5. Understanding Business
Organisations
Provide Goods and Services to earn Profit
Types and forms of business organisations
Cash Machine
Importance of Information
Accounting as the language of business
7. Definition 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
(AAA)
8. Internal and External
Users of Accounting Information
Current Customers
Banks
and Creditors
Potential
Owners
Internal
Public
Users -
Financial Management
Analysts Suppliers
Employees and Government and
Trade Regulatory
Unions Agencies
10. What is an AIS?
A system is a set of two or more interrelated
components that interact to achieve a goal.
Systems are almost always composed of
smaller subsystems, each performing a
specific function supportive of the larger
system.
An accounting information system (AIS)
consists of:
People
Procedures
Data
Software
Information technology
11. 3 Basic Functions of AIS
1. Collecting and processing data about the
organization business activities efficiently
and effectively
2. Providing information useful for decision
making
3. Establishing adequate controls to ensure
that data about business activities are
recorded and processed accurately and to
safeguard both that data and other
organizational assets
12. Basic Subsystems in the AIS
1 The expenditure cycle: involves activities of
buying and paying for goods or services used
by the organization.
2 The production cycle: involves activities
converting raw materials and labor into
finished goods.
3 The human resources/payroll cycle: involves
activities of hiring and paying employees.
13. Basic Subsystems in the AIS
4 The revenue cycle: involves activities of
selling goods or services and collecting
payment for those sales.
5 The financing cycle: involves activities
of obtaining necessary funds to run the
organization, repay creditors, and
distribute profits to investors.
14. Basic Subsystems in the AIS
Financing Expenditure Human
Cycle Cycle Resources
General Ledger & Reporting System
Production Revenue
Cycle Cycle
15. How An AIS Can Add Value
To An Organization
An AIS adds value...
– by providing accurate and timely
information so that five primary value
chain activities can be performed
more effectively and efficiently. This
is done by:
– improving the quality and reducing the costs
of products or services.
16. How An AIS Can Add Value
To An Organization
An AIS can…
– improve efficiency.
– improve decision making capabilities.
– increase the sharing of knowledge.
A well-designed AIS can also help
an organization profit by improving
the efficiency and effectiveness of
its supply chain.
17. The Value Chain
The ultimate goal of any business is
to provide value to its customers.
A business will be profitable if the
value it creates is greater than the
cost of producing its products or
services.
18. The Value Chain
An organization’s value chain consists of
nine interrelated activities that
collectively describe everything it does.
The five primary activities consist of the
activities performed in order to create,
market, and deliver products and
services to customers and also to
provide post-sales services and support.
19. The Value Chain
Primary Activities
Inbound Outbound
Operations
Logistics Logistics
Marketing
Service
and Sales
20. The Value Chain
The four support activities in the
value chain make it possible for the
primary activities to be performed
efficiently and effectively.
21. The Value Chain
Support Activities
Infrastructure Technology
Human
Purchasing
Resources
22. The Value System
The value chain concept can be
extended by recognizing that
organizations must interact with
suppliers, distributors, and
customers.
An organization’s value chain and
the value chains of its suppliers,
distributors, and customers
collectively form a value system.
23. The Supply Chain
Raw Materials
Supplier
Manufacturer
Distributor
Retailer
Consumer
24. Information and Decision Making
What is information?
The term data refers to any and all
of the facts that are collected,
stored, and processed by an
information system.
Information is data that has been
organized and processed so that it
is meaningful.
25. Information and Decision Making
Characteristics of Useful Information
Relevant Timely
Reliable Understandable
Complete Verifiable
26. Value of Information
The value of information is the benefit
produced by the information minus the
cost of producing it.
27. Information and Decision Making
What is decision making?
Decision making involves the following
steps:
1 Identify the problem.
2 Select a method for solving the problem.
3 Collect data needed to execute the decision
model.
4 Interpret the outputs of the model.
28. Information and Decision Making
5 Evaluate the merits of each alternative.
6 Choose and execute the preferred solution.
Decisions can be categorized in terms of the
degree of structure that exists
29. Decision Structure
Structured decisions are repetitive,
routine, and understood well enough
that they can be delegated to lower-
level employees in the organization.
An example is:
Extending credit to customers.
30. Decision Structure
Semi-structured decisions are
characterized by incomplete rules for
making the decision and the need for
subjective assessments and judgments
to supplement formal data analysis.
An example is:
Setting a marketing budget for a new
product.
32. Decision Making Process
Recognize dilemma
Identify interested
parties / associated
variables
List alternatives and
Evaluate
Select best alternative
33. Decisions Made with
Financial /Accounting Information
Add new
Invest?? product line??
Borrow?? Build new plant??
Loan ??
Extend credit??
Start new business?? Sell stocks or bonds??
34. The Future of AIS
The Internet makes strategy more
important than ever
Enterprise resource planning (ERP)
systems are a recent development that
integrate all aspects of a company’s
operations with its traditional AIS.
The important point underlying ERP
systems is the need for and value of cross-
functional integration of financial data and
other non financial operating data.
37. Economic Entity Concept
Each entity has its own books, records
and financial statements that are
separate from owners
No intermingling of personal and
business assets and liabilities or
income and expenses
Owners’
Business Books &
Books & Records
Records
38. Cost Principle
Record assets at cost paid
to acquire them
Continue to value assets at
historical cost until sold
More objective than market
value
39. Going Concern
Assume business
will continue
indefinitely into the
foreseeable future
Justifies use of
historical cost
40. Monetary Unit
How we measure (e.g. U.S.
dollar, Japanese yen,
Mexican peso, etc.)
Assumes economic measure
is relatively stable; no
adjustment for inflation made
in financial statements
41. Time Period Assumption
Assumes it is possible to break up an
entity’s earnings in discrete time
periods (a month, quarter, year)
Necessary to provide users with
financial results on a timely basis
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 27 28 29 30 31
42. Generally Accepted Accounting Principles
Generally Accepted Accounting Principles
known as GAAP are the commonly
understood and accepted conventions,
rules and procedures for gathering,
organizing, and reporting the financial
history of an organization.
43. Generally Accepted Accounting Principles
Generally GAAP applies to one or more of
the following three broad areas:
Accounting Valuation
Recognition
Disclosure
44. Generally Accepted Accounting Principles
Accounting Valuation - GAAP helps to
specify the value of the items reported. It
provides guidance and restrictions on the
accounting values used in the financial
statements.
45. Generally Accepted Accounting Principles
Recognition – How should an item be
treated in the accounting records? Should
an item be treated as an asset or an
expense? For instance, does an
advertising campaign have future benefits?
46. Generally Accepted Accounting Principles
Disclosure – The act of providing
information about the organization and
construction of its accounting reports.
GAAP requires the disclosure of
measurement methods, assumptions, etc.,
that add to the information content of the
annual report.
48. Ethical Dilemmas
Conflicting
GAAP rules
Pressure to make
Pressure to choices not in best
compromise interests of company,
acctg procedures employees, and
stockholders
Personal
responsibilities
and obligations
“Aggressive”
No specific
accounting
GAAP rules
practices
Biased
information
or fraud
49. Ethics Decision-Making Model
Likely to occur when
Recognize dilemma
considering decision about
accounting methods or
Identify interested disclosures and:
parties
• There are conflicting rules
• There are no clear GAAP
List alternatives
• Fraud or other questionable
actions have occurred
Select best alternative
50. Ethics Decision-Making Model
For each group (management,
Recognize dilemma
shareholders, investors, auditor,
creditors, employees), identify
Identify interested potential:
parties
• Benefits
• Harm
List alternatives
• Rights / claims
Select best alternative • Conflicting interests
• Responsibilities
51. Ethics Decision-Making Model
Recognize dilemma
Which alternative provides:
Identify interested • The most useful and timely
parties info?
• The most reliable info?
List alternatives and • Info that most accurately
evaluate
represents what it claims?
• Info that is free from bias?
Select best alternative
52. Ethics Decision-Making Model
Recognize dilemma
Which alternative best
Identify interested
provides decision makers
parties
with:
• The most relevant info?
List alternatives and
evaluate • The most reliable info?
• The most accurate info?
Select best alternative
• The most neutral info?
53. The Accounting Equation
Assets = Liabilities + Owners’ Equity
(or Stockholders' Equity)
Economic Creditors' Owners'
Resources
= Claims + Claims
to Assets to Assets
Examples:
Cash Accounts payable Capital stock
Accounts receivable Notes payable Retained earnings
Inventory
56. Balance Sheet
Shows relationship between assets
liabilities and equities--on a particular date
(i.e., point in time).
Assets and liabilities and stockholders'
equity must balance.
57. Balance Sheet
Assets – A probable future economic benefit
obtained by entering into a transaction. The
resources owned by the business.
Liabilities – The probable future sacrifice of
economic benefits arising from an entity’s
obligation to transfer assets or provide services for
a past transaction. Creditors claims on total assets
(obligations or debts of the business).
58. Balance Sheet (continued)
Stockholders' Equity – The difference
between an entity’s assets and liabilities.
The owners’ claim on total assets.
59. Income Statement
Reports success or failure of the
company's operations during the period.
Summarizes all revenue and expenses for
period--month, quarter, or year. If
revenues exceed expenses, the result is a
net income. If expenses exceed revenue,
the result is a (net loss).
60. Income Statement (continued)
Revenues – increases in net assets
resulting from an entity’s operation over a
period of time.
Expenses – decreases in net assets
resulting from an entity’s operation over a
period of time.
Net Income - the excess of revenues over
expenses.
61. Cash Flow Statement
The Cash Flow Statement - describes the flow
of cash into and out of an organization during an
accounting period. These flows are classified in
three categories:
Operating activities – The change in cash
resulting from actions intended to generate net
income.
Investing activities – The change in cash
resulting from actions taken to acquire or
dispose of productive company assets.
62. Cash Flow Statement (continued)
Financing activities – The change in cash
resulting from payments to or receipts
from suppliers of money to the firm (e.g.,
common shareholders or debt holders).
63. Other Elements of Annual Reports
Management Discussion and Analysis
Notes to Financial Statements
Auditor's Report
64. Management Discussion and Analysis
Covers three aspects of a company:
liquidity - ability to pay near-term
obligations
capital resources - ability to fund
operations and expansions
results of operation - profitability and
efficiency
65. Notes to Financial Statements
Provide additional information not included in
body of statements
Does not have to be numeric
Examples:
Description of accounting policies or
explanation of uncertainties and
contingencies
Company statistics (e.g., market share,
percentage of international sales, etc.)
66. Auditor's Report
Auditor, a professional accountant who
conducts an independent examination of the
financial accounting data presented by a
company.
Auditor gives an unqualified opinion if the
financial statements present the financial
position, results of operations, and cash
flows in accordance with GAAP.
