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Summary 1CV10 ()
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Summary of the course 1CV10, given at the Eindhoven University of Technology. Contains all literature chapters, all lectures and other important information.
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Fundamentals of Financial and Management Accounting (1CV10) Summary Q2 2021
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Cost management samenvatting
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Summary 1CV10 (2020-2021)Content
Week 1 ........................................................................................................................................ 2
Readings .................................................................................................................................................. 2
Lecture slides ........................................................................................................................................... 7
Week 2 ........................................................................................................................................ 9
Literature ................................................................................................................................................. 9
Lecture slides ......................................................................................................................................... 14
Week 3 ...................................................................................................................................... 16
Literature ............................................................................................................................................... 16
Lecture slides ......................................................................................................................................... 24
Week 4 ...................................................................................................................................... 25
Literature ............................................................................................................................................... 25
Lecture slides ......................................................................................................................................... 27
Week 5 ...................................................................................................................................... 28
Literature ............................................................................................................................................... 28
Lecture slides ......................................................................................................................................... 32
Week 6 ...................................................................................................................................... 33
Literature ............................................................................................................................................... 33
Lecture slides ......................................................................................................................................... 43
Week 7 ...................................................................................................................................... 46
Literature ............................................................................................................................................... 46
Lecture slides ......................................................................................................................................... 52
, Week 1
Readings
Atrill and McLaney
Chapter 1 – Introduction to accounting
Accounting: collecting, analysing and communicating financial information. This information should
have two qualities:
- Relevance: information should make a difference – be capable of influencing users decisions
- Faithful representation: information should represent what it is meant to represent
Accounting information has other qualities that can enhance its usefulness:
- Comparability: users must be able to detect both similarities and differences
- Verifiability: assure users that the accounting information faithfully portrays
- Timeliness: information should be made available in time for users to make their decisions
- Understandability: information should be presented in as clear and as concise a form as
possible
Accounting information system: contains certain features
Accounting has two distinct strands:
- Management accounting: seeks to meet
the accounting needs of managers
- Financial accounting: seeks to meet the
needs of owners and lenders
Main differences lie in:
- Nature of reports produced
- Level of detail
- Regulations
- Reporting interval
- Time orientation
- Range and quality of information
What is the purpose of a business?
Basically three arrangements for private-sector businesses:
- Sole proprietorship: individual is the sole owner of a business. Easy to set up, unlimited
liability but not obligated to share accounting information
- Partnership: two or more individuals carry on a business together with the intention of
making a profit. Easy to set up, unlimited liability
- Limited company: unlimited number of individuals who participate. Limited liability
Business normally have the objective of increasing the wealth of its owners
2
,Chapter 2 – Measuring and reporting financial position
Three different types of financial statement (final accounts):
- Statement of cash flows: shows cash movements over a particular period
- Income statement: shows the wealth (profit) generated over a particular period
- Statement of financial position: shows the accumulated wealth at a particular point in time
o Sets out the assets of the business and the claims against those assets
Asset: resource held by a business. Resource must have the following characteristics:
- Must be an economic resource
- Economic resource must be under the control of the business
- Economic resource must be capable of measurement in monetary terms
Can be both tangible and intangible:
- Tangible asset: assets that have a physical substance and can be touched
- Intangible asset: asset that have no physical substance
Claims: obligation of the business to provide cash or some other form of benefit to an outside party
- Equity: claim of the owner(s) against the business
- Liabilities: represent the claims of other parties against the business
Accounting equation: Assets = Equity + liabilities
Assets are often grouped in categories:
- Current assets: assets that are held for the short term
o Held for sale or consumption during the business’ normal operating cycle (time
between buying and/or creating a product/service and receiving the cash on its sale)
o Expected to be sold within a year after the date of relevant statement of financial
position
o Held principally for trading
o Cash or near cash such as easily marketable, short-term investments
- Non-current assets: do not meet the definition of current assets
o Held for the long term operations
o Examples are property, equipment and plant
Liabilities are also classified as current or non-current:
- Current liabilities: amounts due for settlement in the short term
- Non-current liabilities: represent amount that do not meet the definition of the current
liabilities
When preparing the statements of financial positions, certain accounting conventions should be
followed:
- Business entity convention: business and its owner(s) are treated as being quite separate
and distinct
- Historic cost convention: value of assets shown on the statement of financial position should
be based on their historic cost (acquisition cost)
- Prudence convention: caution should be exercised when preparing financial statements
- Going concern convention: financial statement should be prepared on the assumption that a
business will continue operations for the foreseeable future, unless there is evidence to the
contrary
- Dual aspect convention: each transaction has two aspects, both of which will affect the
statement of financial position
3
, Some resources of a business are hard to measure in a monetary form:
- Goodwill and brand: various attributes such as the quality of the product, the skill of
employees and the relationship with the customers
- Human resources
- Monetary stability: fail to recognize that money will change in value over time
Key valuations rules:
- Non-current assets:
o Non-current assets with finite lives: depreciation
- Fair values: recording non-current assets using monetary values that can be measures with a
reasonable degree of certainty
- Impairment of non-current assets
o Impairment loss: amount by which an asset value is reduced
Wouters
Chapter 1 – Cost Management and Strategic Decision Making
Cost management: organizational commitment to create more value at lower cost
Cost management system: set of cost management techniques that function together to support the
organisation’s goals and activities
Decision-making Framework
Stage I: Setting goals and objectives
- First stage of the decision-making is about setting goals and objectives
o Tangible objectives: benchmarks capable of being measured in some manner
Stage II: Gathering information
- Analysts collect information to understand the decision alternatives through which
organizational goals and objectives can be achieved
o Decision alternatives: alternative courses of action about which a decision is made
- Based on financial and non-financial criteria
o Financial quantification: translating a non-financial criterion into a financial criterion
- Should consider the information quality:
o Decision usefulness
o Objectivity
o Subjectivity
o Accuracy
o Timeliness
o Relevant costs and benefits
1. Sunk costs: costs that are in the past and not relevant anymore
Stage III: Evaluating alternatives
- Evaluate the alternatives
Stage IV: Execution and Tracking costs
- Execute the selected alternative
- Keep track of the actual costs and revenues
Stage V: Obtaining feedback
Strategic Decision Making
Strategic decision making: determines where and how by choosing and implementing actions that
will affect an organization’s future abilities to achieve its goals
Competitive advantage: resource, process or value chain that enables the organization to provide
more value than its competitors
Value chain: relation of an organization’s processes that links ideas, resources, suppliers, customers
4
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