliable
accounting information and understand
the =ve components of internal control.
3. Explain the importance of =nancial
accounting information for external
parties–primarily investors and creditors–
2, 3, 6, 7,
9, 16
