ACCT102 Week 1 Lecture 2 - Nature and Role of Accounting

LO1: Understand what accounting is and its purpose in the economy.
LO2: Know who uses financial information for making decisions.
LO3: Learn the important features that make financial information helpful.
LO4: Compare financial accounting with management accounting in terms of their goals and formats.

Language of Business:
- Accounting is like a language that describes business activities.
- Everyone involved in business should learn it to make good decisions.
- According to Robert Kiyosaki, understanding accounting is crucial for building wealth.
Perception vs. Reality:
- How People See It: Many think of accounting as just numbers and strict rules.
- What It Really Is: Actual accounting is complex and needs critical thinking. It aims to support a healthy economy.
- Cultural and Ethical Aspects: Good accounting practices involve values like:
- Tiakitanga: Taking care of resources.
- Tikka: Doing things right.
- Utu: Fair exchanges.
- Manaakitanga: Caring for others.

What is the Accounting Process?:
- It includes finding, measuring, and sharing financial information with users for better decision-making.
How Accounting Works:
- Identification: Gathering useful financial information.
- Recording: Writing down the information systematically.
- Analysis and Interpretation: Looking at the data for insights.
- Reporting: Sharing the information in a clear way for users.

What are Business Transactions?:
- They involve exchanging valuable things between different parties.
- These transactions affect assets, liabilities, and equity.
- They should be quantifiable, meaning they must have a monetary value that can be measured.

Stewardship:
- This means responsibly managing resources and being accountable for them.
Decision-Usefulness:
- Refers to how helpful the accounting information is for making decisions.

Internal Users:
- Owners and managers who use accounting information for running the business.
External Users:
- People outside the business who need information to make decisions, such as:
- Investors: Interested in returns and risks.
- Customers: Want assurance that the business can provide services.
- Suppliers and Banks: They care about the business's ability to pay debts.
- Employees: Interested in job stability and wages.
- Government and Tax Authorities: For regulation and tax purposes.
- Analysts and Community Representatives: They look at broader impacts.
- Competitors: For understanding market positions.

Financial Accounting:
- Main Users: Designed for outside stakeholders like shareholders and banks but also used by management.
- Regulations: Must follow strict guidelines (GAAP).
- Timeliness: Generally historical data showing past performance.
- Detail Level: Offers a broad view of the whole entity in mainly numerical data.
- Types of Statements: Includes Balance Sheet, Income Statement, and Cash Flow Statement.
Management Accounting:
- Main Users: Used only by internal management.
- Regulations: No strict rules; tailored to the needs of managers.
- Timeliness: Includes past information and future forecasts like budgets.
- Detail Level: Highly detailed, focusing on specific departments or segments.
- Main Activities: Planning, budgeting, and performance monitoring.

Global Marketplace:
- Financial markets are global, so companies seek money and investors worldwide.
- Financial data needs to be comparable across countries.
Benefits of IFRS:
- Enhances comparison and transparency of financial information worldwide.
- Lowers costs of preparing financial statements globally.
- Helps organizations allocate resources efficiently.

Standard Setting:
- Accounting standards in New Zealand are created by the External Reporting Board (XRB).
Professional Organizations:
- Two key accounting bodies in New Zealand are CPA Australia and CAANZ.

Main Goal:
- Provide useful information for investors and lenders in decision-making.
Qualitative Characteristics:
- Relevance: Information provides insights into future and past outcomes.
- Faithful Representation: Must accurately represent what it claims, being complete and error-free.
Enhancing Characteristics:
- Comparability: Helps users compare different time periods or entities.
- Verifiability: Ensures information reliability.
- Timeliness: Information should be available when needed.
- Understandability: Information should be clear and simple.

Cost Constraint:
- The benefits from information must outweigh the costs to gather it.
Time Lag:
- There is often a delay between economic events and when reports are shared, affecting accuracy.
Historical Nature:
- Reports reflect past data, which might not help future decisions.
Subjectivity:
- Decisions on reporting items can be subjective.

Common Job Areas:
- Public accounting, private sector, and government jobs.
Emerging Fields:
- Forensic accounting, managing e-commerce, insolvency, and sustainability reporting.
Career Growth:
- Many start in "Big Four" firms, such as KPMG and Deloitte.
- Roles include cost accounting, tax, and auditing.
Job Market Overview:
- Accountants are a large occupation with many job openings expected.
- Most jobs are full-time, generally have competitive pay, and require at least a Bachelor’s degree.

Balance Sheet: Shows the company’s assets and liabilities at a specific time.
Income Statement: Reports profits or losses over a period.
Statement of Changes in Equity: Details changes in owner’s interest in the assets.
Cash Flow Statement: Shows where cash comes from and where it goes during a period.
Interconnections:
- The Balance Sheet provides snapshots at the start and end of periods, while the other statements explain changes during that time.