Topic 1: Introduction to the accounting environment

Introduction

Many students about to embark on a first course in accounting and finance may have some
misconceptions as to what graduates of accounting and finance actually do!

Accounting and finance for some may be associated with repetitive tasks such as data entry
and especially the accounting function may be considered as being rather dull. There is,
however, a lot more to accounting and finance than may be first imagined.

In this unit we are concerned with the use of financial information for making decisions.
Generally we will look at the use of financial information by business organisations for
making decisions as part of the process of achieving business objectives.

An understanding of accounting and finance and their various roles in decision making will
equip you with some important tools and techniques for understanding a broad range of
accounting and business issues.

People in all walks of life rely on accounting and finance information to make daily decisions
concerning the allocation of scarce resources. For example, a retired rugby player may rely
on accounting/finance information to help guide investment decision making on the
allocation of his earnings as a professional sportsman; a student might use budgeting tools to
help fund an overseas trip to Vietnam at the end of the university year; and knowledge of
expected costs could help a construction company quote for a job on a large-scale,
multimillion-dollar building project. All of these scenarios would benefit from the input of
accounting information to help reach the best decision based on the available resources.

In recent years, the responsibilities of the accounting profession have changed dramatically.

Changes in the structure of business entities, including the growth of the multinational and
diversified entity, have had consequences for the accounting profession. The role of the
accountant is continually evolving and comprises a lot more than just the rudimentary
preparation of financial statements, and the traditional work areas of management and
financial accounting. Finance graduates also need to be able to interpret financial information
and make investment recommendations and manage funds.

Accountants can work in exciting new growth areas such as forensic accounting, carbon
accounting, water accounting, sustainability accounting, procurement and insolvency.

Finance graduates seeking to enter the world of finance can work in banking, government and
private firms dealing in money management including financial advice, and analysis.
Video

The following short videos available in the Accounting Videos icon on MySCU may help
with your understanding of key concepts.

Understanding Financial Information

Financial Reporting for Business

Balancing the Books

Learning objectives

Explain the process of accounting and the differences between accounting and
bookkeeping.

The process of accounting is one of identifying, measuring and communicating economic

information about an entity for decision making by a variety of users. Bookkeeping more
simply is the recording and summarising of financial transactions and the preparation of basic
financial statements.

Accounting then is a process within which financial information is created and analysed. In
this unit we will not concern ourselves with a lot of the detail of the way that accounting and
financial information is created. That is left for other units which progress towards an
accounting major. We will however pay some attention to the way in which accounting and
finance information is analysed. It is important to have some understanding of the process of
financial information formation to appreciate the content of financial statements and their
implications for decision making.

There is however a cost/benefit trade off in the extent and precision with which accounting
and financial information is collected, recorded and reported. Sometimes it costs more in time
for an organisation to prepare very detailed accounting information about a particular part of
the organisations operations than is likely to be gained in benefits from costs savings or extra
earnings.

Textbook

Turn to pages 2-3 of your text and read the section ‘The accounting process’.

Outline the role of accounting in decision making by various users.

Accounting information is an important part of the information used by individuals and

entities in decision making regarding investment and other business opportunities.

The internal users (i.e. management) use accounting information to make decisions
concerning sales mix, which products to make or buy, and opportunities for expansion.
Stakeholders (e.g. suppliers, consumers, banks, investors and regulatory bodies) require
accounting information to help decide whether to lend money to the entity, whether to invest
in the entity and whether to purchase goods from the entity.

In order to achieve objectives business managers must make decisions about the best way to
make use of limited resources available. Decisions should be made in the light of particular
objectives, and with the benefit of accurate and reliable information. It is the information,
particularly financial information that supports business decision making.

Textbook

Turn to pages 4–5 of your text and read the section ‘Accounting information and its role in
decision making.’

Refer Table 1.2 to identify types of accounting information used in decision making by
various stakeholders.

Explain the differences between financial accounting and management accounting.

When we consider the various user groups, accounting is divided into two main areas;
financial accounting and management accounting.

Management accounting concerns the creation of reports for use by management in internal
planning and decision making. The management accounting reports are much less formal
than financial accounting reports, as they are not bound by regulatory requirements. The
reports can also be tailored to suit the needs of management. There is no time lag with
management reports, so they are up to date.

Financial accounting provides information for the use of external parties so that they can
make economic decisions about the entity. Financial accounting is bound by generally
accepted accounting principles (GAAP). There is usually a time lag from the date of the
report to when it is distributed to the various users. The financial accounting information is
concise, as unnecessary detail is disclosed in the notes to the financial statements. The users
of financial statements include suppliers, consumers, banks, investors and regulatory bodies.

Management accounting is not as prescriptive in the format or layout and tends to be more
purpose-specific. In the latter part of the course we will look at some of the more typical
types of management reports that can assist managers in making decisions.

Textbook

Turn to pages 6-8 of your text and read the section ‘Financial accounting and management
accounting.’

Refer Table 1.3 to clearly understand the differences between financial and management
accounting.
Explain the role of accounting information in the business planning process.

Businesses such as profit oriented sole traders, partnerships, companies (should you wish to
read more on the form of these profit oriented entities read text chapter 3 section 3.1 – 3.8)
and also not for profit clubs hospitals and charities can all benefit from having a business
plan. A business plan is a document that explains and analyses an existing or proposed
business. Appendix 1A also gives detail to the business planning process.

Textbook

Turn to pages 8-10 of your text and read the section ‘Role of accounting information in
business planning.’ Read also Appendix A should you wish to view more extensive detail.

Identify the sources of company regulation in Australia.

Corporate regulation in Australia is under closer scrutiny than ever before due to many recent
large-scale corporate collapses and employee fraud. The main source of company regulation
is the Corporations Act, administered by the Australian Securities and Investments
Commission (ASIC). The other important sources of regulation are the Listing Rules of the
Australian Securities Exchange (ASX); and the accounting principles, standards, ethics and
disciplinary procedures of the professional accounting associations.

Corporate regulation protects the interests of the different stakeholders and promotes
confidence and investment in business and economic activities.

Textbook

Turn to pages 10-13 of your text and read section ‘Sources of company regulation.’

Explain the current standard-setting framework and the role of the professional
accounting associations in the standard-setting process.

The professional associations are, in Australia, CPA Australia, the Institute of Chartered
Accountants in Australia, the Institute of Public Accountants and, in New Zealand, the New
Zealand Institute of Chartered Accountants.

These associations provide a range of services for their respective members — including
training, products and services, and the right to use the designation after their names (i.e.
CPA, CA and MIPA) — and employment opportunities.

The professional associations provide feedback on exposure drafts and forward any
comments to the AASB. They also inform their members of any developments in accounting
standards, through newsletters and by conducting continuing professional education (CPE)
sessions.

Textbook

Turn to pages 14-17 of your text and read section ‘Australian and international accounting
standards’.
Evaluate the role of the Conceptual Framework and illustrate the qualitative
characteristics of financial statements.

The Conceptual Framework is designed to assist in the preparation and presentation of

financial statements, to guide the standard setters in developing future accounting standards,
and to help users interpret information in the financial statements.

The Conceptual Framework specifies the objective of financial statements, their desirable
qualitative characteristics, and the definition and recognition of elements in the financial
statements.

The two fundamental qualitative characteristics of financial statements are relevance

(including materiality) and faithful representation.

The enhancing qualitative characteristics are comparability, verifiability, timeliness and

understandability. Cost is a major constraint on the provision of financial reporting.

Textbook

Turn to pages 17-20 of your text and read section ‘Role of conceptual framework’.

Refer Figure 1.3 ‘Consolidated Statement of Profit or Loss for the Qantas Group’ to
understand the basic structure of a profit or loss statement. Work your way through the
statement to see how Qantas arrives at the bottom figure in the statutory profit/(loss) for the
year column.

Give examples of the limitations of accounting information.

Users of accounting information need to consider carefully, the limitations of the information
provided, especially in the financial statements.

The limitations of accounting information include the time lag between production of the
report and distribution to the users, and the historical nature of financial statements. Costs
associated with releasing accounting information include the costs of preparing and
disseminating the information, and any losses from the potential release of proprietary
information to competitors.

Textbook

Turn to pages 21-23 of your text and read section ‘Limitations of accounting information’.

Provide examples of new and exciting opportunities in the accounting discipline.

Accountants are employed in public accounting roles, private and public sector accounting
roles, and government and not-for-profit sector accounting roles. New opportunities for
accountants exist in forensic accounting, environmental accounting, e-commerce, insolvency,
and international accounting.
Textbook

Turn to pages 23-25 of your text and read section ‘Careers in accounting’.

Refer Figure 1.5 ‘Accounting opportunities in Australia’.

What you should know from Topic 1

 what the accounting process is and differences between accounting and bookkeeping
 how accounting aids decision making by various users
 the differences between financial accounting and management accounting
 the role of accounting information in the business planning process
 globalisation of financial reporting
 the main sources of company regulation
 the role of professional accounting associations in standard setting
 the Conceptual Framework for financial reporting
 some of the limitations of accounting information
 career opportunities for accountants.

Review activities from chapter 1: 1.1

Turn to the Key Terms section of the text on pages 27-28 and see if you understand each of
them.

Review activities from chapter 1: 1.2

Turn to page 29 and attempt comprehension questions 1.2, 1.3, 1.6, 1.7 and 1.9.

Review activities from chapter 1: 1.3

Turn to page 31 and attempt decision making activity 1.35

Solutions to review activities

Solutions will made be available on MySCU