FINANCIAL ACCOUNTING FOR MANAGERS- TRIM 1

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the map
 The Changing Business Environment

A more competitive
environment emphasizing:
 Higher quality products
 Lower prices and costs
 Global competition Business environment
changes in the past
 Meeting and anticipating
customer needs
twenty years
 Planning and Control Cycle
Formulating long- and Begin
short-term plans
(Planning)

Comparing actual to Implementing

planned performance Decision plans (Directing and
(Controlling) Making Motivating)

Measuring
performance
(Controlling)
 Comparison of Financial and Managerial Accounting

Financial Managerial
Accounting Accounting
1. Users External persons who Managers who plan for
make financial decisions and control an organization

2. Time focus Historical perspective Future emphasis

3. Emphasis Objectivity and Relevance

Verifiability for planning and control

4. Importance Precision of information Timeliness of information

5. Subject focus Summarized data for Detailed segment reports
the whole organization of an organization

6. Requirements Must follow GAAP Need not follow GAAP

and required for and no mandatory use
external reports
 Expanding Role of Managerial Accounting

Increasing complexity and

size of organizations
Regulatory
environment
Factors that
Increased
increase the need for
emphasis
managerial accounting
on quality
information
World-wide
competition
Rapid development and
implementation of technology
 Organizational Structure
An
Anorganization
organizationisisaagroup
groupofofpeople
people
united
unitedfor
foraacommon
commonpurpose.
purpose.

C o r p o ra te O rg a n iz a tio n C h a rt
B o a r d o f D ir e c t o r s

P r e s id e n t

P u r c h a s in g P e rs o n n e l V ic e P r e s id e n t C h ie f F in a n c ia l
O p e r a t io n s O f f ic e r

T re a s u re r C o n t r o lle r
 Decentralization
Decentralization
Decentralization isis the
thedelegation
delegation of
of decision-making
decision-making
authority
authority throughout
throughout an
an organization.
organization.

C o r p o ra te O rg a n iz a tio n C h a rt
De
t i on cen
l i za g B o a r d o f D ir e c t o r s de
cis traliz
t r a k i n
e n a i on a ti
ec – m –m on
D io n P r e s id e n t ak
c i s in g
de
P u r c h a s in g P e rs o n n e l V ic e P r e s id e n t C h ie f F in a n c ia l
O p e r a t io n s O f f ic e r

T re a s u re r C o n t r o lle r
 The Controller

The
Thechief
chiefaccountant
accountantin
inan
anorganization
organizationwith
withresponsibility
responsibilityfor:
for:
–– Financial
Financialplanning
planningand
andanalysis.
analysis.
–– Cost
Costcontrol.
control.
–– Financial
Financialreporting.
reporting.
–– Accounting
Accountinginformation
informationsystems.
systems.
 The Need for Accounting

Managers, investors, and other internal groups

want the answers to two important questions:

How well did

the organization
perform?
Where does
the organization
stand?
 The Need for Accounting

Accountants answer these questions

with three major financial statements:

Income Balance
statement sheet

Statement of
cash flows
 The Need for Accounting

A transaction is any event that affects the

financial position of an organization
and requires recording.
 Balance Sheet

The balance sheet (also called statement of

financial position or statement of financial
condition) is a snapshot of the financial
status of an organization at a point in time.
 Balance Sheet

Assets are economic resources that

are expected to benefit future
activities of the organization.

Liabilities are the entity’s economic

obligations to nonowners.

Owners’ equity is the excess

of the assets over the liabilities.
 Balance Sheet

The owners’ equity of a corporation

is called shareholders’ equity.

Shareholders’ equity

Paid-in Retained
capital earnings
King Hardware Transactions

Initial investment by owners: 100,000 cash

Acquisition of inventory: 75,000 cash

Acquisition of inventory on
open account: 35,000

Merchandise costing 100,000 was

sold on open account for 120,000.
King Hardware Transactions

Cash collections of accounts receivable: 15,000

Cash payments of accounts payable: 20,000

On March 1, paid 3,000 cash for store rent for

March, April, and May. Rent is 1,000 per month.
Revenues and Expenses

Revenues are increases in ownership

claims arising from the delivery
of goods or services.

Expenses are decreases in ownership

claims arising from delivering goods
or services or using up assets.
Relationship Between Balance Sheet
and Income Statement

The income statement measures the

performance of an organization by
matching its accomplishments
(revenue from customers, which is
usually called sales) and its efforts
(cost of goods sold and other expenses.)
The Analytical Power of the
Balance Sheet Equation

The balance sheet equation can highlight the link

between the income statement and balance sheet.

Assets (A) = Liabilities (L) + Stockholders’ equity (SE)

A = L + Paid-in capital + Retained income

A = L + Paid-in capital + Revenue – Expenses

Accrual Basis and Cash Basis

The accrual basis of accounting

recognizes revenues and expenses
when they occur regardless of when
cash is received or disbursed.

The cash basis of accounting recognizes

revenue and expense when cash is
received and disbursed.
Accrual Basis and Cash Basis

The major deficiency of the cash basis

of accounting is that it is incomplete.

It fails to match efforts and accomplishments

in a manner that properly measures economic
performance and financial position.
 Users of financial statements

Employees
Employees
Shareholders
Shareholders Tradecreditors
Trade creditors

Government
Government Management
Management Customers
Customers

Loanproviders
Loan providers Public
Public
Potential
Potential
Investors
Investors
 Basic Concepts
1. Money measurement.
2. Entity.
3. Going concern.
4. Cost.
5. Dual aspect.
6. Accounting period.
7. Conservatism.
8. Realization.
9. Matching.
10. Consistency.
11. Materiality.
 Steps of the accounting cycle
1. Journal entries to record transactions and events

2. Post journal entries to ledger

3. Prepare unadjusted trial balance to ensure that debits =

credits

4. Prepare and post adjusting entries to update accounts, e. g.

 proportion of assets consumed (insurance, equipment)
 expenses incurred but not yet invoiced (interest,
purchases, salaries, etc.)
 revenues earned but not yet recorded (interest,
investment)
 Steps of the accounting cycle (cont’d)

5. Prepare adjusted trial balance

6. Prepare income statement

7. Prepare balance sheet and cash flow statement

Profit and Loss Account - Flow
 Profit and Loss Account
Consolidated Profit & Loss Account for the year ended 2003 2002 2001

Weeks 52 52 52

Currency £ million £ million £ million

Turnover 7688.0 8340.0 9278.0

Cost of sales -7263.0 -8291.0 -8757.0

Gross Profit 425.0 49.0 521.0

Operating Expenses -130.0 -137.0 -77.0

Operating Profit 295.0 -88.0 444.0

Other costs/income 95.0 166.0 -68.0

Profit before interest and taxation 390.0 78.0 376.0

Net interest receivable (payable) -255.0 -278.0 -226.0

Profit on ordinary activities before taxation 135.0 -200.0 150.0

Tax on profit on ordinary activities -50.0 -71.0 -69.0

Profit on ordinary activities after taxation 85.0 -129.0 81.0

Equity minority interests -13.0 -13.0 -14.0

Profit for the financial period 72.0 -142.0 67.0

Dividends 0.0 -193.0

Retained profit 72.0 -142.0 -126.0

Balance Sheet - Snapshot
 Balance Sheet – Part 1
Consolidated Balance Sheet for the year ended 2003 2002 2001

Weeks 52 52 52

Currency £ million £ million £ million

Fixed assets

Intangible Assets 164.0 105.0 60.0

Tangible Assets 9487.0 10509.0 10662.0

Investments 524.0 489.0 426.0

Total Fixed Assets 10175.0 11103.0 11148.0

Current assets

Stock 87.0 109.0 170.0

Debtors due within one year 986.0 1231.0 1444.0

Short-term investments 1430.0 1155.0 865.0

Cash at bank and in hand 222.0 64.0 71.0

Total Current Assets 2725.0 2559.0 2550.0

 Balance Sheet – Part 2

Creditors: Amounts falling due within one year -2904.0 -3201.0 -3308.0

Net Current Assets (liabilities) -179.0 -642.0 -758.0

Total assets less current liabilities 9996.0 10461.0 10390.0

Creditors: Amounts falling due after more than one year -6553.0 -7097.0 -6901.0

Provisions for liabilities and charges -1169.0 -1157.0 -1164.0

Net assets 2274.0 2207.0 2325.0

Capital and reserves

Called-up share capital 271.0 271.0 271.0

Share premium 788.0 788.0 788.0

Other reserves 270.0 270.0 290.0

Profit and loss account 729.0 687.0 772.0

Equit shareholders' funds 2058.0 2016.0 2121.0

Minority interests 216.0 191.0 204.0

Total capital employed 2274.0 2207.0 2325.0

 Accounting regulation
• Types of regulatory body:

– Government

– Stock exchange

– Private sector body

– Professional accountants

– Specialist industry organizations

• Usually separate rules for banks and insurance companies.

 International bodies
• International Accounting Standards Board (IASB)

– Accepted as an international source of best practice

– Issues the International Financial Reporting Standards (IFRS)

• International Organization of Securities Commissions (IOSCO)

– Represents the world’s stock exchange regulators
– Strives for a single, uniform set of accounting standards worldwide

• Intergovernmental Working Group of Experts on International Standards of

Accounting and Reporting (ISAR)
– Under the auspices of the UN Conference on Trade and Development (UNCTAD)
– Commissions research reports into current accounting problems

• International Federation of Accountants (IFAC)

– International representative of the accounting profession
TABLE 4.4
NATIONAL AND INTERNATIONAL ACCOUNTING
ORGANISATIONS OPERATING IN NORTH AMERICA
NAME DESIGNATION PRIME MANDATE(S) LOCATION
American Institute of Certified CPA Auditing, management United States, some
Public Accountants (AICPA) accounting Canadian
provinces
Institute of Management CMA Management United States
Accountants (IMA) accounting
Canadian Institute of Chartered CA Auditing, management Canada
Accountants (CICA) accounting
Society of Management CMA Management Canada
Accountants of Canada (SMAC) accounting
Certified General Accountants CGA Management accounting, Canada,
Association of Canada (CGAAC) auditing some provinces
 Criteria used by the FASB to make decisions

Conceptual Framework, augmented by Jonas and Blanchet (Accounting

Horizons, September 2000)

Decision usefulness Clarity

Comparability (Consistency)
Relevance  Reliability

Timeliness
Neutrality
Feedback value
Verifiability

Predictive value Representational

Measurement faithfulness
uncertainty
Disaggregated
Earnings Information
Persistence Completeness
 Value Chain

Research & Production or

Design
Development Purchases

Customer
Marketing Distribution
Services
 Financial Statements for
Service Companies

• There is no inventory and thus no inventoriable costs.

• The income statement does not include cost of goods
sold.

Revenues – Expenses = Operating income

 Financial Statements for
Merchandising Companies
BALANCE SHEET INCOME STATEMENT
Inventoriable Sales Revenue
Costs
when deduct
Purchases of sales
occur Cost of
Inventory plus Inventory
Goods Sold
Freight-In
equals Gross Margin
deduct
Period Operating
Costs Expenses
equals Operating Income
 Financial Statements for
Manufacturing Companies
BALANCE SHEET INCOME STATEMENT
Inventoriable
Costs Sales Revenue
when deduct
Materials Finished sales
Inventory occur Cost of
Goods
Goods Sold
Inventory
equals Gross Margin
deduct
Work in
Period Operating
Process Costs Expenses
Inventory equals Operating Income
thanx