Summary Financial and Management Accounting
Financial accounting (HC 1 tm 3)
HC 1
Accounting definition = Collecting, analysing and communicating financial information. This is useful
for those who need to make decisions and plans about businesses.
Who needs accounting information? → banks, insurance companies, government, hospital
management, employees (job security), suppliers, owners, customers, competitors, community
Accounting information is not always objective, it can be potentially misleading:
1. measurement is quite subjective (difficult to measure value of things)
2. many companies increasingly pay attention to non-financial key performance indicators (how
a company contributes to pollution, community)
3. creative accounting: accounting practices that follow required laws and regulations, but
deviate from what those standards intend to accomplish. Creative accounting capitalizes on
loopholes in the accounting standards to falsely portray a better image of the company.
Different types of accounting
- Financial accounting: measuring and reporting of financial information for external users
(those other than the managers of the business)
Based on: Income statement, Statement of financial position, Statement of cash flows
- Management accounting: measuring and reporting financial information for the managers of
a business
Based on: Cost accounting, Decision making
1
,Financial accounting
- Financial performance and position contained in three financial statements:
▪ Statement of financial position (balance sheet, wealth)
▪ Income statement (profit and loss statement; flow of wealth & cash)
▪ Cash flow statement (flow of wealth & cash)
- Contained as part of company’s annual report (AR): all companies must prepare these
annually, and send to shareholders, some information is required by law or accounting
regulation and some is discretionary
- Only a small amount of annual report is made up of financial statements (this part is
regulated and subject to annual audit)
Balance sheet:
- Left: uses, where money is spent or things owned by the business
- Right: sources, where money obtained or amount owed by the business
2
,Long term investments = e.g. investments in other companies
Intangibles = assess that don’t have physical presence
Inventories → 3 types: raw materials, work-in-process, finished goods
Trade receivables → the amount owed to a business by its customers following the sale of goods or
services on credit (money is received around day 80, but goods are already sold on day 45)
Trade payables → an amount billed to a company by its suppliers for goods delivered to or services
consumed by the company in the ordinary course of business (money the company has to pay to
suppliers)
Equity = owner’s claim against the business, includes
1. Capital stock
2. Retained earnings, profit
Liabilities → claims of anyone else against the business, e.g. loans, trade payables, tax due
- Current liabilities: due for settlement in the short term, <1 year
- Non-current liabilities: due for settlement in the long term, >1 year
Accounting Equation
- Equation always balances!
- Idea that each accounting transaction affect at least one part of the equation
3
, Example:
Basic transaction, the company sells half of all goods purchased for £5,000 cash
➔ Company makes profit (added to retained earnings)
Accounting conventions:
- Business Reporting entity: the reporting entity is a separate from its owners
- Historical cost: the amount recorded is the amount paid
- Periodicity: accounts refer to a set period
- Consistency : the same treatment across years (use same method)
- Going Concern: accounts are prepared under the assumption that the business will continue
in the foreseeable future.
- Accruals: income and expenses are recorded when they occur (not when cash is transacted)
- Monetary measurement: only things (events, assets) that have financial implications are
measured, some items on the balance sheet are difficult to measure (e.g. relationships with
costumers/suppliers)
4
Financial accounting (HC 1 tm 3)
HC 1
Accounting definition = Collecting, analysing and communicating financial information. This is useful
for those who need to make decisions and plans about businesses.
Who needs accounting information? → banks, insurance companies, government, hospital
management, employees (job security), suppliers, owners, customers, competitors, community
Accounting information is not always objective, it can be potentially misleading:
1. measurement is quite subjective (difficult to measure value of things)
2. many companies increasingly pay attention to non-financial key performance indicators (how
a company contributes to pollution, community)
3. creative accounting: accounting practices that follow required laws and regulations, but
deviate from what those standards intend to accomplish. Creative accounting capitalizes on
loopholes in the accounting standards to falsely portray a better image of the company.
Different types of accounting
- Financial accounting: measuring and reporting of financial information for external users
(those other than the managers of the business)
Based on: Income statement, Statement of financial position, Statement of cash flows
- Management accounting: measuring and reporting financial information for the managers of
a business
Based on: Cost accounting, Decision making
1
,Financial accounting
- Financial performance and position contained in three financial statements:
▪ Statement of financial position (balance sheet, wealth)
▪ Income statement (profit and loss statement; flow of wealth & cash)
▪ Cash flow statement (flow of wealth & cash)
- Contained as part of company’s annual report (AR): all companies must prepare these
annually, and send to shareholders, some information is required by law or accounting
regulation and some is discretionary
- Only a small amount of annual report is made up of financial statements (this part is
regulated and subject to annual audit)
Balance sheet:
- Left: uses, where money is spent or things owned by the business
- Right: sources, where money obtained or amount owed by the business
2
,Long term investments = e.g. investments in other companies
Intangibles = assess that don’t have physical presence
Inventories → 3 types: raw materials, work-in-process, finished goods
Trade receivables → the amount owed to a business by its customers following the sale of goods or
services on credit (money is received around day 80, but goods are already sold on day 45)
Trade payables → an amount billed to a company by its suppliers for goods delivered to or services
consumed by the company in the ordinary course of business (money the company has to pay to
suppliers)
Equity = owner’s claim against the business, includes
1. Capital stock
2. Retained earnings, profit
Liabilities → claims of anyone else against the business, e.g. loans, trade payables, tax due
- Current liabilities: due for settlement in the short term, <1 year
- Non-current liabilities: due for settlement in the long term, >1 year
Accounting Equation
- Equation always balances!
- Idea that each accounting transaction affect at least one part of the equation
3
, Example:
Basic transaction, the company sells half of all goods purchased for £5,000 cash
➔ Company makes profit (added to retained earnings)
Accounting conventions:
- Business Reporting entity: the reporting entity is a separate from its owners
- Historical cost: the amount recorded is the amount paid
- Periodicity: accounts refer to a set period
- Consistency : the same treatment across years (use same method)
- Going Concern: accounts are prepared under the assumption that the business will continue
in the foreseeable future.
- Accruals: income and expenses are recorded when they occur (not when cash is transacted)
- Monetary measurement: only things (events, assets) that have financial implications are
measured, some items on the balance sheet are difficult to measure (e.g. relationships with
costumers/suppliers)
4
