ADVANCED FINANCIAL

ACCOUNTING
Course Instructor:
Dr Qaisar Ali Malik
M.Phil (Management Accounting), PhD (Corporate
Finance), FCMA
Associate Professor/Head of Department
Department of Economics & Finance
Foundation University

Course Text Book

Financial & Managerial Accounting
By Williams Haka Bettner 18th Edition

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 Chapter 1
Accounting:
Information for
Decision Making

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Introduction
The primary objective of accounting is to provide
information that is useful in making good
decisions, and as a result of good decisions
societal prosperity and welfare is maximized.

Accounting is sometimes called the

“language of business.”

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Primary Goals
Our primary goal in this book is to develop your
ability to understand and use accounting
information in making economic decisions. To do
this, you need to understand the following:
 The nature of economic activities that
accounting information describes.
 The assumptions and measurement techniques
involved in developing accounting information.
 The information that is most relevant for
making various types of decisions.

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Types of Accounting Information:
Financial
1. Financial Accounting
• Information describes the financial
resources, obligations, and activities of an
economic entity.
• Assists external users such as investors
and creditors in the decision-making
process.
• Is often called “general-purpose”
accounting information.

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Types of Accounting Information:
Management
2. Management Accounting
• Involves the development and
interpretation of accounting information
for management.
• Information can be specifically tailored to
management’s needs in order to assist in
the decision-making process.
• Reports are only provided to internal
users.

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Types of Accounting Information: Tax
3. Tax Accounting
• Information must conform with income
tax reporting requirements.
• Laws and regulations are often different
from those underlying the preparation of
financial accounting information.

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The Accounting Process
The
Accounting
Process

Economic Accounting
Activities Information

Actions Reported Results

(decisions) Decision of Actions
Makers (decisions)

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Accounting as an Information System

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External Users of Accounting
Information
Examples include:
• Owners • Suppliers
• Creditors • Customers
• Potential investors • Trade associations
• Labor unions • General public
• Governmental
agencies

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Objectives of External Financial
Reporting

Provide specific information about

economic resources, claims to resources,
and changes in resources and claims.

Provide information useful in assessing

the amount, timing, and uncertainty of
future cash flows.

Provide general information useful in

making investment and credit decisions.
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Primary Financial Statements
1. Balance sheet: shows where the company
stands in financial terms on a specific date;
also called the statement of financial position.

1. Income statement: shows the details of a

company’s profit-related activities over a
period of time.

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Primary Financial Statements (cont.)
3. Statement of cash flows: shows the details of a
company’s activities involving cash over a
period of time.

NOTE

You will learn more about each of these financial

statements in future chapters.

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Characteristics of Externally Reported
Information
1. Financial Reporting—A Means
a. A means to an end; not an end in and of
itself.
b. Improve the quality of decision making for
outside users.
c. Help to create prosperous society.
2. Financial Reporting vs. Financial Statements
a. Financial statements are a subset of the
broader concept of financial reporting.

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Characteristics (cont.): Historical
b. Financial reporting also includes other
communications to external parties
including press releases, disclosures, and
other open communications.
3. Historical in Nature
a. Financial statements report events for an
accounting period that has already occurred.
b. Focuses on the past more than the future.

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Characteristics (cont.): Inexact
4. Inexact and approximate measures
a. Accounting information is often based on
estimates, judgment, and assumptions about
the past and the future.
b. Considered an inherent limitation of
accounting information.
5. General-Purpose Assumption
a. Information is not tailored for a specific user.
b. The same financial reporting package is
available for multiple user groups.

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Characteristics (cont.): Explanation
6. Explanation
a. Value is enhanced by management
explanations.
b. Qualitative information assists in
interpreting the financial reports.

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Users of Internal Accounting
Information
Examples include:
 Board of directors
 Chief executive officer (CEO)
 Chief financial officer (CFO)
 Vice presidents
 Business unit managers
 Plant managers
 Store managers
 Line supervisors

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Objectives of Management Accounting
 Help management achieve the organization’s
mission and goals.
 Evaluate and reward decision-making
performance.

KEY POINT

Many companies have a reward system linked to

performance as measured by the accounting system.

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Characteristics of Management
Accounting Information
1. Timeliness
a. Timely information is needed for planning
and controlling business activities.
b. Management can save money and make
better decisions by being able to act quickly.
2. Identity of Decision Maker
a. The right people need the right information
to make decisions and correct problems.

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Characteristics (cont.): Future
Oriented
3. Future Oriented
a. Purpose of generating management
information is to affect the future.
b. Motivate management to make future
decisions to achieve the organization’s goals.
4. Efficiency and Effectiveness
a. Measures the efficiency and effectiveness of
resource usage.

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Characteristics (cont.): A means
5. A means
a. A means to an end; not an end in and of
itself.
b. Ultimate objective is to design and use an
accounting system that helps management
achieve the goals and objectives of the
enterprise.

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 Key Point
For the auditor to reach the conclusion that the
financial statements are fair representations of a
company’s financial position, results of operations,
and cash flows, the statements must comply in all
important ways with generally accepted
accounting principles.

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 Your Turn
You are a professional accountant working for a public
accounting firm and find yourself in a difficult situation.You
have discovered some irregularities in the financial records
of your firm’s client.You are uncertain whether these
irregularities are the result of carelessness on the part of
the company’s employees or represent intentional steps
taken to cover up questionable activities.You approach
your superior about this and she indicates that you should
ignore it. Her response is, “These things happen all of the
time and usually are pretty minor. We are on a very tight
time schedule to complete this engagement, so let’s just
keep our eyes on our goal of finishing our work by the
end of the month.” What would you do?

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You as a Professional Accountant This situation puts you in a very difficult
position. On the one hand, you want to do the right thing and, in your
opinion, that involves an in depth study of the problem you have found. On
the other hand, you are pulled in the direction of doing what your superior
says to do because you may respect her position as your superior and
because your responsibility is to take directions from the person with whom
you are assigned to work.You might want to discuss with your superior the
potential implications of the irregularities that you have found and try to
convince her that some additional effort to better understand what is going
on may be very important.You may want to discuss this with a peer or
another person not directly involved in your engagement but whose opinion
you value.You may want to talk with a person higher up in the organization
than your superior, although you should be careful to avoid creating a
conflict with your superior.You probably should keep a record of steps you
have taken to resolve the situation and certainly keep your eyes open for a
pattern of similar behavior that may be a signal to you that you need to
consider a job elsewhere. Also, if you are responsible for auditing this area
and you believe that the audit procedures employed to date are insufficient,
following your superior’s instructions will generally not be an adequate
defense if regulators or private litigants name you in a lawsuit.

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Ethics, Fraud, & Corporate Governance
 Corporate governance entails corporate
structures and processes for overseeing the
company’s affairs to ensure that the company
is being managed with the best interests of
shareholders in mind.

Dennis Kozlowski, the former CEO of Tyco, was

sentenced to 8 1/3 to 25 years in prison for his
conviction for conspiracy, securities fraud, and falsifying
records.

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End of Chapter 1

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