Where to find money

Personal savings; Family & friends; Bank loan; Private investors; Go Public
Purpose and Importance of Accounting
1. [From textbook] Accounting is an information and measurement system that identifies, records, and
communicates relevant, reliable, and comparable information about an organisation’s business
activities.
a. Identifying: Selecting transactions and events relevant to an organisation.
b. Recording: Keeping a chronological log of transactions and events measured in dollars.
i. Classified and summarised in a useful format.
c. Communicating: Preparing, recording, and interpreting accounting reports.
2. [From textbook] Record-/Book-keeping is the recording of transactions and events either manually or
electronically  A part of accounting!
3. Accounting is the system used to identify, record, and communicate economic information about a
business organization to users.
a. [From textbook] An accounting information system is established by all organisations to
communicate data to help people make better decisions.
b. Accounting is the language of the business world!
c. Accounting helps us to better understand the business world!
[From textbook] Technology
1. Reduces the time, effort, and cost of record-/book-keeping while improving clerical accuracy.
2. Changed the way we store, process, and summarize masses of data.
a. Consulting, planning and other financial services require data sorting  Interpretation,
identification of key factors and analysis of their implications  Closely linked to accounting!
3. ***Only as useful as the accounting data available, and users’ decisions are only as good as their
understanding of accounting.
a. The best software and record-/book-keeping cannot make up for the lack of accounting
knowledge!
Users of Accounting Information

Type of user External users Internal users

Definition Not directly involved in running the Directly involved in managing
organisation. and operating the organisation.
a. [From textbook] Have limited
access to an organisation’s
information BUT their business
decisions depend on reliable,
relevant, and comparable
information  Evaluation of
company
b. Use the information to help
improve the efficiency and
effectiveness of the day-to-day
activities of the organisation.
Example 1 Shareholders and potential Managers and employees
investors
a. [From textbook] Owners of a [From textbook] R&D – Require
corporation  Dividends information about projected
costs and revenues of any
proposed changes in products
and services.
Purchasing – Need to know
what, when and how much to
purchase.
HR – Need information about
employees’ payroll, benefits,
performance, and
compensation.
 Production – Requires the
information to monitor costs
and ensure quality.
Distribution – Require the
reports to deliver products and
services timely, accurately, and
efficiently.
Marketing – Use reports about
costs and sales to target
consumers, set prices, and
monitor consumer needs,
tastes, and price concerns.
Service – Require information
on the costs and benefits of
looking after products and
services.
b. Use accounting reports to assess a Plan operations
company’s performance and To be well paid and promotions
decide whether to buy, hold or sell
shares  “purchase low, sell high”
c. Elect a board of directors to
oversee their interests in the
organisation.
Directors are responsible to
shareholders  Similar
information needs!
Example 2 Creditors/Lenders
a. [From textbook] Look for
information to help them assess
whether an organisation is likely to
repay its loans with interest  Can
lend money/other resources or not
b. E.g. Banks; savings & loans; co-
operatives; mortgage & finance
companies
Example 3 Suppliers
a. [From textbook] Judge the
soundness of a customer before
making sales on credit
b. Pay on time
Maintain demand
Example 4 Customers
a. [From textbook] Assess the staying
power of potential suppliers.
b. Deliver products on time
Maintain supply and price
Example 5 Competitors/Directors
a. To understand your “enemy”
Example 6 Regulators
a. [From textbook] Have legal
authority over certain activities of
organisations.
b. Oversee the “players” and fairness
in the market
Example 7 Voters/Legislators/Government
Officials/Taxing Authorities
 a. Monitor and evaluate government
receipts and expenses
Collect appropriate level of taxes
Example 8 [From textbook] Nonexecutive
employees and labour unions
a. Judge the fairness of wages
Assess job prospects
Bargain for better wages
Example 9 [From textbook]
External/Independent auditors
a. In later section!
Example 10 [From textbook] Contributors to
non-profit organisations
a. Evaluate the use and impact of
their donations
Extra Consumer groups and lawyers; [From textbook] Officers,
Brokers and the press Internal auditors, Sales staff,
Budget officers and Controllers
a. [From textbook] Rely on internal controls (Procedures set up to
protect company property and equipment, ensure reliable
accounting reports, promote efficiency, and encourage adherence to
company policies) to monitor and control company activities.
Each user has their own special information needs depending on the
types of decisions that need to be made
The Accounting System
Churns out different information to their respective users
3 types Financial Managerial Tax
Report economic External users Internal users Tax
information to who? authorities
a. Periodic financial statements and related Detailed financial plans and
disclosures with no access to detailed continuous performance
internal records. reports.
General purpose (broad range of purposes Contain a lot of operational
which external users rely on). information.
b. Not subjected to the same
rules as external reports
Examples Investors, creditors, suppliers, and Managers, who make
customers Internal decisions on how to
operate the organisation.
Primary objective Provide useful economic information
about a business to help external parties
make sound financial decisions.
Additional Report of the past Forward looking
b. Solely monetary based Not solely monetary based
Emphasis Accuracy Timeliness
Financial Accounting Standards
[From textbook] Principles of Accounting
Types General Specific
Definition Basic concepts and guidelines for preparing Detailed rules used in reporting business
financial statements. transactions and events.
Origin Long-used accounting practices Accounting standards.
[From textbook] General Principles of Accounting
Measurement/(Historical) Revenue Matching/Expense Full Objective
Cost recognition recognition disclosure
Definition Accounting information is Provides A company record A company Provide
based on actual cost, with guidance on the expenses it report the financial
 a potential for subsequent when a incurred to details information
adjustments to market. company must generate the behind that is useful
recognise i.e. revenue reported. financial to users in
record revenue statements making
(the amount that would decisions
received from impact about
selling products users’ providing
and services). decisions resources to
in an entity.
footnotes
to the
statements
How is it Cash or equal-to-cash Cash received
measured? basis plus the cash
value of items
received
b. If cash is given for a Too early: Look
service: The amount of more profitable
cash paid. than it is.

c. Something besides cash is Too late: Look

exchanged: The cash value less profitable
of what is given up or than it is
received.
d. Revenue is
recognised
when earned
i.e. services are
performed or a
seller transfers
ownership of
products to the
buyer.
e. Proceeds from
selling products
and/or services
need not be in
cash (Credit
sales: Customer
promise to pay
at a future
date)
Emphasis Reliability and verifiability
a. information is considered
objective i.e. supported
by independent, unbiased
evidence  Demands >1
person’s opinion
International
1. International Accounting Standards Board (IASB) issues the International Financial Reporting
Standards (IFRS)
a. Since 2001
b. [Additional] Some old IFRS were issued as International Accounting Standards (IAS)  The
terms IFRS and IAS can be used interchangeably.
c. [From textbook] Identifies preferred accounting practices.
 Singapore
1. Companies incorporated here must follow the Singapore Financial Reporting Standards (FRS)/
International Financial Reporting Standards (IFRS) set by the Accounting Standards Council Singapore
(ASC).
a. Since 2007
b. [Additional] Singapore FRS is based on the IFRS.
c. [Additional] ASC was known as the Council on Corporate Disclosure and Governance (CCDG)
from 2002 – 2007.
USA (Just for comparison)
1. U.S. Securities and Exchange Commission (SEC) issues the Generally Accepted Accounting Standards
(GAAP) to companies that raise money from the public through issuances of their shares (on US
exchanges) and debit
a. Since 1934
b. [From textbook] Aims to make information in financial statements relevant (affect the
decisions of its users), reliable (trusted by its users) and comparable (helpful in contrasting
organisations).
c. The task of setting it has been delegated to the Financial Accounting Standards Board
(FASB), a private sector group that sets both broad and specific principles.
Around the World
1. Global convergence to IFRS in response to global and increased demand by external users for
comparability of accounting reports.
i. Everyone can follow and be on the same page: A company can use one single set of
financial statements at all financial markets.
ii. [From textbook] Companies wish to raise money from lenders and investors in
different countries.
iii. Example: US’ GAAP and IFRS: Aims to achieve a single set of accounting standards
for global use
iv. [From textbook] Changes over time in response to the demands of users.
[From textbook] Accounting Assumptions
1. Going-concern – Accounting information reflects a presumption that business will continue operating
instead of being closed or sold.
2. Monetary unit – We can express transactions and events in monetary units, the common
denominator in business.
a. Dependent on the country it operates in.
3. Time period – Presumes that the life of a company can be divided into time periods, and that useful
reports can be prepared for those periods.
4. Business entity –Business is accounted for separately from other business entities, including its
owner.
a. Separate information about each business is necessary for making good decisions.
IASB Conceptual Framework for Financial Reporting (revised in March 2018)
1. [From textbook] Effective immediately for the Board and companies that use the Conceptual
Framework to develop accounting policies, when no IFRS Standard applies to a particular transaction.
2. Cost is a pervasive constraint on the reporting entity’s ability to provide useful financial information.
a. Reporting financial information imposes costs, and therefore it is important that those costs
are justified by the benefits of reporting that information.
b. Looks at both the importance and relative size of an amount.
i. The cost-benefit constraint prescribes that only information with benefits of
disclosure greater than the costs of providing it need be disclosed.
3. [From textbook] Purposes
a. [From textbook] To assist the Board in developing IFRS Standards based on consistent
concepts provide useful financial information to investors, lenders, and other creditors.
b. [From textbook] To assist preparers of financial reports to develop consistent accounting
policies for transactions/other events when
i. There is no Standard to follow
ii. A Standard allows a choice of accounting policies.
c. [From textbook] To assist all parties in understanding and interpreting Standards.
d. Defines basic accounting concepts and gives guidelines for good accounting.
Income i.e. Revenues, Expense Capital Maintenance Dividends
Gains Adjustments
Inflow/Enhancement Outflow/Depletion of Revaluation/Restatement Decrease in equity
of assets assets of assets/liabilities ***Not part of the
resulting in changes in company’s earnings process
equity  Not reported as expenses
Decrease in liabilities Incurrence of liability
 Increase in equity  Decrease in equity
During the accounting During the
period other than accounting period
contributions from other than
owners distributions to
owners

*** Revenues are *** [From textbook] ***Not included in the ***Not used in computing
earned from a Reflects the costs to income statement. net profit!
company’s earnings generate the Treated as Other
activities revenues reported. Comprehensive Income
Qualitative Characteristics (Definition)
Define/Identify the types of information that are likely to be most useful to users… [From textbook] …making
decisions about the reporting entity based on information in its financial report.
Qualitative Characteristics (Fundamentals)
Relevance
1. Gives numbers that users need for decisions
a. [From textbook] Capable of making a difference.
2. Predictive - Can be used as an input to processes employed by users to predict future outcomes.
3. Confirmatory – Can be used to provide feedback about/changes to/confirmation for past evaluations
4. [From textbook] Materiality – Omitting/Misstating it could influence decisions that users make based
on financial information.
Faithful Representation
1. [From textbook] Representation of the substance of an economic phenomenon and the phenomena
that it purports to represent instead of representation of its legal form only.
2. Provides a true, fair, and neutral view
a. [From textbook] Complete and free from error.
b. Neutrality is supported by prudence, the exercise of caution when making judgements
under conditions of uncertainty and does not allow for over-/under-statement of assets,
liabilities, income, or expenses.
Qualitative Characteristics (Enhancements)
1. [From textbook] Enhance the usefulness of information that is relevant and faithfully represented.
a. Help determine which of the two ways should be used to depict a phenomenon if both are
considered equally relevant and faithfully represented.
Comparability
1. [From textbook] Identify and understand similarities in, and differences among, items.
2. Consistency refers to the use of the same methods for the same items.
a. Consistency helps to achieve the goal, which is comparability
3. Can compare company X to company Y, or company X this year to company X last year
Verifiability
1. [From textbook] Enables different knowledgeable and independent observers to reach consensus,
although not necessarily complete agreement, that a depiction is a faithful representation.
2. Able to check if the numbers are correct
Timeliness
1. [From textbook] Having information available to decision-makers in time to be capable of influencing
their decisions.
2. Ensures that Information is not stale or out of date
a. [From textbook] The older the information is, the less useful it is.
 Understandability
3. [From textbook] Classifying, characterising, and presenting information clearly and concisely.
4. Financial reports are prepared for users who
a. Have a reasonable knowledge of business and economic activities.
b. Review and analyse the information diligently
c. Can understand the information
Ethics
1. Beliefs that distinguish right from wrong: accepted standards of good and bad behaviour.
a. [From textbook] Preferred: A course of action that avoids casting doubt on one’s decisions.
2. For information used in decisions to be useful, it must be trusted by its users.
a. Ethics is crucial to accounting!
3. [From textbook] Ethical standards and guidance are developed by the International Ethics Standards
Board for Accountants (IESBA)
4. [From textbook] Guidelines for Ethical Decision Making
a. Identify ethical concerns – Use personal ethics to recognise an ethical concern.
b. Analyze options – Consider all good and bad consequences.
c. Make ethical decisions – Choose the best option after weighing all consequences.
5. Misleading information  Wrongful closing of a division, harming workers, customers, and suppliers.
6. Social responsibility is a concern for the impact of actions on society.
7. Accounting scandals driven by greed and poor ethics:
a. Luckin Coffee 2020 - Chinese coffee chain inflated sales by more than RMB 2 billion in 2019
through fake coupons.
b. Hin Leong 2020 - Singapore oil trading company overstated assets by US$3 billion and
fabricated documents to conceal US$800 million in losses.
c. Satyam 2009 - Indian IT services firm inflated revenue by $1.5 billion by falsifying revenues,
margins, and cash balances.
d. Enron 2001; Worldcom 2002; AIG 2005; Lehman Brothers 2008; Bernie-Madoff 2008; Wells
Fargo Bank 2016
Good ethics are good business!
Auditors
1. An auditor is an independent certified public accountant, who examines (underlying transactions
incorporated into) financial statements prepared by a company’s management and issues an auditing
report that contains an auditing opinion.
a. Examine financial reports to ensure compliance with/verify that they are prepared according
to generally accepted accounting standards.
2. Must verify the effectiveness of internal controls.
Why audit financial statements?
1. An audit provides the public with additional assurance, beyond the management’s own assertions,
that a company’s financial statements can be relied upon.
2. [From textbook] Does not attest to absolute accuracy of the statements!
[From textbook] Corporate Governance
1. Includes a corporation’s owners, managers, employees, board of directors, and other important
stakeholders who work together.
a. Reduces the risk of accounting fraud and increases confidence in accounting reports.