Summary - financial and management accounting
Chapter 1 – Introduction to accounting and finance
What are accounting and finance?
Accounting provides financial information to help various user groups make better
judgements and decisions.
Finance also helps users to make better decisions and is concerned with the financing
and investing activities of the business.
Accounting and user needs
For accounting to be useful it must be clear for whom and for what purpose the
information will be used.
Owners, managers and lenders are important user groups but there are several
others.
Conflicts of interest between users may arise over the ways in which business wealth
is generated or distributed.
The evidence suggests that accounting is both used and useful for decision-making
purposes.
Providing a service
Accounting can be viewed as a form of service as it involves providing financial
information to various users.
To provide a useful service, accounting information must possess certain qualities, or
characteristics.
The fundamental qualities required are relevance and faithful representation. Other
qualities that enhance the usefulness of accounting information are comparability,
verifiability, timeliness and understandability.
Providing a service to users can be costly and, in theory, financial information should
be produced only if the cost of providing the information is less than the benefits
gained.
Accounting information
Accounting is part of the total information system within a business. It shares the
features that are common to all information systems within a business, which are the
identification, recording, analysis and reporting of information.
Management accounting and financial accounting
Accounting has two main strands – management accounting and financial
accounting.
Management accounting seeks to meet the needs of the business’s managers, and
financial accounting seeks to meet the needs of providers of owners and lenders but
will also be of use to other user groups.
These two strands differ in terms of the types of reports produced, the level of
reporting detail, the time orientation, the degree of regulation and the range and
quality of information provided.
The changing face of accounting
, Changes in the economic environment have led to changes in the nature and scope
of accounting.
Financial accounting has improved its framework of rules and there has been greater
international harmonisation of accounting rules.
Management accounting has become more outward looking, and new methods for
managing costs have emerged to help a business gain competitive advantage.
Why study accounting?
Accounting and finance exert an enormous influence over the ways in which a
business operates. As a result, everyone connected with business should be a little
‘streetwise’ about these areas.
What is the purpose of a business?
According to Drucker, the purpose of a business is to create and keep customers.
What kinds of business ownership exist?
There are three main forms of business unit:
sole proprietorship – easy to set up and flexible to operate but the owner has
unlimited liability;
partnership – easy to set up and spreads the burdens of ownership, but partners
usually have unlimited liability and there are ownership risks if the partners are
unsuitable; and
limited company – limited liability for owners but obligations imposed on the way a
company conducts its affairs.
How are businesses organised and managed?
Most businesses of any size are set up as limited companies.
A board of directors is appointed by owners (shareholders) to oversee the running of
the business.
Businesses are often divided into departments and organised along functional lines;
however, larger businesses may be divisionalised along geographical and/or product
lines.
The move to strategic management has been caused by the changing and more
competitive nature of business.
The quest for wealth creation
The key financial objective of a business is to enhance the wealth of the owners.
To achieve this objective, the needs of other groups connected with the business,
such as employees, suppliers and the local community, cannot be ignored.
When setting financial objectives, the right balance must be struck between risk and
return.
Ethical behaviour
Accounting staff may be put under pressure to commit unethical acts.
Businesses may produce a code of ethical conduct to help protect accounting staff
from this risk.
Not-for-profit organisations
, They produce accounting information for decision making purposes in much the
manner as do commercial businesses.
They have user groups that are similar to, or the same as, those of commercial
businesses.
Chapter 2 – Measuring and reporting financial position
The major financial statements
There are three major financial statements: the statement of cash flows, the income
statement and the statement of financial position.
The statement of cash flows shows the cash movements over a particular period.
The income statement shows the wealth (profit) generated over a particular period.
The statement of financial position shows the accumulated wealth at a particular
point in time.
The statement of financial position
The statement of financial position sets out the assets of the business, on the one
hand, and the claims against those assets, on the other.
Assets are resources of the business that have certain characteristics, such as the
right to potential economic benefits.
Claims are obligations on the part of the business to provide cash, or some other
benefit, to outside parties.
Claims are of two types: equity and liabilities.
Equity represents the claim(s) of the owner(s) and liabilities represent the claims of
others.
The statement of financial position reflects the accounting equation:
o Assets = Equity + Liabilities
Classification of assets and liabilities
Assets are normally categorised as being current or non-current.
Current assets are cash or near cash or are held for sale or consumption in the
normal course of business, or for trading, or for the short term.
Non-current assets are assets that are not current assets. They are normally held for
the long-term operations of the business.
Liabilities are normally categorised as being current or non-current liabilities.
Current liabilities represent amounts due in the normal course of the business’s
operating cycle, or are held for trading, or are to be settled within a year of, or
cannot be deferred for at least a year after, the end of the reporting period.
Non-current liabilities represent amounts due that are not current liabilities.
Statement of financial position layouts
The standard layout begins with assets at the top of the statement of financial
position and places equity and liabilities underneath.
A variation of the standard layout also begins with the assets at the top of the
statement of financial position, but then the non-current and current liabilities are
deducted from the total assets figure to arrive at a net assets figure. Equity is placed
underneath.
