Finance

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C H A P T E R
Accounting Environment

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Chapter Outline

• What is Accounting Accounting Profession
• Process and flow of accounting information
• Accounting as a business language
• Users of Accounting Information
• Financial accounting vs Management accounting
• Generally Accepted Accounting Principles (GAAP)
• Professional Accounting Bodies and Standard
  Setting in Malaysia
• Statutory and Capital market requirements
• International Accounting Standards Board
  (IASB)
• Nature, characteristics and type of
  business

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LEARNING OBJECTIVES

• LO1 Define accounting, and explain the concepts
  underlying accounting measurement.
• LO2 Explain how generally accepted accounting
  principles (GAAP) and international financial
  reporting standards (IFRS) including MFRS relate
  to financial statements and the independent CPAs
  report, and identify the organizations that
  influence GAAP.
• LO3 Identify the users of accounting
  information, and identify business goals,
  activities, and performance measures.
• LO4 Identify the type of business

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What is Accounting

• Accounting can be defined as a systematic
  recording of information which involves
  analyzing, classifying, summarizing and
  interpreting business transactions
• Accounting is an information system that
  measures, processes, and communicates financial
  information about a business or other economic
  entity.
• An economic entity is a unit that exists
  independently, such as a business, hospital, or
  governmental body.

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Accounting Profession/Opportunities in Accounting
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Process and flow of accounting information
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Accounting as a business language

• Accounting deals with the interpretation of
  organizationals operations and finances and each
  transaction being carried out by the business.
• The affairs and the results of the business are
  communicated to others through accounting
  information, which has to be systematically
  recorded and presented.
• For example, companies communicate their
  performance to outside parties and evaluate the
  performance of their employees using information
  generated by the accounting system

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Internal and External users/Decision Makers of
Accounting Information

• The people who use accounting information to make
  decisions fall into three categories managers
  (internal users), outsiders who have a direct
  financial interest in the business, and outsiders
  who have an indirect financial interest.

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Management

• Management is responsible for ensuring that a
  company meets its goals of profitability and
  liquidity.
• To make good decisions, owners and managers need
  answers to such questions as
• What were the companys earnings during the past
  quarter?
• Is the rate of return to the owners adequate?
• Does the company have enough cash?
• Which products or services are most profitable?

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Users with a Direct Financial Interest

• Investorsowners and stockholdershave a direct
  financial interest in the success of their
  companies.
• Creditorsthose who lend money or deliver goods
  or services before being paidare interested
  mainly in whether a company will have the cash to
  pay interest charges and to repay the debt on
  time. They study a companys cash flow to
  determine its liquidity.

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Users with an Indirect Financial Interest

• Tax authoritiesfederal, state, and local
• Regulatory agenciessuch as the SEC for publicly
  traded corporations
• Labor unions
• Advisors of investors and creditors
• Consumer groups, customers, the general public
• Economic plannerssuch as the Presidents Council
  of Economic Advisers

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Financial and Management Accounting

• Accounting is usually divided into financial
  accounting and managerial accounting.

• External decision makers use financial accounting
  to evaluate how well a business has achieved its
  goals.
• These reports, called financial statements, are a
  central feature of accounting. They report on a
  businesss financial performance.

• Internal decision makers use information provided
  by managerial accounting about operating,
  investing, and financing activities.
• It provides managers and employees with
  information about how they have done in the past
  and what they can expect in the future.

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Financial and Management Accounting

• It is important to distinguish accounting from
  bookkeeping and management information systems.
• Bookkeeping is the process of recording financial
  transactions and keeping financial records. It is
  mechanical and repetitive and is usually handled
  by computers.
• Management information systems (MIS) consist of
  the interconnected business subsystems, including
  accounting, that provide the information needed
  to run a business.

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Generally Accepted Accounting Principles

• To ensure that financial statements are
  understandable to their users, a set of generally
  accepted accounting principles (GAAP) has been
  developed to provide guidelines for financial
  accounting.
• They encompass the conventions, rules, and
  procedures necessary to define accepted
  accounting practice at a particular time.
• They evolve to meet the needs of decision makers,
  and they change as circumstances change or as
  better methods are developed.

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GAAP and the Independent External Auditors Report

• Many companies of all sizes have their financial
  statements audited by an independent/external
  auditor (qualified accountant)
• Independent means that the CPA is not an employee
  of the company being audited and has no financial
  or other compromising ties to it.
• An audit is an examination of a companys
  financial statements and the accounting systems,
  controls, and records that produced them. It
  ascertains that the statements were prepared in
  accordance with GAAP.

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The Operating Guidelines of 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 Assumptions
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Accounting Principles
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Accounting Constraints
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Professional Accounting Bodies and Standard
Setting in Malaysia

• Professional bodies
• Malaysian Institute of Accountant (MIA)
  http//www.mia.org.my
• Malaysian Institute of Certified Public
  Accountant (MICPA)
• Standard Setting
• Malaysian Accounting Standards Board (MASB)
  http//www.masb.org.my
• Financial Reporting Foundation (FRF)
• Others http//www.masb.org.my/pages.php?id71
• https//www.ssm.com.my/en/companies_act_2016

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Malaysian Institute of Accountant (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 Institute of Accountant (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

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Malaysian Institute of Certified Public
Accountant (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.

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Malaysian Accounting Standards Board (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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Financial Reporting Federation (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.

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International Accounting Standards Board (IASB)

• The IASB is the independent standard-setting body
  of the IFRS Foundation responsible for the
  development and publication of IFRSs and for
  approving Interpretations of IFRSs as developed
  by the IFRS Interpretations Committee.
• International Financial Reporting
  Standards (IFRS) is a set of accounting standards
• The basic purpose of the IASB Framework is to
  provide assistance and guidance to the IASB in
  developing new or revised standards in addition
  to assisting the preparers of financial
  statements in applying the standards and dealing
  with issues which are not explicitly dealt with
  by the standards.

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Nature, characteristics and type of business

• In general, there are three (3) types of business
  entities in Malaysia
• Sole Proprietorship (also known as Sole Trader)
• Partnership
• Limited Company (Sendirian Berhad/Sdn.Bhd and
  Berhad/Bhd.)

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Sole Proprietorship

• Like many other countries out there, the Sole
  Proprietorship business entity in Malaysia is
  owned solely by one individual, as his/her
  liability is unlimited. What unlimited liability
  means is If a business fails or is declared
  bankrupt, creditors can sue the sole proprietors
  owner for all debts owed to respective merchants.
  This means personal assets, personal income and
  employment income are all liable

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Advantages of a Sole Proprietorship

• Less paperwork additional formalities
  (registration is easy, fast and fewer documents
  are needed)
• Price of entity formation is much cheaper and is
  not required by the Malaysian government to be
  audited.
• Not required to disclose financial statements to
  the public.
• Easy to convert into partnership or limited
  company (SDN BHD)

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Partnership

• The Partnership business entity is a
  joint-entity holder with two or more persons to
  carry out a legal business in Malaysia. The
  Companies Commission of Malaysia requires that
  partnership entities MUST comprise of at least
  two (2) members and a maximum twenty (20)
  members.
• Partners in a partnership business entities are
  also bounded by unlimited liability
• The partners share the profits or losses
  according to a prearranged formula.
• A partnership must be dissolved if a partner
  leaves or dies.

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Limited Company (SDN BHD or BHD)

• Sendirian Berhad (SDN BHD) is a private limited
  company, where it prohibits any invitation to the
  public to subscribe to any of its shares, deposit
  money with the company for investment or
  subscription. Minimum members in a private
  limited company is TWO (2) and maximum is FIFTY
  (50).
• Berhad (BHD) is a public limited company where
  its shares can be offered to the public for fixed
  periods and any other forms of subscription. The
  minimum amount of members (shareholders) are TWO
  (2) and maximum of unlimited amount of members.

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Limited Company (SDN BHD or BHD)

• The owners are called shareholders/stockholders
  because their ownership is represented by sharing
  of shares/stock.
• The shareholders do not directly control the
  corporations operations but elect a board of
  directors to run the company for their benefit.
• Shareholders enjoy limited liability, which means
  that their risk of loss is limited to the amount
  they paid for their shares.
• Shareholders can sell their shares without
  dissolving the company, so the life of a company
  is unlimited.

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IMPORTANT CONCEPTS

• Accounting measurement measuring business
  activities by recording data about them for
  future use
• Business transactions economic events that
  affect a businesss financial position
• Money measure the concept that all business
  transactions are recorded in terms of money
• Separate entity the concept that a business
  organization is distinct from its owners,
  creditors, and customers
• Assets economic resources that are expected to
  benefit the companys future operations
• Liabilities a businesss obligations to pay
  cash, transfer assets, or provide services to
  other entities in the future
• Owners equity the claims by the owner of a
  business to the assets of the business sometimes
  said to equal net assets