Topic

1
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Accounting Environment
100 Shares

Accounting?
$1 par value

Learning Objectives
What is Accounting Accounting Profession Internal and External users of Accounting Information Financial accounting vs Management accounting Generally Accepted Accounting Principles (GAAP) Professional Accounting Bodies and Standard Setting in Malaysia Financial Reporting Framework in Malaysia International Accounting Standards Board (IASB)

Financial Statements
Income Statement Owners Equity Statement Balance Sheet Cash Flow Statement

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What is accounting?
is a Accounting
system that Identifies

Records information Relevant Reliable Comparable

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that is

Communicates

to help users make better decisions.

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Accounting as an Information System

Accounting is an information system that measures, processes, and communicates financial information.
Accounting is a link between business activities and decision makers. Management must have a good understanding of accounting to set financial goals and make financial decisions. Management must not only understand how accounting information is compiled and processed but also realize that accounting information is imperfect and should be interpreted with caution. 4
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Accounting as an Information System

A business is an economic unit that aims to sell goods and services to customers at prices that will provide an adequate return to its owners.
Goals
Profitabilityearning a sufficient return to maintain owner interest Liquidityhaving enough cash to pay debts as they come due

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Accounting as an Information System

Activities
Operatingselling goods and services to customers; employing managers and workers; buying and producing goods and services; and paying taxes Investingspending the capital a company receives in productive ways that help it achieve its objectives Financingobtaining funds to begin operations and to continue operating

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Figure 1: Accounting as an Information System

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Figure 2: Business Goals and Activities

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Accounting Activities
Identifying Business Activities Recording Business Activities

Communicating Business Activities

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Accounting as an Information System

Ways in which accounting information is processed
Bookkeeping is the mechanical and repetitive recordkeeping aspect of accounting.

Computerized accounting
Computerized accounting is useful for routine bookkeeping chores and complex accounting calculations. Computerized information is only as useful as the data input into the system.

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Decision Makers: The Users of Accounting Information

Three major groups use accounting information. Management (internal users) Outsiders with a direct financial interest Present or potential investor Present or potential creditors People, organizations, and agencies with an indirect financial interest Tax authorities Regulatory agencies a Securities and Exchange Commission (SEC) Other groups (labor unions, financial advisers, economic planners, etc.) Government and not-for-profit organizations also use financial information.

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Figure 3: The Users of Accounting Information

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Users of Accounting Information

External Users

Internal Users

Lenders

Consumer Groups Managers

Officers

Sales Staff
Budget Officers

Shareholders External Auditors Governments Customers

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Internal Auditors Controllers

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Accounting as an Information System

Categories of accounting
Management accountingaccounting information for internal decision makers Financial accountingaccounting information for external decision makers; reports are called financial statements.

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Exh. 1-2

Financial vs Managerial Accounting

Financial Accounting
1. Users 2. Time focus 3. Verifiability versus relevance 4. Precision versus timeliness 5. Subject 6. GAAP 7. Requirement External persons who make financial decisions Historical perspective Emphasis on verifiability Emphasis on precision Primary focus is on the whole organization Must follow GAAP and prescribed formats Mandatory for external reports

Managerial Accounting
Managers who plan for and control an organization Future emphasis Emphasis on relevance for planning and control Emphasis on timeliness Focuses on segments of an organization Need not follow GAAP or any prescribed format Not Mandatory
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FA vs MA
External Users
Internal Users

Financial accounting provides external users with financial statements.

Managerial accounting provides information needs for internal decision makers.

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Characteristics of Accounting Information

USEFUL FINANCIAL INFORMATION

RELEVANCE 1. Predictive value 2. Feedback value 3. Timely

RELIABILITY 1. Verifiable 2. Faithful representation 3. Neutral

COMPARABILITY

CONSISTENCY

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Generally Accepted Accounting Principles

Financial accounting practice is governed by concepts and rules known as Generally Accepted Accounting Principles (GAAP).
Relevant Information Reliable Information Affects the decision of its users. Is trusted by users. Is helpful in contrasting organizations.
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Comparable Information

The Operating Guidelines of Accounting

ASSUMPTIONS
Economic entity Monetary unit

PRINCIPLES
Historical costs Revenue recognition

CONSTRAINTS
Conservatism Materiality

Going concern

Matching

Time period

Full disclosure

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Accounting Assumptions
Now Future

Economic Entity The business is accounted for separately from other business entities, including its owner

Going-Concern Principle Reflects assumption that the business will continue operating instead of being closed or sold

Monetary Unit Principle Express transactions and events in monetary, or money, units

Time Period The economic life of business can be divided into artificial time period for the purpose of financial reporting
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Accounting Principles
Revenue Recognition 1. Recognize revenue when it is Historical Cost earned. Accounting information is based 2. Proceeds need not be in cash. on actual cost. 3. Measure revenue by cash received plus cash value of items received.
Full Disclosure Report enough information for users to make knowledgeable decisions about the company
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Matching Expenses are matched against revenues, and recorded in the same period in which the related revenues are earned
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Accounting Constraints

Conservatism Income and assets be reported at their lowest reasonable amounts (i.e. minimizing the assets and understating the income)

Materiality Accountants are required to accurately account for significant items and transactions

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Accounting Profession and the Financial and Reporting Environment of Malaysia

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Statutory and capital market requirement

Accountant Act 1967 Companies Act 1965 (revised) Financial Reporting Act 1997 Bursa Malaysia Listing Requirement

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Financial Reporting Framework in Malaysia

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Professional Accounting Bodies and Standard Setting in Malaysia

Malaysian Institute of Accountant (MIA) http://www.mia.org.my Malaysian Institute of Certified Public Accountant (MICPA) Malaysian Accounting Standards Board (MASB) http://www.masb.org.my Financial Reporting Foundation (FRF)

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Malaysian Accounting Standards Board (MASB)

Established under the Financial Reporting Act 1997 (the Act) as an independent authority to develop and issue accounting and financial reporting standards in Malaysia. Working with FRF to make up the new framework for financial reporting in Malaysia, with representation from all relevant parties in the standard-setting process, including preparers, users, regulators and the accountancy profession.

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Malaysian Institute of Accountant (MIA)

established under the Accountants Act 1967 regulating the accounting profession. play a significant role in the development and advancement of accounting profession globally. Its membership in such bodies include the: Asean Federation of Accountants (AFA) Confederation of Asian and Pacific Accountants (CAPA) International Federation of Accountants (IFAC) Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR)
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Malaysian Institute of Accountant (MIA)

Objectives:
To promote and regulate professional and ethical standards To enhance competency through continuous education and training to meet the challenges of the global economy To enhance the status of members To lead research and development for the enhancement of the profession To inculcate a high sense of social responsibility
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Malaysian Institute of Certified Public Accountant (MICPA)

Objectives:

To advance the theory and practice of accountancy in all its aspects. To recruit, educate, train and assess by means of examination or otherwise a body of members skilled in these areas. To preserve at all times the professional independence of accountants in whatever capacities they may be serving. To maintain high standards of practice and professional conduct by all its members. To do all such things as may advance the profession of accountancy in relation to public practice, industry, commerce, education and the public service.
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Financial Reporting Federation (FRF)

Established under the Financial Reporting Act 1997 (Act), comprises representation from all relevant parties in the standard setting process, including preparers, users, regulators and accountancy profession. Oversight the MASB's performance, financial and funding arrangements, and as an initial source of views for the MASB on proposed standards and pronouncements. It has no direct responsibility with regard to standard setting. This responsibility rests solely with the MASB.
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Opportunities/Profession in Accounting
Financial
Preparation Analysis Auditing Regulatory Consulting Planning Criminal investigation

Managerial
General accounting Cost accounting Budgeting Internal auditing Consulting Controller Treasurer Strategy Lenders Consultants Analysts Traders Directors Underwriters Planners Appraisers

Taxation
Preparation Planning Regulatory Investigations Consulting Enforcement Legal services Estate planning

Accountingrelated

FBI investigators Market researchers Systems designers Merger services Business valuation Human services Litigation support Entrepreneurs
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International Accounting Std. Board (IASB)

The International Accounting Standards Committee (IASC) was set up in 1973 to develop a set of international accounting standards for use by those countries wishing to do so.

The IASC was replaced in 2001 by the IASB. The main reason for replacement was that the IASCs standards allowed too many alternatives and it was felt that international accounting standards should be of a higher quality if they were to be accepted and used for the purpose of listing a companys shares on stock exchanges around the world.
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International Accounting Std. Board (IASB)

Following the direction given by Malaysias FRF in 2005, the MASB was required to adopt the standards issued by the IASB as from 1 January 2006. Hence, the financial statements prepared by Malaysian companies are in line with those prepared by entities in other countries which also have adopted IASB standards. This should allow for greater comparability and understanding of financial statements worldwide, and lead to a more efficient flow of capital resources across national boundaries.
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Financial Statements
1. Income Statement/ Statement of Comprehensive Income
2. Statement of Owners Equity/ Capital Statement 3. Balance Sheet/ Statement of Financial Position 4. Statement of Cash Flows

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Scott Company Income Statement For Month Ended 31 December 2006 Revenues: Consulting revenue Less:Expenses Salaries expense Profit for the period

3.000 800 2.200

Profit is the difference between Revenues and Expenses.

The income statement describes a companys revenues and expenses along with the resulting profit or loss over a period of time due to earnings activities.
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Scott Company Income Statement For Month Ended 31 December 2006 Revenues: Consulting revenue Less Expenses: Salaries expense Profit for the period

3.000 800 2.200

The profit of $2,200 increases Scotts capital by $2,200.

The Statement of Owners Equity explains changes in equity from profit (or J. Scott, Capital, 1 Dec. 2006 loss) and from owner Add: Investment by owner investments and Net income withdrawals for a Less: Withdrawals period of time. J. Scott, Capital, 31 Dec. 2006
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Scott Company Statement of Owner's Equity For Month Ended 31 December 2006 $ 20.000 2.200 500 21.700
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The Balance Sheet describes a companys financial position at a point in time.

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SCOTT COMPANY BALANCE SHEET 31 DECEMBER 2006 ASSETS Non-current assets Equipment Total non-current assets Current Assets Cash Supplies Total current assets Total assets EQUITY AND LIABILITIES Equity J.Scott, Capital

$16,000 $16,000

$ 9,700 1,200 10,900 $ 26,900

$ 21,700

From Statement of Owners Equity

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SCOTT COMPANY BALANCE SHEET 31 DECEMBER 2006

Current liabilities Accounts payable Notes payable Total current liabilities Total equity and liabilities

$1,200 4,000 $5,200 $26,900

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SCOTT COMPANY STATEMENT OF CASH FLOWS FOR THE MONTH ENDED 31 DECEMBER 2006 Cash flows from operating activities: Cash received from clients $ 3,000 Purchase of supplies (1,000) Cash paid to employees (800) Net cash provided by operating activities Cash flows from investing activities: Purchase of equipment (15,000) Net cash used in investing activities Cash flows from financing activities: Investment by owner 20,000 Borrowed at bank 4,000 Withdrawal by owner (500) Net cash provided by financing activities Net increase in cash Cash balance, 1 December 2006 Cash balance, 31 December 2006

1,200

(15,000)

$ $

23,500 9,700 9,700

The Statement of Cash Flows identifies cash inflows and cash outflows over a period of time.
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End of Topic 1

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