Accounting for Managers

MBA 533
Dr O. Muvingi
Mobile: +263 779965258 or +263 713229428
Email. o.muvingi@hotmail.co.uk
 Learning Objectives

▪ Explain the nature and roles of accounting and finance

▪ Identify the main users of financial information and discuss their needs
▪ Distinguish between financial accounting and management accounting
▪ Explain why an understanding of accounting and finance is likely to be relevant
to managers’ needs.

2
 What is Accounting- Chapter 1 Atrill and McLaney

❖ Accounting is concerned with collecting, analysing and communicating financial

information.
❖ The ultimate aim is to help those using this information to make more informed
decisions.
❖ The managers of businesses may need accounting information to decide whether to:
✓ develop new products or services
✓ increase or decrease the price or quantity of existing products or services;
✓ borrow money to help finance the business;
✓ increase or decrease the operating capacity of the business; and
✓ change the methods of purchasing, production or distribution.
❖Accounting is the medium of recording business transactions and it is considered as a
language of business.
 What is Accounting
▪ Accounting is a combination of various functions
▪ The business dictionary defines Accounting as:
“a systematic process of Identifying; Recording; Measuring; Classifying; Verifying;
summarizing; Interpreting; and communicating financial information”.
▪ This process is informed by Generally Accepted Accounting Practices (GAAP),
accounting principles; standards; laws and regulations and other factors.
▪ For Zimbabwean organisations:
▪ the process of accounting in profit making organisations, is informed by
International Financial Reporting Standards
▪ The process of accounting in not-for profit and public sector is informed by
International Public Sector Accounting Standards and other laws.
 Financial Accounting and Management Accounting:
Part 1 and 2 Atrill and McLaney

❖Accounting has two main strands – management accounting and financial

accounting
❖Management accounting seeks to meet the needs of the business’s managers.
❖Financial accounting is primarily concerned with meeting the needs of owners and
lenders but will also be useful to other external user groups.
❖These two strands of accounting differ in terms of the types of reports produced,
the level of reporting detail, the time orientation, the degree of regulation and the
range and quality of information provided.
 What is the difference between Financial Accounting
Management Accounting Financial Accounting
Nature of the Specific-purpose reports General purpose reports
reports produced
Level of detail Considerable detail to help managers with a Information is
particular operational decision. aggregated
Regulations Management accounting reports are for Subject to accounting
internal use only, there are no regulations regulations
from external sources
Reporting interval Managers are provided with certain reports Produced on an annual
on a daily, weekly or monthly basis basis, half yearly or
quarterly
 Financial Accounting and Management Accounting
Management Accounting
Time Reports provide information
orientation concerning future performance as
well as past performance.
Range and Reports contain information
quality of of both a financial and non-financial
information nature
Management Accounting may use
information that is less objective and
verifiable, but nevertheless provide
managers with the information they
need.
Financial Accounting
Reports are backward-looking. They
reflect the performance and position
of the business for the past period.
Reports concentrate on information
that can be quantified in monetary
terms.
Financial accounting places greater
emphasis on the use of objective,
verifiable evidence when preparing
reports
 Management accounting and financial accounting

❖ Why management accounting reports are not subject to the same regulations
imposed on financial accounting reports?
✓ Management accounting reports are produced exclusively for managers and
are for internal use only.
✓ Financial accounting reports, on the other hand, are for external publication.
✓ To protect external users, who depend on the quality of information
provided by the business, they are subject to regulation.
✓ The regulations vary from one jurisdiction to another
Main Users of Accounting Information
Main Users of Accounting Information
 Accounting Specialisations

❖ Financial Accounting
❖ Management Accounting
❖ Cost Accounting
❖ Tax Accounting
❖ Auditing
 The Conceptual Framework for Financial Reporting

▪ The revised International Accounting Standards Board (IASB) Conceptual

Framework was issued in March 2018.
▪ The IASB Framework provides the underlying rules, conventions and definitions
that underpin the preparation of all financial statements prepared under
International Financial Reporting Standards (IFRS).
❖Ensures standards developed within a conceptual framework
❖Provide guidance on areas where no standard exists
❖Aids process to improve existing standards
❖Ensures financial statements contain information that is useful to users
❖Helps prevent creative accounting
 The Conceptual Framework for Financial Reporting
Objective of financial reporting
❖The main objective of general purpose financial reports is to provide the financial
information about the reporting entity that is useful to existing and potential:
o Investors,
o Lenders, and
o Other creditors
to help them make various decisions (e.g. about trading with debt or equity
instruments of a reporting entity).
❖The decisions made by users will involve:
o Investment decisions
o Financing decisions
o Voting, or influencing management actions
 The Conceptual Framework for Financial Reporting

Objective of financial reporting

❑Chapter 1 describes more general purpose reports that should contain the following
information about the reporting entity:
❖Economic resources and claims (this refers to the financial position);
❖The changes in economic resources and claims resulting from entity’s
financial performance and from other events.
❑The users will be assessing the management’s stewardship of the entity alongside its
prospects for the future, which will require the following information:
❖Economic resources of the entity
❖Claims against the entity
❖Changes in the entity’s economic resources and claims.
❖Efficiency and effectiveness of management
 The Conceptual Framework for Financial Reporting

Objective of financial reporting

❑Chapter 1 places an emphasis on accrual accounting to reflect the financial
performance of an entity.
✓ It means that the events should be reflected in the reports in the periods when
the effects of transactions occur, regardless the related cash flows.
✓ However, the information about past cash flows is very important to assess
management’s ability to generate future cash flows.
 The Conceptual Framework for Financial Reporting

Chapter 2: Qualitative characteristics of useful financial

information

In this Chapter, the Framework describes 2 types of characteristics

for financial information to be useful:
❖Fundamental, and
❖Enhancing
 The Conceptual Framework for Financial Reporting

Qualitative characteristics – make information useful

❑Fundamental qualitative characteristics
❖Relevance – information that makes a difference to decisions made by users.
✓ Relevant information is that which is PREDICTIVE (of what may happen in
the future), CONFIRMATORY (of what has happened in the past), and
companies must have a policy as to what may or may not be MATERIAL.
❖Materiality – related to relevance
❖Faithful representation – must faithfully represent the substance of what it
represents and is therefore complete (helps understand and includes descriptions
and explanations), neutral (no bias, and supported by the exercise of prudence)
and free from error.
✓ Measurement uncertainty will impact the level of faithful representation.
 The Conceptual Framework for Financial Reporting
Qualitative characteristics – make information useful
❑Enhancing qualitative characteristics
❖Comparability – identify similarities/differences between entities and
year-on-year
❖Verifiability – if information is verifiable, one would expect two
professional accountants to agree that the numbers tie back to what is
really happening (the economic phenomena).
❖Timeliness – information is less useful the longer it takes to report it
❖Understandability – users have a reasonable knowledge of business and
activities
▪ A cost constraint applies in ensuing that the information is useful, in that the
benefit of obtaining the information should outweigh the cost of obtaining it.
 The Conceptual Framework for Financial Reporting
Chapter 3: Financial Statements and the
Reporting Entity
❑The financial statements should provide
the useful information about the reporting
entity:
❑In the statement of financial position, by
recognizing
❖Assets,
❖Liabilities,
❖Equity
 The Conceptual Framework for Financial Reporting
Chapter 3: Financial Statements and the
Reporting Entity

❑Income
❑The financial statements should provide the
❖Increase in asset
useful information about the reporting
entity: ❖Reduction in liability
❑In the statements of financial performance, ❑Expense
by recognizing ❖Reduction in asset
❖Income, and ❖Increase in liability
❖Expenses
 The Conceptual Framework for Financial Reporting

Chapter 3: Financial Statements and the Reporting Entity

❑The financial statements should provide the useful information about the reporting
entity:
❑In other statements, by presenting and disclosing information about
❖recognized and unrecognized assets, liabilities, equity, income and expenses, their
nature and associated risks;
❖Cash flows;
❖Contributions from and distributions to equity holders, and
❖Methods, assumptions, judgements used, and their changes.
 The Conceptual Framework for Financial Reporting

Chapter 3: Financial Statements and the Reporting Entity

Reporting Period
❖Financial statements are always prepared for a specified period of time, or the
reporting period.
❖Normally, the financial statements are prepared on the going concern assumption.
❖It means that an entity will continue to operate for the foreseeable future (usually
12 months after the reporting date).
 The Conceptual Framework for Financial Reporting

Chapter 3: Financial Statements and the Reporting Entity

❑This is a new concept introduced in 2018.
❖Although the term “reporting entity” has been used throughout IFRS for some time,
the Framework introduced it and “made it official” only in 2018.
❖Reporting entity is an entity who must or chooses to prepare the financial statements.
It can be:
✓ A single entity – for example, one company;
✓ A portion of an entity – for example, a division of one company;
✓ More than one entities – for example, a parent and its subsidiaries reporting as a
group.
 The Conceptual Framework for Financial Reporting

Chapter 3: Financial Statements and the Reporting Entity

❑There are a few types of financial statements:
❖Consolidated: a parent and subsidiaries report as a single reporting entity;
❖Unconsolidated: e.g., a parent alone provides reports, or
❖Combined: e.g., reporting entity comprises two or more entities not linked by
parent-subsidiary relationship.
 The Conceptual Framework for Financial Reporting

Chapter 4: Elements of the financial statements

There are five basic elements:
❑Asset = a present economic resource controlled by the entity as a result of past events.
❑Liability = a present obligation of the entity to transfer an economic resource as a
result of past events.
❑Equity = the residual interest in the assets of the entity after deducting all its liabilities.
❑Income = increases in assets or decreases in liabilities resulting in increases in equity,
other than contributions from equity holders.
❑Expenses = decreases in assets or increases in liabilities resulting in decreases in equity,
other than distributions to equity holders.
 The Conceptual Framework for Financial Reporting

Chapter 5: Recognition and derecognition

This chapter discusses the recognition and derecognition process.
Recognition
▪ Recognition – the process of including an item in the financial statements and is
appropriate if it results in relevant and faithful representation, provided that the cost
of inclusion does not outweigh the benefit.
Derecognition
▪ Derecognition means removal of an asset (loss of control) or liability(no
obligation)from the statement of financial position and normally it happens when the
item no longer meets the definition of an asset or a liability.
 The Conceptual Framework for Financial Reporting
Chapter 6: Measurement
❑Measurement means IN WHAT AMOUNT to recognize asset, liability, piece of
equity, income or expense in your financial statements.
❑Thus, you need to select the measurement basis, or the method of quantifying
monetary amount for elements in the financial statements.
❑The Framework discusses two basic measurement basis:
❖Historical cost – this measurement is based on the transaction price at the time of
recognition of the element;
❖Current value – it measures the element updated to reflect the conditions at the
measurement date. Here, several methods are included:
o Fair value;
o Value in use;
o Current cost.
 The Conceptual Framework for Financial Reporting

Chapter 6: Measurement
❑Historic cost
❖This has the advantage of being easily verifiable.
❑Current value
❖Fair value – the price at which an asset would be sold or a liability settled.
Sometimes known as an EXIT PRICE.
❖Current cost – the replacement cost of an asset in an equivalent condition.
Sometimes known as an ENTRY PRICE.
 The Conceptual Framework for Financial Reporting

Chapter 7: Presentation and disclosure

❑The main aim of presentation and disclosures is to provide an effective
communication tool in the financial statements.
❑Effective communication of information in the financial statements requires:
❖Focus on objectives and principles of presentation and disclosure, not on the
rules;
❖Group similar items and separate dissimilar items;
❖Aggregate information, but do not provide unnecessary detail or the opposite –
excessive aggregation to obscure the information.
❑The Framework discusses classification of assets, liabilities, equity, income and
expenses in a greater detail with describing offsetting, aggregation, distinguishing
between profit or loss and other comprehensive income and other related areas.
Why is an understanding of accounting is relevant to the needs of
managers
❑ The accounting/finance function within a business is a central part of its
management information system.
❑ On the basis of information provided by the system, managers make decisions
concerning the allocation of resources.
❑ These decisions may concern whether to:
▪ continue with certain business operations;
▪ invest in particular projects; or
▪ sell particular products.
Why is an understanding of accounting is relevant to the needs of
managers
❑ It is important, therefore, that all those who intend to work in a business should
have a fairly clear idea of certain important aspects of accounting and finance.
These aspects include:
❖ how financial reports should be read and interpreted;
❖ how financial plans are made;
❖ how investment decisions are made;
❖ how businesses are financed; and
❖ how costs are managed.