Accounting and Finance for Non-Specialist
Chapter 1: Introduction to accounting and finance
What are Accounting and Finance?
- Accounting is concerned with collecting, analyzing and communicating financial
information
o Help those who are using the information to make more informed decisions
o To improve the quality of their decisions
- Finance (Financial Management) is concerned with the ways in which funds for a
business are raised and invested
o A business exists to raise funds from investors (owners and lenders) and then
use those funds to make investments (in equipment, premises, inventories) in
order to create wealth
- Both Accounting and Finance are concerned with the financial aspect of decision
making
Who are the users of Accounting Information?
- Customers:
o Whether to take further services from the company
o Is the company able to continue its business and meet customer’s needs?
- Competitors:
o How best to compete against the company
o Competitors might use aspects of the company’s performance as a
benchmark when evaluating their own performance
o Competitors try to assess the company’s financial strength & identify changes
that signal future intentions (e.g. raising funds as a prelude to market
expansion)
- Employees:
o Whether to continue working for the company
o Whether to demand higher wages
o To know about the future plans, profits and financial strength of the company
- Government:
o Whether the company should pay tax & how much?
o Whether the company complies with agreed pricing policies
o Whether financial support is needed
- Community representatives:
o Whether to allow the company to expand its premises
o Whether to provide economic support for the business
o The company’s ability to provide employment for the community
o Its use of community resources
o Its willingness to fund environmental improvements
- Investment analysts:
o Whether to advise clients to invest in the company
- Suppliers:
o Whether to continue to supply for the company
o This involves an evaluation of the likely risks and future returns associated
with the company
- Lenders:
o Whether to lend money to the company / and if so / whether to demand
repayment of any existing loans
o The company’s ability to pay the interest due
- Managers:
o Whether the performance of the business needs to be improved
o Whether the company has the financial flexibility and resources to change the
future direction and take new challenges
- Owners:
o Whether to invest in the company or to sell all
o Owners may also have to decide on the rewards offered to managers
Accounting as an information system
- Accounting can be viewed as part of the business’s total information system
- Users make decisions concerning the allocation of scarce resources
- For these resources to be efficiently allocated -> they often need financial
(accounting) information on which to base decisions
o The accounting system must provide this information
- The accounting information system should have certain features that are common to
all information systems within a business:
o Identifying and capturing relevant information (in this case financial
information)
o Recording, in a systematic way, the information collected
o Analyzing and interpreting the information collected
o Reporting the information in a manner that suits users’ needs
- Four sequel stages of an accounting information system:
Management Accounting and Financial Accounting
- Accounting is seen as having 2 strands:
o Management accounting -> seeks to meet the accounting needs of managers
o Financial accounting -> seeks to meet the needs of other users
- Nature of the reports produced
o Financial accounting
Reports tend to be general-purpose
They contain financial information that will be useful for a broad range
of users & decisions
o Management accounting
Reports are often specific-purpose reports
They are designed with a particular decision in mind & for a particular
manager
- Level of detail
o Financial accounting
Reports provide users with a broad overview of the performance &
position of the business for a period
Information is aggregated & detail is often lost
o Management accounting
Reports often provide managers with considerable detail to help them
with a specific operational decision
- Regulations
o Financial accounting
Reports are subject to regulations imposed by law & accounting rule
makers
Standard content, standard format
o Management accounting
Reports are not subject to regulation & can be designed to meet the
needs of particular managers
- Reporting interval
o Financial accounting
Reports are produced on an annual basis
Some large businesses produce half-yearly reports & a few produce
quarterly ones
o Management accounting
Reports will be produced as frequently as needed by managers
A sales manager may need routine sales reports on a daily, weekly or
monthly basis to monitor performance closely
Special reports can also be prepared -> e.g. where an evaluation is
required of a proposed investment in new equipment
- Time orientation
o Financial accounting
Reports reveal the performance and position of a business for the past
period -> Reports are backward-looking
o Management accounting
Reports provide information concerning the future performance
- Range & quality of information
o Financial accounting
Reports concentrate on information that can be quantified in
monetary terms
Financial accounting place greater emphasis on the use of objective,
verifiable evidence when preparing reports
o Management accounting
Reports are more likely to contain information that are non-financial
nature (e.g. physical volume of inventory, number of sales orders
received, number of new products launched)
Management accounting may use information that is less objective
and verifiable
Chapter 2: Measuring and reporting financial position
The major financial statements:
- The major financial statements aim to provide a picture of the financial position and
performance of a business
- The three statements are:
o The Income Statement (IS)
Also known as profit & loss statement (P&L statement)
o The Balance Sheet (BS)
Statement of the financial position
o The Cash Flow Statement (CFS)
The operating cycle of a business:
- Operating cycle of a business = time between buying/creating a product/service and
receiving the cash on its sale.
- For most businesses -> less than a year
- Sales by most businesses are made on credit
o The customer pays at some point after the goods are received
- The most common current assets are…
o Inventories
o Trade receivables (amount owed by customers for goods provided on credit)
o Cash
They
