Topic 1 - Accounting Environment

Topic

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Accounting Environment 100 Shares

Accounting? $1 par value

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Learning Learning Objectives 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 Owner’s Equity Statement Balance Sheet Cash Flow Statement

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What What is is accounting? accounting? Accounting Accounting

is a system that

Identifies Identifies Records Records

Relevant Relevant

information that is

Communicates Communicates

Reliable Reliable Comparable Comparable

to tohelp helpusers usersmake make better better decisions. decisions. 3

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Accounting Accounting Activities Activities  Identifying Business Activities

 Recording Business Activities

 Communicating Business Activities

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Users Users of of Accounting Accounting Information Information Internal Users

External Users

•Lenders

•Consumer Groups •Managers

•Sales Staff

•Shareholders •External Auditors

•Officers

•Budget Officers

•Governments •Customers

•Internal Auditors •Controllers 5

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Exh. 1-2

Financial Financial vs vs Managerial Managerial Accounting Accounting

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FA FA vs vs MA MA External Users

Financial accounting provides external users with financial statements.

Internal Users

Managerial accounting provides information needs for internal decision makers. 7

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Characteristics Characteristics of of Accounting Accounting Information Information USEFUL FINANCIAL INFORMATION

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

COMPARABILITY

RELIABILITY 1. Verifiable 2. Faithful representation 3. Neutral

CONSISTENCY

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Generally Generally Accepted Accepted Accounting Accounting Principles Principles Financial Financial accounting accounting practice practiceis isgoverned governedby by concepts concepts and and rules rulesknown knownas asGenerally Generally Accepted Accepted Accounting Accounting Principles Principles(GAAP). (GAAP). Relevant Relevant Information Information Reliable Reliable Information Information

Comparable Comparable Information Information

Affects Affectsthe thedecision decisionof of its itsusers. users. Is Istrusted trustedby by users. users. Is Ishelpful helpfulin incontrasting contrasting organizations. organizations. 9

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The The Operating Operating Guidelines Guidelines of of Accounting Accounting ASSUMPTIONS

PRINCIPLES

CONSTRAINTS

Economic entity

Historical costs

Conservatism

Monetary unit

Revenue recognition

Materiality

Going concern

Matching

Time period

Full disclosure

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Accounting Accounting Assumptions 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 11

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Accounting Accounting Principles 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.

Matching Expenses are matched against revenues, and recorded in the same period in which the related revenues are earned Wan N -2008

Full Disclosure Report enough information for users to make knowledgeable decisions about the company 12

Accounting Accounting Constraints 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 Statutory and and capital capital market market requirement requirement    

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

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Financial Financial Reporting Reporting Framework Framework in in Malaysia Malaysia

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Professional Professional Accounting Accounting Bodies Bodies and and Standard Standard Setting Setting in in Malaysia 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 Malaysian Accounting Accounting Standards Standards Board Board (MASB) (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 Malaysian Institute Institute of of Accountant Accountant (MIA) (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 Malaysian Institute Institute of of Accountant Accountant (MIA) (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 20 Wan N -2008

Malaysian Malaysian Institute Institute of of Certified Certified Public Public Accountant Accountant (MICPA) (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. 21

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Financial Financial Reporting Reporting Federation Federation (FRF) (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. 22 Wan N -2008

Opportunities/Profession Opportunities/Profession in in Accounting Accounting Financial Financial •Preparation •Preparation •Analysis •Analysis •Auditing •Auditing •Regulatory •Regulatory •Consulting •Consulting •Planning •Planning •Criminal •Criminal investigation investigation

AccountingAccountingrelated related

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Managerial Managerial

Taxation Taxation

•General •Generalaccounting accounting •Cost •Costaccounting accounting •Budgeting •Budgeting •Internal •Internalauditing auditing •Consulting •Consulting •Controller •Controller •Treasurer •Treasurer •Strategy •Strategy

•Preparation •Preparation •Planning •Planning •Regulatory •Regulatory •Investigations •Investigations •Consulting •Consulting •Enforcement •Enforcement •Legal •Legalservices services •Estate •Estateplanning planning

•Lenders •Lenders •Consultants •Consultants •Analysts •Analysts •Traders •Traders •Directors •Directors •Underwriters •Underwriters •Planners •Planners •Appraisers •Appraisers

•FBI •FBIinvestigators investigators •Market •Marketresearchers researchers •Systems •Systemsdesigners designers •Merger •Mergerservices services •Business •Businessvaluation valuation •Human services •Human services •Litigation •Litigationsupport support •Entrepreneurs •Entrepreneurs

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International International Accounting Accounting Std. Std. Board Board (IASB) (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 IASC’s 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 company’s shares on stock exchanges around the world. 24 Wan N -2008

International International Accounting Accounting Std. Std. Board Board (IASB) (IASB)  Following the direction given by Malaysia’s 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 Financial Statements Statements 1. Income Statement 2. Statement of Owner’s Equity 3. Balance Sheet 4. Statement of Cash Flows

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Profit is the difference between Revenues and Expenses.

The income statement describes a company’s revenues and expenses along with the resulting profit or loss over a period of time due to earnings activities. 27 Wan N -2008

The profit of $2,200 increases Scott’s capital by $2,200.

The Statement of Owner’s Equity explains changes in equity from profit (or loss) and from owner investments and withdrawals for a period of time. 28 Wan N -2008

The The Balance Balance Sheet Sheet describes describes aa company’s company’s financial financial position position at at aa point point in in time. time.

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From Statement of Owner’s Equity Wan N -2008

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The Statement of Cash Flows identifies cash inflows and cash outflows over a period of time. Wan N -2008

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End of Topic 1

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