MFA204 INTRODUCTION TO FINANCIAL ACCOUNTING

Zarinah Mohd Yusoff IFP, CFP, MBA, BACCT

CHAPTER 1: INTRODUCTION TO ACCOUNTING

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CONTENTS
The Accounting Process Accounting Information and Its Role in Decision Making Financial and Management Accounting Limitation of Accounting Information Changes in Accounting Careers in Accounting

THE ACCOUNTING PROCESS

ORGANIZATI ON ECONOMIC INFORMATION
IDENTIFYING MEASURING
BUSINESS TRANSACTION ANALYZING, RECORDING AND CLASSIFYING BUSINESS TRANSACTION

COMMUNICATIN G

RELEVANT INFORMATION THRU ACCOUNTING REPORTS

DECISION MAKING
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VARIETY OF USERS

THE ACCOUNTING PROCESS

IDENTIFYING Transaction that affect the entitys financial position are taken into consideration. They must be able to be reliably measured and recorded. MEASURING This stage includes the analysis, recording and classifying of business transaction. Identifies how transactions affect the entitys position, and group together similar items e.g. income and expenses. COMMUNICATI NG Accounting information communicated thru various accounting reports e.g. income statement, balance sheet and statements of cash flow. DECISION MAKIN Accounting information used for investment decision, make/buy decision, decisions to supply company with goods, decision to lend credit, etc.

ACCOUNTING VS BOOKKEEPING AND AUDITING

Accountant Identifying, measuring and communicating financial info to users Bookkeeper Recording and summarizing of financial transactions External Auditor Checking the financial statements to ensure that data contained is accurate and has been prepared in compliance with policies, laws and regulations

Internal Auditor Assisting management in ensuring the appropriate system is in place

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ACCOUNTING INFORMATION AND ITS ROLE IN DECISION MAKING

Accounting information is designed to meet the needs of both internal and external users Internal users: The management of the entity budgeting setting prices forecasting profits determining the appropriate sales mix assessing the performance of employees determining how many overtime hours are required, determining the capacity of the plant investing the resources of the plant
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ACCOUNTING INFORMATION AND ITS ROLE IN DECISION MAKING

External users Accounting info and decision making

Employees
Investors

Info concerning job security, potential bonus, increment

Info on future profitability, future cash flows and possibility of capital growth

Suppliers
Banks Consumers

Info on ability to pay credit purchases

Info on ability to service loan Info on continuity of company and ability to provide goods and services

Taxation authorities
Regulatory bodies

Info to determine the amount of tax payable

Info to determine if the firm is abiding by regulations, e.g. Companies Act 1957, Securities Act, etc.
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FINANCIAL AND MANAGEMENT ACCOUNTING

Financial Accounting Regulations Bound by GAAP* which are represented by accounting standards, Companies Act and other relevant rules Management Accounting Much less formal and there are no rules as such which apply

Timeliness

Information is often outdated by the time the report is distributed to the users
More concise as it does not contain excessive detail Prepared to suit a variety of users

Much more up-to-date

Level of detail

Much more detailed and can be tailored to suit the needs of the user

Main users

Note: *Generally Accepted Accounting Principles (GAAP) provides accounting standards for preparing accounting reports

LIMITATION OF ACCOUNTING INFORMATION

Time Lag:
There

is significant delay from the end of the financial year until the info reaches users in the form of financial report The internet has assisted in decreasing the time lag: however, there is often a time period of three months from the end of the financial year until the publishing of the financial report

LIMITATION OF ACCOUNTING INFORMATION

Historical Information:
Despite

one of the major roles of accounting info being to make an assessment as to the future performance of the entity, the info in financial reports is based on past transactions and therefore does not provide forecast info. However, often a review of the past is the best guide to the future performance

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LIMITATION OF ACCOUNTING INFORMATION

Subjectivity of information:
Even

though the preparation of reports is based on GAAP, there is much subjectivity in the inclusion of items to be reported and the choice of policies to be adopted. Different practices in different countries also resulted in difficulties in comparing financial reports on companies based in different countries

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POTENTIAL COSTS OF PROVIDING ACCOUNTING INFORMATION

Information costs
Various

costs involved in gathering, summarizing and producing the financial reports info could be used by the competitors to strengthen their market position

Release of competitive information

The

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CHANGES IN ACCOUNTING
Entities become larger, more diversified and multinational, thus require accountants to be more well-verse of current accounting standards including knowledge of international accounting standards Entity liquidation has become a more widespread issue, with far-reaching consequences, e.g. Enron, the 7th largest entity in the U.S. and Arthur Andersen, a 100-year-old accounting entity, which is also among the bigfive accounting entities

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CHANGES IN ACCOUNTING

In the years leading up to its bankruptcy, Enron had been reporting inflated profits and understating liabilities. Arthur Andersen, in its position of auditor, had checked Enrons account and reassured investors and creditors that the accounts did accurately reflect the financial performance and position of the entity. This resulted in a large numbers of investors and creditors seeking damages in the law courts from Arthur Andersen
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CHANGES IN ACCOUNTING

In local scene, Transmile Group Berhad, a company involved in air-freight services had been under probe in early 2008 due to financial irregularities The dramatic exposure of Transmile came to light in mid-2007, when auditors discovered fake receivables sitting on Transmiles books From a market cap of RM3.89bil at its high of RM14.40 on Jan 3, 2007, the company has now been reduced to a dismal market cap of RM155.32mil Since then, Transmile shareholders have collectively lost billions. Not surprisingly too, Transmile has been announcing losses in its quarterly earnings since
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CHANGES IN ACCOUNTING

Corporate Governance and Ethics

Recent

corporate collapses have resulted in many questions being raised about the integrity and ethics of the accounting profession, the role of corporate governance in entities and the quality of financial reporting Simple definition of ethics is what is good or bad, having to do with moral duty and obligation

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CHANGES IN ACCOUNTING

Corporate Governance and Ethics

Maintaining ethics in an entity means complying with the rules and policies of the entity, and having awareness of the different needs of the stakeholders in the entity Increasing expectations from stakeholders forcing companies to address ethics effectively Corporate governance structure in an entity specifies the distribution of rights and responsibilities among different participants in the entity, e.g. BOD, managers, shareholders, etc

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CAREERS IN ACCOUNTING

Traditionally accountants work in public sector, private sector, government sector and not-for profit sector New opportunities:

Forensic accounting E-commerce accounting Insolvency accounting Environmental accounting International accounting

Apart from being an accountant, bookkeeper or auditor, having knowledge in accounting is essential for those in management level of an entity
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PROFESSIONAL ASSOCIATION

Malaysian Institute of Certified Public Accountant (MICPA), previously known as MACPA

Vision To be the premier business qualification in Malaysia, comparable to the best in the world. Mission To enhance the value and distinctiveness of the Certified Public Accountant (CPA) qualification To promote high standards of professional conduct and technical competence of members to safeguard public interest To provide quality professional education and training thereby creating a competitive advantage for members
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PROFESSIONAL ASSOCIATION

Malaysian Institute of Accountant (MIA)

MIA is a statutory body established under the Accountants Act, 1967 to regulate and develop the accountancy profession in Malaysia. To date, MIA has close to 25,000 members. MIAs responsibilities include education and quality assurance as well as enforcement which are carried out to ensure that the credibility of the profession is maintained and that public interest is continuously upheld.

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STUDY QUESTION
1. 2.

3.

4.

5.

What is the accounting process? What is the difference between accounting and bookkeeping? How does accounting assist in decision making by various users? What are the differences between management accounting and financial accounting? What re some of the limitations of accounting information?
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