UNIT 03: INTRODUCTION TO MANAGERIAL FINANCE LESSON 01 UNIT - PowerPoint PPT Presentation

UNIT 03: INTRODUCTION TO MANAGERIAL FINANCE LESSON 01

UNIT LEARNING OUTCOMES Understand the role of accounting within an organisation  Be able to make decisions based on financial information  Understand the basic concepts of managerial accounting  Be able to prepare forecasts and budgets for small business 

OVERVIEW OF ACCOUNTING System for recording & reporting business transactions, in financial terms , to interested  parties who use this information as the basis for: Performance assessment  Decision making  Controlling 

PRIMARY PURPOSES OF ACCOUNTING To record financial transactions : cash received and paid out goods bought and sold, items bought  to use rather than to sell and so on. To classify and summarize: to differentiate the profit/ (losses) generated by the business and to  identify the amount of resources owned and owed by the business on a closing date of an accounting period. To communicate information : to identify the financial strengths and weaknesses of the business. 

USERS OF ACCOUNTING INFORMATION Owners/shareholders/investors  Banks/Financial institutions  Government agencies: inland revenue  Management  Employees  Trade contacts: suppliers 

QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION Attributes that make the information useful to users.  Understandability  Relevance  Reliability  Comparability 

QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION Understandability: Accounting information must be readily understandable by its users.  Complete: Information should not be missing any key information  Clear: user friendly presentation method (charts & graphics)  Organized: the readers should be able to easily cross reference the financial information (notes) 

QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION Relevance: information must be relevant to the needs of the users: the information should influence  the economic decisions of users. Predictive value: Financial information could be used to base predictions, forecasts and projections and so on.  Feedback value: Financial information has a feedback value when it can confirm or correct previous expectations.  Timeliness: Financial reporting must be timely and current for the users to make decisions. 

QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION Reliability: Financial information should have the ability to verified and used consistently by users  with the same results. Free biasness/ neutrality  Verifiability: Multiple and independent measures will generate same results  Faithful representation: presenting information indicating what actually happened during a particular accounting  period.

QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION Comparability : Information that is prepared using the same measurement techniques and reported in  a similar fashion is considered comparable information because this information is similar and can be judged side by side other similar financial information.

ACCOUNTING CONCEPTS Accounting concepts are considered as the basic rules, assumptions or conventions adopted in  preparation of accounts. Business entity concept  Dual aspect concept  Money measurement concept  Going concern concept  Accounting period concept  Accruals concept 

ACCOUNTING CONCEPTS Business entity concept : Business entity concept Accounting period concept : Identifies the   implies that business is distinct and separate from its necessity of dividing the indefinite future time period owners i.e. business and its activities are independent into shorter periods for the purpose of financial of its owner and their respective activities. statement preparation. Dual aspect concept : Every business transaction Accruals concept : Revenues and expenses relevant   requires recording in two different accounts: concept to the financial period must be taken into of double entry (debit & credit). consideration irrespective of the date of receipt or payment of cash. Money measurement concept : All business  transactions must be recorded in monetary terms to enable a common unit of measurement. Currency of the country. Going concern concept : Business will continue to  operate for the foreseeable future.

ELEMENTS OF FINANCIAL INFORMATION Assets acquired with the Assets : Resources used by a business to derive revenue in future. intention of converting them into  cash during the normal business operations Probable future economic benefits  Current assets Controlled by the business  Trade receivables Results of a past transaction  Cash/bank Inventory Assets Assets acquired for relatively long periods for carrying on business Noncurrent assets Machinery Equipment Furniture Vehicles Property

ELEMENTS OF FINANCIAL INFORMATION Liabilities which are Liabilities: Entity’s obligation to transfer economic benefits as a result of past transaction  payable within a year or events. from the date of balance sheet Probable future economic sacrifice  Current liabilities Obliged to pay on demand Trade payables  Bank overdraft Result of a past transaction  Bills Short term loans Liabilities Liabilities which do not become due for payment in one year Noncurrent liabilities Long term loans

ELEMENTS OF FINANCIAL INFORMATION Capital: A special kind of Revenues: A company’s actual Expenses: Expenses are the    liability that exists in a business. or promised cash inflows benefits that are consumed or resulting from a completed sale used up in the process of Residue interest of the owners.  of the company’s products or the earning revenue. satisfactory delivery of its services.

BOOK KEEPING PROCESS Book keeping process is the recording of monetary transactions appropriately classified in the financial records of an entity, either by manual  means or otherwise. • Should be classified as a business transaction: • Result of a management decision, can be measured in monetary terms, financial position of the business will change Event • Evidence of proof of a transaction • Invoices, receipts, cheque books, credit notes, debit notes, purchase orders, payment vouchers Source document • To summarise the information on source documents • Sales journal (credit sales), purchase journal (credit purchases), cash book (all cash transactions), general journal (for different transactions which do not fall within the above books) Books of prime entry • Summarises the financial affairs of the business and categorise into assets, liabilities, capital, income and expenditure Nominal ledger • All listing of accounts to check the arithmetical accuracy Trial balance • Final summary of the information GPFR

BOOK KEEPING PROCESS: A CREDIT SALE

GENERAL PURPOSE FINANCIAL REPORTS Statement of Statement of Statement of Statement of     Financial Position Comprehensive Changes in Equity Cashflow Income A statement of assets and Statement summarizing Statement recording the liabilities of a business at the opening and closing amount of cash and cash Statement indicating in a given moment in time. positions of shareholder’s equivalents entering and detail how the profit (or funds. leaving an organisation. loss) of a period has been made)

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