Lecture 1.

Decision Making and the

Role of Accounting
 Learning Objectives
1. Introduction
2. Understand the nature of decisions and the
decision-making process
3. Appreciate the wide range of economic
decisions made in the marketplace
4. Explain the nature of accounting and its main
functions
5. Identify the potential users of accounting
information
 Lecture References
• Accounting in Australia 8th edition,
Hoggett and Edwards – Chapter 1
What is Decision Making?
What is Accounting?
Why is Accounting needed in
Decision-Making?
Which type of Decisions need
Accounting?
So do you want to be an
Accountant?
 The changing environment of
Accounting.
• The changes are eminent due to the following
advancements.
 Technological developments.
 Increasing demand for information.
Globalization of business.
International regulations
 The Changing Environment of
Accounting
• Accountants traditionally viewed as ‘bean
counters’ or “number crunchers”
• Today this view has changed due to demand
for accounting information.
• Accountants work in dynamic business
environment.
• Hence the accountants role has changed
dramatically to advisory and assurance
services.
 New Role of Accountants.
• Because changes in business will continue,
Accountants need to have:
 Record keeping knowledge.
 Analytical and interpersonal skills to develop
effective business strategies.
Planning know-how.
Sound ethical behavior in discharging professional
duties.
 What is Decision Making?
• We make decisions everyday in our lives.
• Making of a choice from alternatives.
• Decision making is necessary as time and
resources are limited.
• Some decisions are easy to make so needs no
time to think.
• Most other decisions require much thinking,
planning and information gathering.
 What is Decision Making?
• Rush decisions can affect us for the rest of our
lives;
destiny in life.
 appearance.
economic wellbeing.
social and spiritual wellbeing.
• It is vital to make decisions after careful
consideration of all information available.
 Steps in Decision-Making
What are Establish goals
we trying
to achieve?

Gather information What Information

on alternatives do we need?

What are the

consequences of Determine
different consequences
alternatives?
Which course
of action will
Choose a we choose?
course of action
 Economic Decisions
• Many decisions involve the use of economic resources
• Economic resources carry a price tag because they are
limited in supply.
• Some decisions costs millions of kina others cost small
amount of money.
• The role of accounting in putting together information
needed to make decisions that involves huge amount
of money.
• Economic decisions usually involves a flow of money.
• Hence Accounting play a major role in economic
decision making.
 Factors Affecting Economic Decisions
• Personal taste
• Social factors
• Environmental factors
• Religious and/or moral factors
• Government policy
 Nature of Accounting.
• Is a service activity that provides and
interpret financial information that is
intended to be useful in making economic
decisions by;
– Businesses
– Government
– Charities
– Clubs
– Families
 Nature of Accounting
• Accounting has evolved over time in response
to the changing needs of society and business.
• Accounting is called the ‘language’ of
business.
• It communicates information about a
business.
• Accounting uses special words and symbols to
communicate financial needs and by
individuals and businesses.
 Nature of Accounting.
• Everyone is expected to poses prior
accounting knowledge before stream to
speciality courses.
• So What is Accounting then?
• Accounting is the process of identifying,
measuring, recording and communicating
economic information that will help decisions
makers to make informed economical
decisions.
 Accounting System Overview
Identification All economic Recording involves Is the process of
involves observing activities must be the maintenance preparing and
economic activities measured using of files of all distributing
& determine which money as a transactions which accounting
in particular medium of affected a reports to
represents exchange and a particular business. potential users of
economic events. measure of value accounting
information for
decision making.

Identification Measurement Recording Communication

Accounting
Recording reports
Quantification
Transactions classification
in K terms Analysis and
summarisation interpretation
 Accounting System Over View
Transactions
Recorded in the Journals General Ledger
source documents

Financial Reports Trial Balance

P & L Statement

Balance Sheet

Equity Statement

Cash Flow Statement

 Functions of Accounting
Accounting for Business has varied functions:
• Means of Communication.
• Provides information for decision making.
• Establishes accountability.
• Control device to safeguard economic resources.
• Aid to users of accounting information.
 Users of Accounting Information
• Accounting Information is useful to internal and external users.
• Internal users
• General Managers, Financial controllers, Sales Managers, Purchase
Managers and others in authority within an organization.
• Questions they raise including
– How much profit is being earned?
– What products should be produced?
– What resources are available?
– What is the most efficient production process?
– What will be the effect of increasing or decreasing selling prices?
– How much profit is owing to outsiders?
– Will cash be available to pay debts as they fall due?
• The accounting function that answers above series of questions is
call Management Accounting.
• Special-purpose financial reports which are prepared for users who
are in authority to obtain information to suits their need.
Users of Accounting Information (cont’d)
• External users
• Investors, shareholders, Creditors, Lenders, Unions,
Government, etc.
• Questions raise by external users include;
– Should I invest money in this business?
– Will the business be able to repay money lent to it?
– What are the business’s earning prospects?
– Is the business financially sound?
• Information is provided through Financial Accounting.
• Generate general-purpose financial reports which are
tailored to general users for their information need.
What is Management Accounting?
• Also known as Managerial Accounting.
• Area of accounting that provides financial and non
financial information to all level managers in an
organization.
• These information helps them to carry the
management tasks of:
 Planning – Construction of detailed operating programs.
 Controlling – comparing performance to plans and taking
appropriate actions to achiever set goals.
 Decision-making – Chossing from cost effective alternative.
What is Management Accounting?
• Management accounting provides information to
the internal decision makers.
• The accountant responsible for providing this
information is called Management Accountant.
• Management Accounting covers many activities,
including:
Determine how costs behave
Determine Cost-Volume-Profit Relationship.
Budgeting for financial planning and control
Capital Budgeting
Responsible for cost of manufacturing products.
 What is Financial Accounting?
• Financial accounting deals with historical financial
information in preparing business reports for external
use.
• Financial Accountants heavily involved in determining
entity’s;
 Financial Performance (Profit and Loss)
 Financial Position (Balance Sheet)
 Cash flow- movement of money through operating,
financing and investing activities.
 Ensure the reporting entity complies with the rules and
regulations – Accounting standards, Auditing Standards
and other corporate rules expected of the entity.
 Management Accounting versus
Financial Accounting.
Management Accounting Financial Accounting
Users of Users are inside the entity: Users are outside the entity:
reports • Managers • Shareholders
• Chief executive officers • Lenders
• General managers • Creditors
• Account managers • Potential investors
• Customers
• Government
• Interest groups
Types of Special-purpose reports: General Purpose financial reports:
Reports • Financial budgets • Financial performance/income
• Performance reports statement.
• Cost-of production reports • Balance Sheet
• Incremental analysis reports • Statement of changes in equity.
Do not have to comply with • Statement of Cash flows.
Accounting Standards. Required by regulatory authorities;
must comply with accounting
standards
 Accounting Services
• Accounting profession is one of the
professional career which offers its
professional services to all Sectors of the
Economy. The major services offered by the
accountants are:
1. Public Accounting.
2. Accounting in Commerce and Industry.
3. Not-For-Profit Accounting.
 1. Public Accounting
• Public Accountants run businesses which offer
their Professional Services for a fee. The fees vary
from small business to very large international
organizations with several thousand employees.
They specialized in four general services:
1. Auditing and Assurance Services
2. Taxation Services.
3. Advisory Services.
4. Insolvency and Administration
 1. Auditing and Assurance Services
• An audit is an independent examination of Financial
Reports, supporting documents and records in
order to form and opinion as to whether the financial
reports comply with certain levels of quality, as
specified in accounting standards, and present a true
and fair view of entity’s performance and financial
position.
• Assurance services are defined as independent
professional services that improve quality of
information, or its contexts, for decision makers.
 2 . Taxation Services.
• Entities and businesses pay different types of
taxes like direct taxes and indirect taxes.
Therefore, accountants are often engaged to
help in tax planning to minimize tax liability of
the businesses, consistent with the rules and
regulations established by the Internal
Revenue Commission (IRC) and other
regulatory bodies.
 3 . Advisory Services.
 Accountants provide advice on overcoming detected
defects in client’s accounting system. Some of the
advisory services are as follows:
• Installation of computer system.
• Production System and Quality Control.
• Forecasting and general financial planning
• Company mergers and takeovers.
 4 . Insolvency and Administration
• Public accountants are also engaged in helping
business with trading difficulties. Whereby,
they help business administer their recovery
from trading difficulties or insolvency, if
possible. However, if recovery is not possible
then they help in winding up of the business’s
affairs.
 2. Accountants in Commerce and Industry
 Many accountants are employed in business entities. The
entity’s Chief Financial Officer (CFO) has overall responsibility
for directing the activities for accounting personal. Services
include:
 General Accounting.
 Cost Accounting.
 Accounting Information System.
 Budgeting.
 Taxation Accounting.
 Internal Audit.
 General Accounting
• One function of accounting in commerce and
industry is to over see the recording the
transactions undertaken by the business
entity and to prepare reports specifically
tailored for use by management in their
planning, controlling and decision-making
activities.
 Cost Accounting
• Cost Accounting deals with the collection,
allocation and control of costs of producing
specific products and services.
 Accounting Information System
• Commercial Accountants also may be heavily
involved in designing both manual and
computerized accounting information system.
• The integrity of data and privacy issues are
very important in the electronic commerce.
 Budgeting
• Budgeting is the phase of accounting that
deals with preparation of a plan or forecast of
future operations. Its main function is to
provide management with a projection of
activities necessary to reach established goals.
 Taxation Accounting
• Business are assessed for a variety of taxes
which require the preparation of public
reports (tax returns) to the Internal Revenue
Commission and other taxing agencies.
 Internal Audit
• Internal audit is maintained by organizations
to conduct ongoing reviews to make certain
that established procedures and policies are
being followed.
 3.Not-For-Profit Accounting.
• Accountants may also offer their services to
the not-for-profit entities, NGOs, City
Councils, Cheshire Homes, Churches and
those entities having budgets involving too
much cash.
 Ethics and Accounting.
• 1990, ethics and moral behavior very much
valued.
• Early 2000s in Australia saw collapse of
number of large business and financial
instructions due to unethical behavior.
• This increased the pressure from the
community to improve the ethics for all
people working in business.
 Ethics in Business
• Most business today appreciate ethical
behavior for business to function effectively.
• Everyone must be honest in dealing with
business transactions.
• Dishonest will cause the business to collapse.
• High standard ethical behavior is highly valued
by the businesses.
 Ethics and Professional Accounting
Bodies
• Accountants are expected to uphold highest
ethical values in discharging professional
duties.
• CPA PNG adopts Code of Ethics for its
members.
• Accounting Registration Board (ARB) set rules
and issues practicing certificates and other
functions.
 Ethics in Practice
– Client proposal to evade tax
– Client proposal to manipulate financial
statements.
– Presenting financial information in most proper
manner so as not to deceive users.
– Incompetence in performing duties.
– breach of confidence – coping with superiors
instructions to carry out unethical acts.