Question

Chapter 1 SLOs: Accounting - Information for Decision Making

 1. Discuss accounting as the language of business and the role of accounting information in making economic decisions.

 2. Explain the differences between financial managerial, and tax accounting.

 3. Explain the importance of accounting information for both external and internal parties in terms of the objectives and the characteristics of that information.

 4. Identify and discuss several professional organizations & related acronyms that play important roles in preparing and communicating accounting information (SEC, FASB, AICPA, GAAP, IFRS & IASB).

 5. Discuss the importance of personal competence, professional judgement, and ethical behavior on the part of accounting professionals.

 6. Explain the various career opportunities in accounting.

 7. Understand how to convert economic business activities into useful accounting information in order to be used to make good future economic decisions in business. Not all economic activities have a standard response; many require an accounting judgement. (Study Exhibit 1-1; p5)

Answer 1

1. Accounting is the language of the business. Through accounting, the various stakeholders get to know how the business is performing and the returns it is generating. Through various financial statements like Profit and Loss account, balance sheet and cash flow the company shows its profits, and its financial health.

The accounting helps to make economic decisions to its management and investors and other stake holders like government, employees etc. Based on accounting information management decides whether to start a business and once it is started to review its periodical performance and make necessary changes if performance is not in line. Investors decide if they should invest in a business or not and also see if business is performing as per expectations etc.

2. Financial Accounting – Role of financial accounting is to record and summarize the financial information of the company as per generally accepted accounting principles. It helps to present the true and fair view of financial position of the company to its various stake holders like management, investors, creditors etc.

Management Accounting - The role of management accounting is to analyze the financial information to help the management in making day to day and strategic decisions of the company. This is done using various techniques like various techniques few of which are ratio analysis, and comparison of performance of the firm over years and with its competitors, simulations, balance scorecards. Management accounting starts where financial accounting ends. Without financial accounting, management accounting cannot start.

Tax Accounting – Role of tax accounting is to calculate the profit and loss of the firm and its tax liability as per tax laws of the country to accurately pay its tax obligations.

3. Importance of accounting for internal parties like management is to summarize the financial performance of the company to take various decisions related to the company and to meet its statutory compliances. While external parties need the accounting to understand if business is doing well to meet its obligations towards them and the society. Like financial institutions need to know the financial position of the company to make regular payments of debt, government needs to know if the business is paying taxes on time etc.
4. 1. SEC – Security Exchange Commission, is an US agency formulated by the government to lay down rules and regulations related to issue of securities and enforcing federal rules and regulations on all entities
   2. FASB – Financial Accounting Standard Board is a private body whose role is to formulate and improve the generally accepted accounting principles for preparation of financial information
   3. AICPA - American Institute of Certified Public Accountants (AICPA) is the professional body which regulates the accounting profession in US
   4. GAAP – Generally accepted accounting principles are accounting principles which are established over time and commonly used in the preparation of financial statements.
   5. IFRS - IFRS i. International Financial Reporting Standards. IFRS are set of accounting policies and rules developed by International Accounting Standard Board (IASB)
   6. IASB – It is the organization that establishes and formulates international financial reporting standards or IFRS which are accepted across the world.
5. Personal competence, processional judgment and ethical behavior, all are required in an accountant to ensure that financial information is correctly presented.

Personal competence ensures the person preparing is duly qualified and has requisite professional skill sets required to prepare the financial statements. It ensures that he has undergone required education and training and understands the laws.

Professional Judgment is needed as accounting requires use of judgment in deciding how to present the information. A person with sound professional judgment will take informed decisions.

Ethical behaviors is one of the most important requisite as an unethical person would tend to mis present the users of financial statements by mis-stating the financial information and committing frauds as well which could impose huge penalty on the company.

6. There are various career opportunities in accounting. Few of these are –

• Practice the profession of accounting as Auditors or financial consultants
• Provide book keeping services
• Work with an a corporate entity in finance function
• Provide management consultancy for businesses
• Work with government in the tax department
• Represent the companies or other business in court of law.

7. Economic business activities are converted into useful accounting information by measuring the economic activities using a common rod which is Money. All economic activities are measured in terms of money and presented to its stakeholders. Activities like purchase, sales, financing etc are presented using money in the shape of profit and loss account, balance sheet and cash flow.

Also, management uses its judgment to present the economic activities into accounting information to ensure that users of accounting information are able to get required information to take decisions.