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CHAPTER 1 DECISION MAKING AND THE ROLE OF …

1 CHAPTER 1 DECISION MAKING AND THE ROLE OF ACCOUNTING TEXT REFERENCE: Hoggett, J.R., Edwards, L., & Medlin, J., Accounting in Australia, Fifth Edition, Chapter 1. OBJECTIVES: ...

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1CHAPTER 1DECISION MAKING ANDTHE ROLE OFACCOUNTINGTEXT REFERENCE:Hoggett, , Edwards, L., & Medlin, J.,Accounting in Australia, Fifth Edition,Chapter :When you have studied this chapter, you should be able the nature of decisions and the decision-making the wide range of economic decisions made in the the nature of accounting and its main the potential users of accounting information to make simple economic the role of accounting information in the decision-making the differences between accounting for management and accountingfor external how the accounting profession is organised in the different areas of the economy in which accountants the importance of ethics in business and accounting and how torecognise and handle ethical dilemmas as part of the decision-making 12STUDY TIPS FOR CHAPTER 11. This is an important chapter because it lays the foundation for all topics that Make sure that you understand each new term as it is Pay particular attention to the significance of accounting information for decision-making Identify the types of activities that are carried out by a professional accountantworking in nature of decisions and the decision-making processDecisions have to be made by all individuals every day. Decision making arisesbecause of the need to choose between alternatives. Careful consideration must begiven to all information available at the time because of the long-termconsequences a decision made now will have. There are four main steps in thedecision-making process:(1)Identify each situation in which a decision is needed and determine thegoals we wish to achieve.(2)Identify the relevant information needed to determine possible availablealternatives.(3)Identify and obtain information needed to assess the consequences oroutcomes of the alternatives.(4)Choose a course of action which will achieve the goals established in step The wide range of economic decisions made in the marketplaceUsually, decision making involves the use of scarce economic resources whichare traded in the marketplace at a price. However, many factors apart from themonetary impact, such as personal taste, social factors, environmental factors,religious and/or moral factors, and government policy, must be decisions usually involve an inwards or outwards flow of money ormonetary equivalents. Economic decisions are made in many different markets, bethey retail, wholesale, the stock market, local or international. Hence, if decisionmakers are to make informed decisions then some knowledge of accountingmeasurement systems, concepts and standards is The nature of accounting and its main functionsAccounting is a service activity. It uses words and symbols to communicatefinancial information useful for decision making. The terminology and symbolsDecision Making and the Role of Accounting3used have developed from the earliest known accounting records. As a profession,accounting has evolved in response to society s need for economic information tohelp people make economic decisions. Accounting is often called the language ofbusiness . To be effective, the recipient must understand the message that thesender intends to convey. You must learn the meaning of the words and symbolsused by accountants. Many people with little knowledge of accounting mustinterpret accounting has been defined as the process of identifying, measuring, recordingand communicating economic information to permit informed judgements andeconomic decisions. The primary purpose of accounting is to help persons makeeconomic decisions. In our society resources must be allocated among and withinall kinds of entities. Accounting information provides the basis for makingdecisions about resource allocation. To be useful, data must be identified,measured, recorded, classified, summarised and communicated to potential are the critical elements of information is financial information about economic activities. Alleconomic entities ( businesses, government agencies, families, charitableentities) need such information because it is used for making economic decisionsabout those entities. An economic event of an entity is referred to as a are of two types: external and have had a significant impact on the accounting process and hence therecording process is much more efficient and The potential users of accounting informationThe ultimate objective of accounting is to provide information in reports whichcan be used by internal and external decision makers. The preparation of thisinformation for users (decision makers) outside the entity is called financialaccounting. Such users might be investors, or creditors of the entity. Thepreparation of information for use by decision makers inside the entity to plan andcontrol operations is called management accounting. Inside users meansmanagement. Management uses the same financial statements as outside decisionmakers, plus internal reports and summaries prepared specifically for reports can be special-purpose reports to meet the needs of aspecific user group, or general-purpose reports for the general use of Using information to make simple economic decisionsEconomic decisions are made every day. Take the example from the business opportunity is identified which will satisfy the ambitions of theentrepreneur. Some research reveals that there is an opening for such a considered in the planning stage are investment needs, financing,estimates of operating costs and how much to charge for services, finallyculminating in the decision to proceed with the 14To summarise, there is the establishment of implicit goals, the collection ofinformation about the proposed business, and consideration of futureconsequences. As the business proceeds, accounting information is needed tomonitor how well the business actually performs in comparison with theestimates, how and when to replace assets, and how income tax and goods andservices tax (GST) will impact on the The role of accounting information in the decision-making processFinancial information is needed before any economic decision is made. Financialaccounting information focuses on actual events. For the purpose of decisionmaking, the past is used as a guide to future estimates of the consequences ofdifferent alternatives. The accountant can help significantly in the areas ofbudgeting, investigating, interpreting and communicating results for use by bothinternal and external decision The differences between accounting for management and accounting forexternal usersManagement accounting is that area of accounting concerned with providingfinancial and other information to management in an organisation to enable themto carry out their planning, controlling and decision-making accounting is concerned with reporting general-purpose information tousers external to an entity in order to help them make sound economic decisionsabout the entity s performance and financial position. The distinction betweenmanagement and financial accounting can be identified by reference to (1) themain users of the reports, (2) the types of reports produced, (3) the frequency ofreports, (4) the content and format of reports, and (5) external How the accounting profession is organised in AustraliaAccountants in Australia are represented by two professional organisations: CPAAustralia and the Institute of Chartered Accountants in Australia (ICAA).Entry to these two professional bodies requires that a number of conditions besatisfied. Certified Practising Accountants (CPAs) and Chartered Accountants(CAs) are required to undertake ongoing professional development activities tomaintain their level of different areas of the economy in which accountants workAccountants generally work in one of three main areas: public accounting,commerce and industry, or not-for-profit entities, which include governmentdepartments at all levels, churches, hospitals, clubs and charities. Publicaccountants tend to specialise in one of four general services: auditing andassurance, taxation, advisory, and insolvency and administration. Accountants incommerce and industry may be involved in six areas: general accounting, costaccounting, accounting information systems, budgeting, taxation and internalauditing. Not-for-profit accounting involves many of the problems and decisionsDecision Making and the Role of Accounting5encountered in private industry, but may require a different approach in somerespects owing to the absence of a profit importance of ethics in business and accountingMost businesses appreciate the importance of ethical behaviour. Regular unethicalbehaviour by managers, owners, employers and customers must eventually lead tothe collapse of the entity. Financial reports and the audit and assurance servicesfunctions of accounting represent controlling influences. CPA Australia and theICAA have issued a joint Code of Professional Conduct (CPC) to provide anauthoritative guide to members on acceptable professional behaviour. The rulesare mandatory for members and severe penalties are imposed on members whobreak the CHECKLISTCan you recall the four steps in the decision-making process?Can you name three non-economic factors which must be consideredin the decision-making process?Do you recall the definition of accounting?Who are the external users of accounting information?Who are the internal users of accounting information?How is accounting information used in the decision-making process?Can you distinguish between management accounting and financial accounting?Do you know how the profession of accounting is organised in Australia?Can you name the principal areas in which public accountants and managerialaccountants work?Are you aware of the importance of ethics in business and accounting, and howthey are regulated?Chapter process of identifying, measuring, recording and communicating that are the economic activities of an winding up of the affairs of a that deals with the cost of a product or a independent professional review scarce investigation of compliance with procedures and polices of an designed to meet the information needs of a wide range of independent examination of the accounts by an system which provides information to internal plan for the future operating activities of a information to external users. __________ to pay debts as they fall dueDecision Making and the Role of Accounting7TEST YOUR first step taken every time a decision is made is to consequences of different reason that resources are traded in the marketplace at price is because they are in limited or scarce An internal transaction is an economic event which one entity and another Public accountants in Australia are found in the serving local, state and federal government Establishing goals, gathering information on alternatives, the consequences of alternatives, and choosing acourse of action involve estimates of future A major focus of accounting information is on actual, financial events. Therefore recording financialtransactions of an entity is of no use in establishing future The area of accounting concerned with providing financial and information to all levels of management in an organisation is known as financial to the CPA Australia and the Institute of Chartered in Australia (ICAA) requires holding a degree froman accredited tertiary institution and a minimum of one yearappropriate, supervised work example of an assurance service in which auditors are involved is electronic managers, owners, employees and customers regularly one another, told lies, falsified records and did notconform to rules, the entity must eventually cease to 18Multiple ChoiceFor each of the following select the best answer under normally prevailingcircumstances. of the following is not one of the four main questions to be followed inmaking a decision?(a)What are we trying to achieve?(b)What information do we need?(c)How long will it take?(d)Which course of action will we choose? , apart from the monetary impact of decision making, include:(a)personal taste(b)social factors(c)environmental factors(d)all of the above. retail market is where:(a)the consumer decides to buy groceries, clothes or home electrical goods(b)retailers buy their supplies for on-selling in their different outlets(c)individuals and business entities buy and sell shares(d)people meet to swap, buy and sell hand-crafted and second-hand goods. accounting information is to be useful, it must be expressed in terms of:(a)non-monetary units(b)monetary and non-monetary units(c)units of consumer demand(d)a common denominator. example of an internal transaction is when an entity:(a)purchases merchandise from a supplier(b)borrows money from a bank(c)sells goods to its customer(d)recognises the use over time of machinery and equipment. example of an external transaction is when an entity:(a)pays an employee his/her fortnightly wages(b)transfers merchandise from the stores department to the salesdepartment(c)recognises the use over time of machinery and equipment(d)uses the maintenance department to service machinery and Making and the Role of Accounting9 raised by external users of accounting information include:(a)Will the entity be able to repay its loans?(b)What is the entity s earning potential?(c)Is the business in a financially sound position?(d)All of the above. the purpose of decision-making:(a)accounting information provides information about future events(b)accounting information provides information about the outcomes ofpast decisions(c)the future is used as a guide to past estimates(d)the accountant never becomes involved in the budgeting rules of professional conduct set down by the joint Code of ProfessionalConduct (CPC) are:(a)to be used as a behavioural guide only(b)unenforceable by the professional bodies(c)mandatory for all members(d)the concerns of public practitioners management accountant working in the commercial field will typically beinvolved in:(a)independent auditing(b)taxation services(c)management advisory services(d)cost wishes to purchase her first car. Following the four main steps inmaking a decision, outlined in the chapter, prepare an analysis of each steptaken by your own hypothetical business scenario similar to that described forDarren in the text. In doing so, incorporate as much costing, funding andoperating estimates as you think broad general terms, explain the purpose of a listing of the main users of accounting information and explain howthey use the information in their decision-making 110SOLUTIONS SECTION CHAPTER set answer. However, the decision is made to buy a car. Samantha needs toestablish her priorities regarding what car will suit her needs and come withinher price range. She may well ask: How much can I afford? Will the pricedetermine affordability of a new or a second-hand car? Do I need to borrow? Ifyes, from whom do I borrow? Do I want automatic or manual transmission? Iscolour a significant factor? What size and/or make of car is acceptable? Indeciding on the size or make of car, is fuel consumption a significant factor? If Idecide to purchase a second-hand car, how do I find out if a particular car ismechanically sound?Decision Making and the Role of set answer, but remember the steps outlined in the chapter in the decision-making process? purpose of accounting is to provide financial information that is useful inmaking economic decisions. It is the process of identifying, measuring,recording and communicating economic information to permit informedjudgements and decisions by users of the of accounting information form two main groups: decision makers whoare internal to the entity or external to the decision makers are managers at all levels who use financialinformation for planning and controlling the operations of a business need to know: What resources are available? How much debt exists?How profitable are operations? What business should they be in? What are themost efficient processes? What effect may changes in selling prices have? Doesthe firm have sufficient cash reserves to meet obligations? Should the firm buyor lease resources? They need data that will ensure that day-to-day and longer-term operations continue successfully. External users comprise resourceproviders (creditors and investors), customers, suppliers and regulatory users need to know: Does a firm have the capacity to meet its monetaryobligations when they fall due? What are its earning prospects? How sound isthe firm s financial structure? Is continuity of operations and supply assured?Has the firm met its statutory obligations?

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