week 1b - accouting & finance i- introduction

8/8/2019 Week 1b - Accouting & Finance I- Introduction

1/26

PowerPoint to accompany

Chapter 1

Introduction to

accounting andfinance


2/26

Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia

Nature and Role of Accounting

Learning Objective: Define accounting

Accounting is concerned with the collection, analysis

and communication of economic information.

Accounting information is useful to those who need

to make decisions and plans about businesses, and

for those who control those businesses.


3/26


Nature and Role of Accounting

Learning Objective: Discuss the role of accounting information

Accounting information is a tool for decision-making,

planning and control of business

Stewardship

The more traditional role of providing accountability reports of

transactions for a given period

Decision usefulness

Is about assisting users with making informed choices about

issues e.g. resource allocation


4/26


The Flow of Accounting

Information

3. Businesses prepare reports to show

the results of their operations.

2. Business transactions occur.

1. People make decisions.


5/26


Accounting information user

groups

Figure 1.1


6/26


Accounting as an information

system

Identify and capture relevant economic information

Record the information collected in a systematicmanner

Analyse and interpret the information collected

Report the information in a manner suitable to theneeds of users

Learning Objective: Explain the different proceduresinvolved in the accounting information system


7/26


Accounting as an information

system contd

Figure 1.2


8/26


Accounting as a service function

Relevance (ability to be used to influence decisions)

Reliability (free from material error or bias)

Comparability (consistency of measurement andpresentation of items)

Understandability (clarity and readability of

presentation)

Cost of information (is the benefit worth the cost)

Learning Objective: State the key characteristics ofaccounting information


9/26


Characteristics of accounting

information

Figure 1.3

TimelinessTimeliness


10/26


Accounting in crisis

Enron and HIH are cases of recent notoriety

HIH collapse caused losses of up to $5.3 billion

Resultant scrutiny led to accusations of dubious

accounting practices

Credibility of financial reports has been undermined

Tighter controls on quality of financial information have

been introduced

Learning Objective: Discuss the recent crisis in accounting


11/26


Decision-making, planning and

control Planning is essential for business success

Prudent decision-making is closely linked to

effective planning

Planning covers both long-term and short-term

scenarios

Over time, plans are normally adapted to changingcircumstances


12/26



control contdLearning Objective: Relate the steps in the planning process

Planning is usually broken down into three stages:

1. Setting the objectives or mission of the business

(Detailing what the business is basically trying to achieve)

2. Setting long-term plans

(Describing how the business will set out to achieve its long-term objectives)

3. Setting detailed short-term plans or budgets

(Typically financial plans for one year ahead)

D i i ki l i d


13/26



control contdLearning Objective: Discuss the nature of control in thedecision-making process

Control is the process of making planned eventsactually occur

Accounting is useful in control to compare plannedoutcomes with actual outcomes in commonlyspecified terms

Managers can take steps to get the business backon track if variances are highlighted between

planned and actual outcomes


14/26


Overview of the planning and controlprocess

Step 1

Step 2

Step 3

Step 4

Step 5

Step 6

Step 7

Identify business objectives

Consider options

Prepare a long-term plan based on themost appropriate option(s)

Perform and collect information on actual performance

Prepare short-term plans (budgets)

Respond to divergences between plans and actuals,

and exercise control

Revise plans and budgets if necessary Figure 1.4


15/26


Business Objectives

Learning Objective: Explain the different procedures involvedin the accounting information system.

The popular suggested business objectives include:

Maximisation of sales revenue(this does not consider

the need to cover business costs) Maximisation of profit(this takes in to account sales

revenues as well as expenses, but is limited as it does not

include other factors such as risk. Maximisation of return on capital employed(accounts

for level of profit as well as the level of investment)


16/26


Maximisation of profit


17/26


Business Objectives contd

Survival(This is the aim of most businesses, however it is

rarely a primary objective) Long-term stability(Like survival, most businesses aim for it,

but it is rarely a primary objective)

Growth(Encompasses survival and long-term stability andaims to strike a balance between short and long-term

benefits, however it is probably not a specific enough target)

Satisficing(Attempting to grant a satisfactory return to all

stakeholders - not just the owners. Difficult to define as apractical benchmark for business decisions.)


18/26


Business Growth


19/26


Business Objectives contd

Achieving sustainable development(Achieving economicgrowth while minimising or eliminating environmental impact

and meeting societys expectations of good corporatecitizenship.)

Enhancement / maximisation of business wealth

Means the business takes decisions intended to make itworth more.

Encompasses all the valuable features of the previous

suggested objectives.

Likely to be the main financial objective for many

businesses )

FinancialandManagement


20/26


Financial and ManagementAccounting

Learning Objective: Compare and contrast financial andmanagement accounting

Management accountingis concerned with

providing managers with information required for

day-to-day running of the business

Financial accountingis concerned with providing

the other users with useful information

FinancialandManagement


21/26


Financial and ManagementAccounting contd

Financial Accounting Management Accounting

Focus Mainly external Internal onlyNature of reports General purpose Specific purpose

Level of detail Broad overview Quite detailed

Restrictions Accounting standards andother regulations

No restrictions

Reporting interval Mainly annual, sometimessemi-annual or quarterly

Whenever required weekly, monthly

Time horizon Mainly historical Both past and future

Range of information Quantifiable in moneyterms; focus on objectiveand verifiable data

Can contain non-financialinformation; less focus onobjectivity and verifiability

The Main Financial Reports an


22/26


The Main Financial Reports - anoverview

Learning Objective: Provide an overview of the main financial reports

There are four main financial reports:

The Cash Flow Statement(shows the sources and uses ofcash for a period i.e. cash movements cash in & cash out)

The Income Statement- statement of financial performance

(traditionally known as Profit and Loss; measures and reports

how much profit has been generated in a period )

The Statement of Changes in Owners Equity(shows all

changes in owners interest in net assets from transactions

during the period)

The Balance Sheet- statement of financial position (shows

overall net financial position at the end of a particular period)


23/26


Paul starts a wrapping paper sales business with $100

On the first day, he uses the $100 to purchase wrapping paper

(inventory)

On the same day he sells 75% of that inventory for $110 in total

What cash movements took place in the first day of trading?

Closing cash balance for the day is $110 (opening balance

$100 - $100 stock purchase + $110 sales = $110)

A Simple Example


24/26


A Simple Example contd

How much did wealth increase as a result of the firstdays trading?

The increase or decrease in wealth is measuredas the difference between sales made and the

cost of goods sold sales were $110 less cost of goods sold $75 =

profit of $35

Note that only the cost of the paper sold is measured against

the sales to find profit, not the total cost of the wrapping paper

purchased.


25/26


A Simple Example contd

What is the financial position at the end of the first day?

At the end of the first day, a balance sheet is drawn up,

showing the resources held by the business:

Cash (closing balance) = $110

Inventory (stock available for resale) = $25

Total business wealth at end of day = $135

Note that the profit of $35 has led to an increase in wealth of

$35Note also that the increase in cash of $10 is not the same asthe increase in wealth because wealth does not exist only inthe form of cash (see inventory)


26/26


Financial Report Relationships

Balance sheet at the

beginning of Period 1


end of Period 2


end of Period 1

Period 1 Period 2 Time

Income statement Income statement

Cash flow statement

Statement of changes

in owners equity

Cash flow statement

Statement of changes

in owners equity

Figure 1.6Note: Balance sheet measures stock of wealth at a particular moment in time (static)Other three statements measure flows of wealth over time

week 1b - accouting & finance i- introduction

Documents