Summary Accounting and Finance for non-specialists

Accounting and Finance for Non-Specialists
Summary


Chapter 1: introduction to accounting and finance

Accounting and finance
Accounting: concerned with collecting, analysing and communicating financial
information.
 The aim is to give users financial information to improve the quality of
their decisions.
Finance: concerned with the ways in which funds for a business are raised and
invested.
 A business exists to raise funds from investors and then to use those funds
to make investments in order to create wealth.

Main users of financial information
It is important for an accountant to identify the main users and the purpose:
 Owners
 Customers
 Competitors
 Managers
 Employees and their representatives
 Lenders
 Government (Taxes)
 Suppliers (Is it reliable to keep supplying a particular business?)
 Investment analysts (Think of investments that they want to make)
 Community representatives (Economic support that is given to businesses)

Accounting as a service
Accounting is a form of service that is used by the user groups. In order to be
useful to users, the information provided must possess certain qualities:
 Relevance: service must help to predict future events or confirm past
events. Furthermore, accounting information must cross a threshold of
materiality. Item of information should be considered material if its
omission or misstatement could alter the decisions that users make (if it is
not material, it should not be included in reports).
 Faithful representation: accounting information should be complete,
unbiased and free from error.
If the abovementioned factors are present, there are 4 other qualities that can
enhance usefulness:
 Comparability
 Verifiability
 Timelessness
 Understandability

,A particular item of accounting information should be produced only if the costs
of providing it are less than the benefits to be derived from its use.
Normally, it is much harder to assess the benefits. We must bear in mind that
accounting information will be only one factor influencing a decision as there are
others factors that are taken into account such as time.

Accounting as an information system
Accounting can serve as an information system to allow making decisions
concerning the allocation of scarce resources. The features it should have are:
 Identifying and capturing relevant information
 Recording the information collected
 Analysing and interpreting the information collected
 Reporting the information in a manner that suits users’ needs

Management and financial accounting
The main difference between management and financial accounting is the end-
user.

Management Financial accounting
accounting
Nature of the reports Tend to the specific Tend to be general
produced purpose purpose
Level of detail Often very detailed Broad overview
Regulations Unregulated Subject to accounting
regulation
Reporting interval As short as required by Usually annual or bi-
managers annual
Time horizon Uses projected future Almost always historical
information as well as
past information
Range and quality of Contains financial and Focus on financial
information non-financial information. Emphasis
information. Uses on objective, verifiable
information that cannot evidence. (open for
be verified. (usually not external usage)
for external usage).

Changing face of accounting
Changes in the business environment:
 Increasing sophistication of customers
 Development of a global economy
 Rapid changes in technology
 Deregulation of domestic markets
 Increasing pressure from owners for competitive returns
 Increasing volatility of financial markets

Important aspects of accounting and finance:
 How accounting reports should be read and interpreted
 How financial plans are made

, How investment decisions are made
 How businesses are financed

, Chapter 2: measuring and reporting financial position

Financial statements
The major financial accounting statements aim to provide a picture of the
financial position and performance of a business. The three statements are
concerned with answering the following questions relating to a particular period:
 What cash movements took place?
 How much wealth was generated?
 What is the accumulated wealth of the business at the end of the period
and what form does it take?

There are three major financial statements to answer these questions:
- Statements of cash flows
- Income statement
- Statement of financial position

Statement of cash flows
Statement of cash flows shows the cash in- and outflows of a business during a
certain period. Cash is a vital resource as it is required to meet debts that
become due and to acquire other resources.

Statement of financial position (balance sheet)
Looks at the financial health of the company at one point in time. This statement
shows the forms in which the wealth of a business is held and how much wealth
is held in each form. It sets out the assets of a business on the one hand, and
the claims against the business on the other.
The money of a company is either owned by the company itself or borrowed
which is a liability.

Assets
Asset: assets are tangible (inventories) or intangible (patents) items that are
owned by the company i.e. buildings or cash.
For an item to be treated as an asset, it should have the following
characteristics:
 A probable future economic benefit must exist
(value arises by either using it or hire or selling it).
 The benefit must arise form past transaction or event
(the transaction that gives rise to a business’s right to the benefit
must have already occurred)
 The business must have right to control the resource.
 The asset must be capable of measurement in monetary terms.
(the item must be able to be measured in monetary terms with a
reasonable degree of reliability)

, Often regarded as assets are:
 Property
 Plant and equipment
 Fixtures and fittings
 Patents and trademarks
 Trade receivables
 Investments outside the business

Current assets are assets that are held for the short term:
 They are held for sale or consumption during the business’s normal
operating cycle
 They are expected to be sold within a year after the date of the relevant
statement of financial position
 They are held principally for trading
 They are cash, or near cash such as easily marketable, short-term
investments

Non-current assets are assets that do not meet the definition of current assets.
These are often held for long-term operations.

Claims
A claim is an obligation of the business to provide cash, or some other form of
benefit, to an outside party.
Claims are either equity or liability:
 Equity (owner’s capital): represents the claim of the owners against the
business. The owner and the business are regarded as existing separately
and therefore any funds contributed by the owner will be seen as coming
from the outside. (Things that are owned by you is equity)
 Liabilities: represent the claims of all individuals and organisations apart
from the owners. (Things that you need to borrow are liabilities)
o Liabilities can be either current or non-current liabilities

Current liabilities are amounts due for settlement in short term, with the
following conditions:
 They are expected to be settled within the business’s normal operating
cycle.
 They are held principally for trading purposes.
 They are due to be settled within a year after the date of the relevant
statement of financial position.
 There is no right to defer settlement beyond a year after the date of the
relevant statement of financial position.

Non-current liabilities represent amounts due that do not meet the definition of
current liabilities and so represent longer-term liabilities.