Financial Management for Decision Makers 9th edition
City University London - Year 1 - AF1101 Introductory Financial Accounting
Notes from the lectures (Week 1 - Week 10) with notes from compulsory reading included
What is accounting? Management and financial
Collecting, analysing and communicating accounting compared
financial information. Such information is
used for business decision making, planning
a a controlling business Management Financial
Accounting Accounting
Main users of financial information
relating to a business Nature of reports Tends to be for a Tends to be for a
specific purpose general purpose
produced
Owners Customers Competitors
Level of detail Often very detailed Usually broad overview
Employees ¢ Regulations Unregulated Subject to accounting regulation
Managers their
representatives
Reporting interval As short as required Usually annually or
Business
by managers bi-annual
Lenders Government Uses projected future info as Almost always historical
Time horizon well as past info
Contains financial and
Investment Community Range & quality non financial info.
Focus on financial
Suppliers of info information. Emphasis on
analysts representatives Often uses non-
objective, verifiable evidence
verifiable info
E.g
Weighing up the costs and benefits of accounting information:
In theory, a particular item of accounting information should only be
produced if it’s costs of providing it are less than the benefits, or values to
be derived from its usage.
The figure shows how the value of information received by the decision
maker eventually begins to decline, this is perhaps because:
- additional info becomes less relevant
- the decision maker may have trouble processing the sheer quantity of
data
The benefits of accounting
Conflicts of interest can take place between various user information will
groups. For example, owners and managers. Although eventually decline. The cost
managers are appointed to act in the best interests of the of providing information,
owners, they may not always do so. Owners may, theft or rely will rise with each
on accounting info to see whether pay and benefits received by additional piece of
managers are appropriate and are in line with agreed policies. information. The optimal
level of information
There is also a potential collision of interest between lenders provision is where the gap
and owners. Funds loaned for a business may not be used for between the value of info
their intended purpose thus lenders may rely on accounting and the cost of providing it
info to see whether the owners have kept to the terms of the loan is at its greatest.
agreement. The broken line indicates the point at which the gap between the value of
information and the cost of providing that information is at its greatest.
This represents the the optimal amount of info that can be provided. This
theoretical model, however, poses a number is problems in practice.
REFER TO TEXTBOOK
PAGE NUMBER
PG 9 & 10
, Qualities which make accounting information useful?
↳ Timeliness - the information is not overly delayed and is made available in a timely manner
↳ Verifiability - thus quality provides assurance to users that the information is faithfully represented and there is a
broad agreement among experts about this
↳ Relevance - accounting information should be impactful and influence users’ decisions
↳ Comparability - under this quality, alike items are treated the same over time and across businesses. Items that are not
alike should not be treated as such
↳ Faithful representation - Information represents what it is meant to represent in a faithful manner and does not
mislead. In that sense, the economic substance of a transaction is more than its legal form
↳ Understandability - Information should be presented in a clear and concise manner
↳ Materiality - an item of information is only considered significant if it’s omission or misinterpretation can influence
users’ decisions
↳ Free from error - Information should be portrayed accurately. It can contain estimates, but care should be taken to
ensure they are accurately described and properly prepared
↳ Completeness - Information should be presented in a comprehensive fashion , incorporating all the necessary details to
help users understand what is being portrayed
↳ Neutrality - information should be presented in an objective manner, without attempting to bias the users’ decision
making
.
, ▫
The accounting information system
Another way if viewing accounting is as part of the businesses total information system. Users, both inside and outside the business,
have to make decisions concerning the allocation of scarce resources. To ensure that these resources are efficient,y allocated, users often
need financial information on which to base decisions. It is the role of the accounting system to provide this information.
The accounting system should have certain features that are common to all information systems within a business. These are
identifying and capturing relevant information (in this case, financial info)
recording, in a systematic way, the information collected
analysing and interpreting the information collected
reporting the information in a manner that suits the needs of users
Difference between Financial accounting and
Management accounting
REFER TO TEXTBOOK
PAGES
PG 13, 14 & 15
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