Accounting and Finance for Non-Specialists 9th edn
This is a comprehensive summary of the course 'Financial and Business Management'. Substance from the various lessons and related literature have been incorporated into it. In addition, an example has been given several times for certain literature that can seem abstract for most students.
When ...
,Part 1: Financial accounting
Chapter 1: Introduction to accounting and finance
• (Check) Lecture Accounting: is the collecting, analysing and communicating financial
information.
o Aim: is to help those using this information to make more informed decisions.
• Finance (financial management): exist also to help decision makers. Nevertheless, Finance
concerns with the ways in which funds for a business are raised and invested.
o An understanding of finance of a business should help identifying:
1. The main forms of finance available
2. The costs, benefits and risks of each form of finance
3. The risks associated with each form of finance
4. The role of financial markets in supplying finance
• When seeking to invest finance can help evaluating risks and returns associated with each
opportunity.
• SO, Finance and accounting are both used for the sake of improved decision-making with
regards to financial matter.
Who are the users of accounting information?
• For accounting information to be useful. It has to be clear for whom and for what purpose it
will be used.
• For Private sector businesses these parties are:
o Owners
o Managers
o Lenders
o Suppliers
o Investment analysts
o Community representatives
o Government
o Employees and their representatives
o Competitors
o Customers
(See page 3 for assignment)
Providing a service
• Accounting can be seen as a service provided e.g. towards ‘clients’.
• Quality of information should be sufficient. 2 Fundamental qualities; relevant & faithful.
o Relevance: should imply 2 factors:
1. Must have predictive value: should have an impact on someone’s decision
making It must help to predict future events or help to confirm past events
→ by doing so, the relevance of the information is assured.
2. Confirmatory value: e.g. help to confirm past accounting information.
3. must cross a threshold (certain level) of materiality (item of information) →
this of level of threshold differs per business based on size, type, amounts
involved, etc.
o Faithful representation:
1. information should be complete. It should reflect all of the information
needed to understand what is being portrayed.
2. Should also be neutral (information should be selected and presented
without bias)
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, 3. Should be free from error! There can be estimates made wrongly.
Nevertheless, there should no errors be in the way in which the estimates
are prepared and described. (info should aim to present faithful
representation)
• Further qualities: there are other qualities that could enhance its usefulness:
o Comparability: users of accounting often want to make comparison→ performance
2018 vs. performance 2017. Or want to compare different business aspects with
those of similar businesses.
▪ Better comparison can be made where accounting system treats items that
are basically the same in the same way (same characteristics) and where
policies for measuring and presenting accounting information are made
clear.
o Verifiability: provides assurance to users.
▪ Verifiability is when: different,
independent experts would be able
to agree that it provides a faithful
portrayal. (supportive by evidence)
o Timeliness: accounting information should
be produced in time before decision
making. (often; the later the info will come
the less useful it will become)
o Understandability: accounting information
should be set out as clearly and concisely as
possible. (should be clear for everyone)
Weighing up the costs and benefits
(See page 7 for assignment)
• When will it be wise to not produce acc. Information when every factor is in place? → when
you judge that the costs of providing will be greater than the benefit you will receive from
providing the information.
• E.g. garage case with dented bumper and scraped paint: points to be considered when
identify the various prices for the job.
o How many garages shall we visit?
o What is the cost of petrol to visit each garage?
o How long will it take to make all the garage visits?
o At what price do we value our time?
• Points to be considered when identifying the potential economic benefit:
o What is the cheapest price that we might find for the job?
o How likely is it that we shall find a price cheaper than $350?
• Producing accounting information can be very costly: costs are however difficult to quantify.
o Costs of producing it: labour costs are not a problem
o Costs of reading and interpreting & analysing it: those costs are harder to
determine.
Accounting as an information system
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, • Accounting can also be seen next to a service as a part of the business’s total information
system. → helps decision making with regards to e.g. resource allocation.
• The accounting information system should have certain common features that apply for all
information systems within a business:
1. Identifying and capturing relevant information (financial information)
2. Recording, in a systematic way, the information collected
3. Analysing and interpreting the information collected
4. Reporting the information in a manner that suits users’ needs
Management accounting and financial accounting:
• Two distinctive strands:
1. Management accounting: which seeks to meet the accounting needs of managers
2. Financial accounting: which seeks to meet those of all users identified (10 groups)
except for managers!!!
• Primary differences:
o Nature of the reports produced:
▪ Financial accounting reports: tend to be general (used for broad range of
decision-making)
▪ Management accounting reports: tend to be more specific-purpose reports
(used for a particular decision-making of a manager)
o Level of details:
▪ Financial accounting reports: Financial accounting reports: provide users
with a broad overview of the performance and position of the business for a
period. (detail is often lost)
▪ Management accounting reports: provide managers with considerable
details to help them with a particular decision-making.
o Regulations:
▪ Financial accounting reports: are imposed by regulations imposed by
law/accounting rule makers. → a standard format required.
▪ Management accounting reports: are for internal use only, there are no
regulation from external parties. → can therefore be designed as managers
desire.
o Reporting interval:
▪ Financial accounting reports: produced on an annual basis, sometimes half-
yearly, and few quarterly.
▪ Management accounting reports: produced as frequently as required. This is
done to continuously monitor business performance. Moreover, special
purpose reports can be demanded in case of e.g. a new investment.
o Time orientation:
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, ▪ Financial accounting reports: reveal the performance and position of a
business for the past period. They are backward looking. Nevertheless,
businesses are also looking forward by incorporate expectations concerning
the future to other users to attempt e.g. to raise finance or to fight of
unwanted takeover bids.
▪ Management accounting reports: often provide information concerning
future performance as well as past performance. It is oversimplification.
o Range and quality of information:
▪ Financial accounting reports: concentrate on information which can be
quantified in monetary terms. In addition, there is more focus and use of
objective, verifiable evidence.
▪ Management accounting reports: also produces such reports but will more
likely produce reports that contain information of non-financial nature, such
as physical volume of inventories, number of sales orders received, number
of new products launched, etc. (non-monetary terms). In addition, may use
less objective, verifiable information but still provide managers with info
they need.
(See page 12 for assignment)
5
,The changing face of accounting:
(See page 14 for assignment)
• Over the past 4 decades, environment in which businesses perform has changed (turbulent
and competitive) due to:
1. The increasing sophistication of customers
2. The development of a global economy where national frontiers become less
important
3. Rapid changes in technology
4. The deregulation of domestic markets (e.g. electricity, water and gas)
5. Increasing pressure from owners (shareholders) for competitive economic returns
6. The increasing volatility of financial markets
• The changed business environment has given added impetus to the search for a clear
conceptual framework with regard to financial accounting.
• The conceptual frameworks that have been developed try to address fundamental questions
such as:
o Who are the users of financial accounting info?
o What kinds of financial accounting reports should be prepared and what should they
contain?
o How should items such as profit and asset values be measured?
• Accounting systems have been internationalised!
• Management accounting has changed in terms of being more outward looking in its
collecting data. → More external data is gathered (from other companies, consumers, etc).
• Businesses have become more customer driven to obtain and maintain this competitive
advantage.
• To compete successfully: businesses have continuous cost review management →
development of more sophisticated methods of measuring and controlling costs.
Why do I need to know anything about accounting and finance?:
• Accounting/finance function within a business is a central part of its management
information system.
• Managers base their decisions on it. These may concern whether to:
o Continue with certain business operations
o Invest in particular projects
o Sell particular products
• It is important for all those connected with the business that they are able to (or have an
idea in terms of):
o How financial report should be read and interpreted
o How financial plans are made
o How investment decisions are made
o How businesses are financed
The quest for wealth creation:
• Financial/managerial accounting is mostly done to increase the wealth of the company.
Meeting the needs of other stakeholders:
• Stakeholders like; employees, customers, suppliers, the community, etc. are truly important.
• It is key to have customer wealth since this will influence the business performance. So,
there is a vital link between satisfying customers’ needs and creating wealth for their
owners.
6
, • E.g. a dissatisfied workforce can result in lower productivity, dissatisfied suppliers can
withhold vital supplies (or give lower priority), a disconnected community can withdraw
access to community resources.
• Wealth creation is concerned with the longer term; it relates not only to this year’s profit but
to that of future years as well.
• In the short term, concerns can be cut and risks taken that improve current profit at the
expense of future profit.
Balancing risk and return:
• Risk and reward will always be in correlation with each other. This also considered financial
decision making.
• The higher the risk, the higher the reward (risktaker wants to be rewarded for taking that
risk)
• Managers should try to find the ultimate balance between risk & reward
Not-for-profit organisations:
• Even though, these types of businesses are not here for the sake of making profit, they do
need accounting information for decision-making purposes.
(See page 30 for assignment)
7
, Chapter 2 Measuring and reporting financial position
The major financial statements – an overview: they aim to provide a picture of the financial position
and performance of a business.
• 3 financial statements (Financial accounts) are produce on a regular, recurring basis:
1. The statement of cash flows: Net cashflow = cash inflow – cash outlfow
2. The income statement (profit & loss account): Profit = Sales revenue – costs (of
revenue sold)
3. The statement of financial position (balance sheet)
• The above statements answer the 3 following questions:
1. What cash movement took place? (cashflow)
2. How much wealth was generated? (income statement)
3. What is the accumulated wealth of the business at the end of the period and what
form does it take? (balance sheet)
• Together they provide an overall financial health overview of the business.
• Cash is crucial for a company: enough cash enables the company to meet its debts that
become due and to acquire other resources (such as inventory) → cash is the ‘lifeblood’ of a
business.
• The wealth stated on the ‘statement of financial position’ (balance sheet) can be portrayed
in different manners. (e.g. assets, inventory, cash, property, machinery, etc)
• The income statement and the statement of cash flows are both concerned with measuring
flows (of wealth and cash) during a particular period.
• The statement of financial position,
however, is concerned with the
financial position at a particular
moment in time.
The statement of financial position (balance sheet):
• Sets out the assets of a business, on the one hand, and the claims against the business, on
the other.
• Asset: = equity + liabilities
o A resource held by the business. An asset should have the following characteristics:
1. A probable future economic benefit must exit: An economic benefit is one that will
have some monetary value. This may arise either through the item’s future uses
within the business or through its future hire or sale.
2. The benefit must arise from some past transaction or event: the transaction giving
rise to a businesses’ right to the benefit, must have already occurred and will not
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