Accounting and Finance for Managers

Financial Accounting and Reporting

Lesson Description
This lesson explains about the nature and purpose of the
accounting function in a business context. On the completion of
this lesson, the student will be able to understand the relationship
of IT to accounting and finance, financial and non-financial
objectives and identify the main stakeholder groups.

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Topics:
What is Accounting?
Financial Accounting Function
Users of Financial Statements

Role of IT in Accounting & Finance

Business Objectives
Stakeholders

Mendelows Matrix
Shareholder Value Added

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What is Business?
Business means the exchange of goods and services for money. It can
be an organisation or an economic system.
A business is an organisation that regularly enters into transactions
that are expected to provide a reward measurable in monetary terms.

Source: CIMA Fundamentals in Financial Accounting (2009)

But how does accounting functions impact business activities?

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What is Accounting?
Accounting is concerned with measurement and management.
Measurement is mainly concerned with the recording of past data,
and management with the use of that data in order to make
decisions that will benefit the organisation.

Source: CIMA Fundamentals in Financial Accounting (2009)

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Financial Accounting
Financial accounting is the classification and recording of
monetary transactions of an entity in accordance with established
concepts, principles, accounting standards and legal requirements,
and their presentation, by means of various financial statements,
during and at the end of an accounting period.
Source: CIMA Fundamentals in Financial Accounting (2009)

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Accounting Functions
In large organisations, accounting department performs a number of functions.
Hence, sometimes, the accounting department is split into number of different
functions as depicted in the below diagram:
Finance Director

Chief
Accountant

Financial Accounting
Auditor Relationship

Tax
Manager

Treasurer

Debt strategy
Currency Management

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Tax strategy
Tax mitigation

Management
Accountant
Management information
and accounting
Budgeting and forecasting

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The Basic Features of Accounting:

Accounting is a Process:
As accounting involves collecting, processing and communicating financial
information, it is considered to be a process. This includes steps such as
collection of recorded data, classifying them, summarising , finalising and
reporting.
Accounting is an art:
As accounting involves recording, classifying, summarising and finalising financial
data, it is considered to be an art. It is a systematic method which includes
definite techniques and appropriate application of skills and expertise.

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The Basic Features of Accounting Contd

Accounting is a mean and not an end:

Accounting provides information on company financial results as well as its financial

position. Simultaneously, these information can be communicated to relevant
stakeholders for decision making. Hence, accounting is not only an objective but
assists in achieving a specific objective. As a result, it is said that accounting is a
means to an end and not an end in itself.
Accounting is an information system:
Accounting is a kind of a storehouse for information. As a service function, it
engages in processing and communicating a companys financial information to
satisfy stakeholder needs.

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Branches of Accounting
Accounting can be divided into two branches as follows:

ACCOUNTING

Financial
Accounting

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Management
Accounting

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Topics:
What is Accounting?
Financial Accounting Function
Users of Financial Statements

Role of IT in Accounting & Finance

Business Objectives
Stakeholders

Mendelows Matrix
Shareholder Value Added

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The Financial Accounting Function

Financial Accounting helps to produce annual financial statements in
accordance with the relevant accounting standards and legislation.
Whenever a business transaction takes place (such as sales, purchases or
payments of expenses), it is necessary to record these transaction in the
organisations' accounting records. In the books of prime entry transactions
are first recorded prior to posting them in the ledger accounts.

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Main Financial Statements of a Business

Income Statement:
This is a financial document that records income as well as costs incurred during
the period. This provides information whether a business has made a profit or a
loss.
Statement of Financial Position:
This is simply a statement of the assets, liabilities and capital of a business at a
particular time. It is thus nothing more than a detailed representation of the
accounting equation.
(Source: CIMA Fundamentals in Financial Accounting,2009)
Statement of Cash flow:
This allows the investors to understand the way business operations occur. It
shows details on cash inflows and outflows.
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Management Accounting Function

Management accounting can be described as the process of identification,
measurement, accumulation, analysis, preparation, interpretation and
communication of information used by management to plan, evaluate and
control within an entity and to assure appropriate use of and accountability
for its resources.
Source: CIMA Fundamentals in Financial Accounting (2009)

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Management
Investors
Creditors
Lenders

Government
Employees
Customers
Others

Information on the entitys

For
Decision
Making

Users of Information

Purpose of Accounting
Profitability
Liquidity
Stability of
operations

Ability to settle
obligations
Tax bases
Going concern

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Topics:
What is Accounting?
Financial Accounting Function
Users of Financial Statements

Role of IT in Accounting & Finance

Business Objectives
Stakeholders

Mendelows Matrix
Shareholder Value Added

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Users of Financial Statements

Usually, there is no requirement to disclose financial information
publicly. Therefore, the main users of financial information are
internal.
Internal users are the management (owners, managers and senior
managers who use it to run the business, which may include passing
it on to others at their discretion).
Limited Liability companies are legally obliged to disclose financial
information to public. Hence, in such companies, apart from internal
users there are external users as well.

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Difference between Financial and Management Accounting

Management Accounting

Financial Accounting

The purpose of producing

information

For internal use. e.g.

Managers & employees

For external use. e.g.

shareholders, government

Purpose of using
information

To aid planning,
controlling & decision
making

To record financial
position and performance

Legal Requirements

None

Limited companies must

produce financial accounts

Nature of Information

Financial and non financial Mostly financial

Time period

Historical and forward

looking

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Mainly a historical record

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Topics:
What is Accounting?
Financial Accounting Function
Users of Financial Statements

Role of IT in Accounting & Finance

Business Objectives
Stakeholders

Mendelows Matrix
Shareholder Value Added

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Role of IT in Accounting & Finance

What is IT?
Information technology is the broad term comprising of
new communication and computing technology . Computer
hardware, software and Internet are key to these systems
that are designed, developed and managed by IT
professionals .

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Information Technology & Information Systems

Information Technology:
Describes any equipment concerned with the capture,
storage, transmission or presentation of data.

Information Systems:
Refer to the management and provision of information to
support the organisational functioning.

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General Roles of IT in Accounting

Improved ability and capacity to conduct accounting research
Assistance for users to organise, store, and retrieve
accounting information conveniently.
Easy access to relevant accounting information and
information sharing
Convenience in accounting data retrieval in order to be used
for decision making
Ability to access accounting information from different
geographical points
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Advantages of Computerisation

SPEED

ACCURACY

Advantages of
Computerization

VOLUME

COMPLEXITY

COST

PRESENTATION

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Data & Information

Information and Data are two different things:
Data consists of numbers, letters, symbols, raw facts,
events and transactions. Data are the raw form of facts
which yet to be processed into a form that is suitable for
making decisions.
Information is processed data in such a way that it has a
meaning to the person that receives it, who may then use
for decision making.
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Qualities of Good Information

Accurate
Complete
Cost
Accurate
Understandable
Relevant
Adaptable
Timely
Easy to use
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Topics:
What is Accounting?
Financial Accounting Function
Users of Financial Statements

Role of IT in Accounting & Finance

Business Objectives
Stakeholders

Mendelows Matrix
Shareholder Value Added

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Business Objectives
Business objectives are set by a business to achieve its aims.
Objectives should be SMART. It is an acronym used to reflect the criteria
business objectives must fulfill. It simply tells you how to set good targets.
They give the business a clear target.
This allows people to make plans in order to meet that target

S
Specific

M
Measureable

A
Achievable

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R
Realistic

T
Timed

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Categories of Objectives
Business objectives can be categorised into two main categories as
follows:

Business
Objectives

Financial
Objectives
Non Financial
Objectives

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Financial Objectives
Financial objectives are set in monetary terms by a company. It is
important to set such objectives for following reasons:

Business survival
To break even
To improve company image and reputation
To motivate employees
To maximise profits
To increase market share
For business growth

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Non Financial Objectives

Non financial objectives are not really measured in monetary terms. Examples
are:
Achieving customer loyalty
Employee training
Achieving quality standards

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Topics:
What is Accounting?
Financial Accounting Function
Users of Financial Statements

Role of IT in Accounting & Finance

Business Objectives
Stakeholders

Mendelows Matrix
Shareholder Value Added

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Who are Stakeholders?

Stakeholders are those persons and organisations that have an interest in
the strategy of the organisation. Stakeholders normally include
shareholders, customers, staff and other local community.
Source: CIMA: Management Accounting Official terminology (2005, p.53)
It is essential for the management to understand diverse stakeholder
needs as if not the company will not be able to satisfy stakeholder
interests.

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Types of Stakeholders
Internal Stakeholders
These are any stakeholders that are within the organisation. Their objectives are likely
to have a strong influence on how it is run. Internal Stakeholders include:
Stakeholder

Need/ Expectation

Example

Employees

Pay, working conditions &

job security

If workers are to be given

more responsibility, they
will expect increased pay.

Managers/ Directors

Status, pay, bonus, job

security

If growth is going to occur,

the managers will want
increased profits, leading
to increased bonuses.

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Connected Stakeholders
Connected stakeholders either invest in or have links with the firm. Their
objectives include:
Stakeholder

Need/ Expectation

Shareholders

Steady flow of income, possible capital growth and the

continuation of the business.

Customers

Customer needs will be achieved by providing value for money

products & services.

Suppliers

Paid promptly

Finance
providers

Ability to repay the funds including interest and security of

investment

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External Stakeholders
These stakeholders do not have a direct link to the organisation, but can
influence or be influenced by its activities.
Stakeholder

Need/ Expectation

Community at large

General public, if their lives are affected by an organisations

decisions.

Environmental
pressure groups

The organisation does not harm the external environment

Government

Economy needs (providing jobs & paying taxes)

Legislation needs (Health & safety) must be met.

Trade Unions

Taking an active part in the decision-making process.

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Stakeholder Conflict
An organisation can have many different stakeholders, all with different
needs. Inevitably, some of these stakeholder needs will come into conflict
with the needs of others. Some of the most common conflicts include:
Stakeholders

Conflict

Employees Vs Managers

Jobs/wages Vs bonus

Customers Vs Shareholders

Product quality/ service levels Vs

profits/ dividends

General public Vs Shareholders

Effect on the environment Vs

profit/dividends

Managers/ Shareholders

Growth Vs Independence

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Topics:
What is Accounting?
Financial Accounting Function
Users of Financial Statements

Role of IT in Accounting & Finance

Business Objectives
Stakeholders

Mendelows Matrix
Shareholder Value Added

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Mendelows Matrix
When there is a stakeholder conflict, an organisation will have to decide on the
most important stakeholder needs. Usually, this will be the needs of the most
dominant stakeholder (the one with the most power). Mendelows power- interest
matrix is a useful tool to prioritise such conflicting stakeholder interests.
Low

Level of Interest

High

Low

Minimal Effort

Keep Informed

High

Keep Satisfied

Key Players

Level of
Power

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Topics:
What is Accounting?
Financial Accounting Function
Users of Financial Statements

Role of IT in Accounting & Finance

Business Objectives
Stakeholders

Mendelows Matrix
Shareholder Value Added

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Shareholder Value Added

Shareholder value added (SVA) is company's value to shareholders, It is
taken in the absence of liabilities and capital costs.
SVA is important as it indicates company performance in a meaningful
manner to its shareholders.
The main aim of any company should be to increase shareholder
returns and not essentially to create value for the company as a whole.

Those seeking ever-higher shareholder value added believe that

management should make decisions for the company that caters to
shareholder interests first and foremost.

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Thank You

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