Chapter 01 – Accounting: Information for Decision Making
Financial and Managerial Accounting, 17e 1-1
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.
Chapter 01 – Accounting: Information for Decision Making
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.
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
A Accounting information: a means to an end
1 Accounting from a user’s perspective
2 Types of accounting information
a Financial accounting – see Case in Point (page 6)
b Management accounting
c Tax accounting
B Accounting systems
1 Determining information needs
2 The cost of producing accounting information
3 Basic functions of an accounting system
4 Who designs and installs accounting systems?
5 Components of internal control
C Financial accounting information
1 External users of accounting information
2 Objectives of external financial reporting
3 Characteristics of externally reported information – see Your Turn (page 11)
a Financial reporting-a means
Chapter 01 – Accounting: Information for Decision Making
Financial and Managerial Accounting, 17e 1-3
b Financial reporting versus financial statements
c Historical in nature
d Inexact and approximate measures
e General-purpose assumption
f Usefulness enhanced via explanation
D Management accounting information
1 Users of internal accounting information – see Exhibit 1-5
2 Objectives of management accounting information
3 Characteristics of management accounting information
a Importance of timeliness
b Identity of decision maker
c Oriented toward the future
d Measures of efficiency and effectiveness
e Management accounting information – a means
E Integrity of accounting information
1 Institutional features
a Standards for the preparation of accounting information
b Securities and Exchange Commission
c Financial Accounting Standards Board
d International Accounting Standards Board – see Case in Point (page 19)
e Public Company Accounting Oversight Board
f Audits of financial statements
g Legislation
2 Professional organizations – AICPA, IMA, IIA, AAA, COSO
3 Competence, judgment, and ethical behavior – see Ethics, Fraud & Corporate
Governance (page 27), Exhibit 1-6 (page 23) and Your Turn (page 23)
F Careers in accounting
1 Public accounting
a The CPA examination
2 Management accounting
3 Governmental accounting
a The GAO
b The IRS
c The SEC
4 Accounting education
5 What about bookkeeping?
6 Accounting as a stepping-stone – see Ethics, Fraud & Corporate Governance
(page 27)
7 What about me? I’m not an accounting major
G Concluding remarks
Chapter 01 – Accounting: Information for Decision Making
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
1
A – C
1, 2, 4
1, 3
1, 3, 4
n.a.
2
D – G
5, 9, 15
5, 6, 7, 8
7, 8, 9, 12
n.a.
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:
1 Explain 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.
5 Explain 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.
7 Briefly describe some career opportunities in accounting and explain why an understanding
of accounting is useful to people other than professional accountants.
Chapter 01 – Accounting: Information for Decision Making
Financial and Managerial Accounting, 17e 1-5
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.
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.
Chapter 01 – Accounting: Information for Decision Making
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?