Using Information in economic decisions

 Many questions need to be asked when making economic decisions. A decision to set up a business can be made only after considering
things such as how much money will be required to start (financing activity), what equipment will be needed (investing activity), the
running costs of the business and the weekly net cash inflow (operating activity).
 Many of the factors considered in making an economic decision are estimates of future events, and financial results will need to be
monitored to see whether the cash flow estimates approximate reality.

Accounting Information and Decisions

Accounting is concerned mainly with identifying transactions and recording the financial history of the transactions of an entity, a major focus of
accounting information is on actual financial events, not on future events. Knowledge of information about actual events is useful in establishing
relationships that are likely to hold in the future. For the purpose of decision making, past information is used often as a guide to future
estimates of the consequences of different alternatives.

A major focus of accounting information is on actual financial events, not on future events, and therefore accounting does not provide all
information needed for making an economic decision. Accountants are often heavily involved in the budgeting process for a business entity, and
in estimating the financial data for the future plans of the entity, so the accountant adds value by helping owners and managers in many ways.

Information needs of managers are different from those of external parties. A manager responsible for the work of other people who report to the
manager for direction and support. The managers in a given organization are collectively called its management.

Management Accounting
Cost behavior and cost–volume–profit relationships, decision making through incremental analysis, capital budgeting, budgeting for financial
planning and control, flexible budgeting for performance evaluation, the determination of manufacturing costs and costing systems, and
accounting and reporting for business segment operations.

Financial Accounting
Determination of an entity’s overall financial performance, its financial position, financing and investing activities and compliance with the
requirements of the law. The financial accountant must be well trained in the regulatory arrangements affecting decision making including
accounting standards, auditing standards, the law relating to corporations and other types of organizations, and the law relating to taxation.

Management Accounting vs Financial Accounting

 A management accountant provides information to all levels of management in an organization. Management accounting includes cost
behavior, capital budgeting, financial planning and control, determination of manufacturing costs and costing systems, and accounting
and reporting for the activities of business segments.
 A financial accountant is concerned with reporting information to senior management and users external to an entity so they can make
sound economic decisions about the entity. Financial accounting is concerned with the entity’s overall financial performance, its financial
position, its financing and investing activities, and whether the entity is complying with the law.
Auditing - is an independent examination of a business entity’s financial statements, supporting documents and records in order to form an
opinion as to whether they comply with certain levels of quality, as specified in accounting standards, and present a true and fair view of the
entity’s performance and financial position. Banks and other lending institutions often require an audit by an independent accountant before
making a loan to a business. Companies that offer their shares prepare a set of audited financial statements, and annual audited statements must
be presented thereafter if the shares are traded through a stock exchange. External users who rely on financial statements in decision making
place considerable emphasis on the auditor’s report. It is essential, therefore, that auditors are independent observers in carrying out their duties.

These traditional audit services are changing — the role of the auditor is becoming one of providing ‘assurance services’. Assurance services are
defined as independent professional services that improve the quality of information, or its context, for decision makers. Due to availability of
online real‐time information which results in less demand for historical information. More emphasis is being placed on the detection of fraud and
commenting on whether the entity has sustainable practices.
Taxation Services - Accountants provide advice concerning the tax consequences of business decisions. Individuals and business entities have to
collect or pay various forms of taxes including income tax, capital gains tax, fringe benefits tax, goods and services tax, local government rates, and
other taxes. Accountants are often engaged to help in tax planning to minimize the tax liability of the business, consistent with the rules and
regulations established by taxing agencies. Accountants are often called on to prepare tax returns. Keep up to date with changes in tax law.

Advisory Services - Accountants provide advice on overcoming detected defects or problems in a client’s accounting system. Public accountants
offer a wide range of advisory services, including advice on such events as installation of computer systems, production systems and quality
control; installation or modification of accounting systems; budgeting, forecasting and general financial planning; design or modification of
superannuation plans; company mergers and takeovers; personal financial planning; and advice for clients in managing deceased estates.

Insolvency and Administration - helping businesses with trading difficulties. Some businesses have difficulty in paying their short‐term debts as
they fall due, which means that they are becoming illiquid. If an entity cannot pay its long‐term debts, the entity is said to be insolvent. Public
accountants are employed to help businesses administer their recovery from trading difficulties or insolvency. However, if recovery is not possible,
accountants then assist in the winding‐up of the business’s affairs. In the case of the company form of business organization, such a wind‐up is
referred to as liquidation.

Accounting Functions:
General Accounting - oversee the recording of transactions undertaken by the business entity and to prepare reports specially tailored for use by
management in their planning, control and decision‐making activities.
Cost Accounting deals with the collection, allocation and control of the costs of producing specific products and services. Knowledge of the cost of
each manufacturing process and each service activity is important in making sound business decisions. (profitability versus costs).
Accounting Information involved in designing both manual and computerized accounting information systems. Once systems have been designed
and installed, their operation is constantly monitored for improvements and system maintenance.
Budgeting is the phase of accounting that deals with the preparation of a plan or forecast of future operations. Its main function is to provide
management with a projection of the activities necessary to reach established goals. They serve as control devices. Assesses the efficiency of
operations.
Taxation Accounting - businesses are assessed for a variety of taxes — including income tax, capital gains tax, GST and fringe benefits tax — all of
which require the preparation of periodic reports for the various taxing agencies. Tax effects must be considered in every investment and financing
decision made by management. Although many businesses rely on public, many large companies also maintain a tax accounting department to
deal with day‐to‐day tax accounting issues.
Internal Auditing and Audit Committees - to supplement the annual audit by the external auditor, many organizations also maintain an internal
audit department. Its main function is to conduct ongoing reviews to make certain that established procedures and policies are being followed.
Thus, any deficiencies can be identified and corrected quickly.

Accountants generally practice in the following main areas:

1. Public Accounting — offering services to the public, such as auditing and assurance, taxation, financial advice, and insolvency and
administration 2. Commercial Accounting — where accountants are employed by business entities, and are involved in general accounting, cost
accounting, accounting information systems, budgeting, taxation, and internal auditing
3. Public Sector and Not‐For‐Profit Accounting — the absence of the profit motive often requires a different accounting approach; for example,
government accounting is concerned with the efficient use of resources consistent with the provisions of laws.

Most of the highly successful businesses today are noted generally for their high ethical standards of business. Financial statements are one of the
many control mechanisms designed to assess the accountability of management and protect the interests of parties who have an interest in the
performance of a particular business entity. The reports enable an evaluation to be made of a company’s management performance.

APESB - Accounting Professional & Ethical Standards Board Limited

The code of ethics establishes the fundamental principles of professional ethics and provides a conceptual framework for applying those
principles. Members of the professional accounting bodies are expected to adhere to various aspects of professional accounting activities,
including competence; conformity with the law, accounting standards, and auditing and assurance standards; confidentiality of client information;
and independence.

The professional accounting bodies set down rules of professional conduct for members which prescribe high standards of practice in many areas
including competency, compliance with the law and accounting standards and auditing and assurance standards, confidentiality and
independence.