Session 1 - Exercises

1.8 Differentiate between financial and management accounting. Give an

example of how management accounting reports would be incorporated
into financial accounting reports.

In differentiating between financial accounting and management accounting it is

important to consider the users of financial information — both internal and external
users. Financial accountants prepare and report information for external users (for
example prospective investors or the Inland Revenue Department) and as such are
subjected to regulation from MFRS, the Companies Act 2016 and in some cases the
Bursa through their Listing Rules. Management accountants are concerned with the
effective use of an entity’s resources, and in so doing assist the manager/s (i.e.
internal users) of the entity in achieving their goal of enhancing customer and
shareholder value. Therefore the management reports generated need to be up to
date to be effective. Regulation in management accounting is much less formal
and in some areas rules are basically non-existent. Ultimately there will be
interaction between the financing accounting and management accounting areas.
The information provided by management accountants will provide information for
internal users that will be reflected in the financial reports used by the external users.

1.9 Describe how accounting information helps shareholders and lenders to

make decisions concerning the operations and performance of the entity.
Users of accounting information (both internal and external) require accounting
information to assist them in the decision making process. External users such as
investors, employees, banks, suppliers, government agencies (e.g. IRD) all have
their own specific information needs. A potential investor will require past profits
and future profit projections, as well as future growth prospects, to determine if the
entity is a good investment proposition or not. Lenders will be seeking details of the
level of risk it is exposing itself to by lending money to the entity plus the prospects of
the entity repaying its’ debt.

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3.5 You are a friend of Lucy Lu who is thinking about starting a business to
sell her handmade quilts. Advise Lucy on the four factors that should be
considered before deciding on what form of business structure to
operate under.

Four factors that one should consider before deciding on what form of business
structure to operate under:

(i) Whether the owner will be the only contributor of capital to the entity;

(ii) The degree of risk that the owner(s) are willing to take with the entity

(i.e.) whether the entity should have limited or unlimited liability;

(iii) The potential for growth of the entity in the future;

(iv) Issues of taxation i.e. sole trader/partnership forms do not pay tax on the
entity’s profits. The owner’s will include their share of the entity profit in their
individual taxation returns.

2.28 Explain the following:

a) triple bottom line reporting;

Triple bottom line reporting refers to the economic, social and environmental
performance of a company. Elkington proposes that a company’s long term viability
is a function of how well it can balance the three areas. The concept supports the
view that companies have a duty of care to society at large. The movement is
developing performance measures to assist the analysis of social and environmental
performance.
b) corporate governance
Corporate governance refers to the direction, control and management of an
enterprise.
c) the relationship of stakeholders to corporate governance.
There is much debate in business literature as to whether an organisation’s sole
responsibility is to its shareholders, or whether there is a wider duty of care for
organisations to identify all the values and principles at stake. A theory called
‘stakeholder theory’ proposes that the purpose of the firm ‘is to serve as a vehicle
for coordinating stakeholder interests’, not the narrow view that the purpose is to
maximise shareholder wealth. After all, the firm is an artificial entity and the
shareholder purpose of the firm is simply based on the shareholder’s right to
property. Proponents of stakeholder theory view the purpose of a firm as far greater.
It is related to corporate governance because corporate governance is about the
direction, control and management of organisations. Therefore, the management of
the nation’s capital and operations rests on the philosophy of the company directors

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that have the responsibility to govern enterprises. How and to what extent they
consider all stakeholder views will have an impact on society in the long term.