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Summary Accounting and Finance for Non-Specialists - Atrill McLaney - Tenth edition
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Summary Finance module 4Additional information: the words that are between the following signs [ ] are the
words translated in Dutch. Also, this document contains formulas that are only visible
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Chapter 1 – Introduction to Accounting and Finance
What are Accounting and Finance?
Accounting
Accounting is concerned with collecting, analyzing, and communicating financial
information. The point of accounting is to give users financial information to improve
the quality of their decisions.
Finance or Financial Management
Finance is concerned with the ways in which funds for a business are raised and
invested. An understanding of finance should help identifying:
- The main forms of finance available
- The costs and benefits of each form of finance
- The risks associated with each form of finance
- The role of financial markets in supplying finance
A business raises funds from investors (owners and lenders) to invest this in the
company (equipment, premises [pand], inventories) to create wealth.
Difference between Accounting and Finance
Financial (accounting) reports are mostly the source of the major information that is
shared when making a decision.
Who are the Users of Accounting Information?
Accounting is useful when the accountant is clear for whom the information is being
prepared and for what purpose it needs to be used.
There are various user groups that have interest in an organization and to make
decisions about it;
- Customers: does the customer want to buy something from organization x
- Competitors: what is the best way to compete against organization x
- Employees: does the employees want to continue working for organization x
- Government: does the organization pay tax, complies with agreed pricing
policies and if financial support needed
- Community representatives: whether to allow organization x to expand or
provide economic support
- Investment analysts: do they advise to invest in the organization
- Suppliers: do we keep supplying to organization x and are they able to pay us
- Lenders: do lenders want to lend money to organization x
- Managers: does the performance of the business needs to be improved
- Owners: do they invest more, sell the company of part of the company.
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,Providing a Service
A way of viewing accounting is in the form of a service. The user groups are then
seen as the clients.
Information that is provided needs to be;
- Relevant: it should be capable of influencing the decision.
Predict future events
Confirm past events
To be relevant, accounting information must cross a threshold of materiality.
What is material will depend on factors such as the size of the business, the
nature of information and the amounts involved. Material for one business
may not be material for all other businesses.
- Faithful representation: it should represent what it is supposed to represent.
Information should be complete
Information should be neutral
Information should be free from error (in the way in which estimates are
prepared and described)
Accounting information must contain both of these qualities to be useful.
Further Qualities
These are qualities can enhance the usefulness of accounting information that is
already relevant and faithful represented.
- Comparability: compare with previous years or other businesses that are
similar.
- Verifiability: independent experts would be able to agree that it provides a
faithful portrayal. Verifiability needs to be supported with evidence.
- Timeliness: accounting information should be produced in time for users to
make their decisions.
- Understandability: accounting information should be set out clearly and needs
to be understood by the user groups. To understand accounting reports a little
knowledge is necessary.
Weighing up the Costs and Benefits
Even when accounting information that can be provided will consist all of the
qualities, the choice can still me made to not produce the information. This because
the cost of providing the information could be higher than the potential benefit of
having the information. However, measuring this is difficult to assess.
Providing accounting information can be very costly. But it is also very hard to
forecast what the potential benefits might be.
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,Accounting as an Information System
information collect analyse report the
identification information information information
Most businesses rely on computerized systems to process financial information.
Management Accounting and Financial Accounting
Management accounting seeks to meet the accounting needs of managers.
Financial accounting seeks to meet the needs of the other user groups.
The main areas of difference are:
Management accounting Financial accounting
Nature of the For a specific person or decision More general purpose
reports
produced
Level of Support with details for a particular Broad overview of the
detail decision performance and position for
a period
Regulations Can be designed to meet the Regulations require standard
needs of particular managers content
Reporting As frequently as needed On an annual basis – per
interval year, half year...
Time Future performance as well as Past performance
orientation past performance
Range and Tend to contain financial and non- Focus on financial
quality financial information, often use information, great emphasis
of information that cannot be verified. on objective, verifiable
information evidence.
The Changing Face of Accounting
Changes for the increasingly turbulent and competitive business environment;
- Increasing of sophistication [wereldwijsheid] of customers
- The development of a global economy where national frontiers become less
important
- Rapid changes in technology
- Deregulation of domestic markets
- Increasing pressure from owners for competitive economic returns
- The increasing of suddenly worse changing of financial markets
3
, These changes resulted in the change of needs for the user groups and financial
accounting and management accounting had to respond.
The conceptual frameworks that have been developed try to address the following
questions;
- Who are the users of the financial accounting information?
- What kinds of reports should be prepared and what should they contain?
- How should items such as profit and asset values be measured?
As a result of the internationalization of businesses there has been an increasing
harmonization accounting rules across national frontiers.
There was criticism that financial reports could be difficult for users. As a result, the
following is done;
- Try to ensure that the accounting policies of businesses are more comparable
and more transparent and financial reports portray economic reality more
faithfully.
- Management account becoming more outward-looking
- Businesses are more customer driven so they need more information about
customers in the market.
Why do I need to know anything about Accounting and Finance?
The accounting/finance function within a business is a central part of its
management information system. On the basis of information provided by the
system, managers make decisions concerning the allocation of resources. These
decisions may concern whether to;
- Continue with a certain business operation
- Invest in particular projects
- Sell particular products
It also is important that everyone in the business has an idea of aspects of
accounting and finance. This includes;
- How financial reports should be read and interpreted
- How financial plans are made
- How investment decisions are made
- How businesses are financed
- How costs are managed
The Quest for Wealth Creation
A business is normally formed to enhance the wealth of its owners. Competitions for
the funds provided by the owners and competition for managers’ jobs will normally
mean that the owners’ interests will prevail. If the managers do not provide the
expected increase in ownership wealth, the owners have the power to replace the
existing management team wit a new team that is more responsive to the owners’
needs.
Creating wealth for the owners is not the same as trying to maximize the current
year’s profit. It does not relate on only this year, but also of the future years.
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