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Accounting and Finance For Managers - MBA CH1
Accounting and Finance For Managers - MBA CH1
(BADM682)
Credit Hrs: 2 Contact Hrs: 3
Pre-requisite: None
Accounting
“links” decision
makers with Accounting
Economic
economic
activities information
activities ¾ and
with the results of
their decisions.
Actions
(decisions) Decision
makers
Accountability: Definition
Accountability: The capacity and willingness to give
explanations for conduct, stating how one has discharged one’s
responsibilities, an explaining of conduct with a credible story
of what happened, and a calculation and balancing of
competing obligations, including moral ones.
Accountability is:
more total and insistent ... [it] ranges more freely over space
and time, focusing as much on future potential as past
accomplishment
Accountability: Definition
Accounting is a collection of systems and processes used to record, report and
interpret business transactions.
Accounting provides an account – an explanation or report in financial terms – about
the transactions of an organization. It enables managers to satisfy the stakeholders in
the organization (owners, government, financiers, suppliers, customers, employees
etc.) that they have acted in the best interests of stakeholders rather than themselves.
This is the notion of accountability to others, a result of the stewardship function of
managers that takes place through the process of accounting. Stewardship is an
important concept because in all but very small businesses, the owners of businesses are
not the same as the managers.
This separation of ownership from control makes accounting particularly influential
due to the emphasis given to increasing shareholder wealth (or shareholder
value). Accountability results in the production of financial statements, primarily
for those interested parties who are external to the business. This function is called
financial accounting.
Cont…
Accounting is traditionally seen as fulfilling three
functions:
• Scorekeeping: capturing, recording, summarizing and
reporting financial performance.
• Attention-directing: drawing the attention of
managers to, and assisting in the interpretation of,
business performance, particularly in terms of the
comparison between actual and planned
performance.
Problem-solving: identifying the best choice from a
range of alternative actions.
History and development of
accounting record
Ancient accounting record:
Using system called “stewardship”. The document
facilitate the owner to control and identify their asset,
which is under the custody of the steward
Renaissance in Italy:
Accounting technique using double entry book-keeping
was introduced. A system to ensure that financial
information was recorded efficiently and accurately.
History and development of
accounting record
Industrial Age:
In 19th century the emergence of large corporations, separation of the owners from
the managers, makes the businesses reports became more complex. Needs to prepare
financial statements to the shareholders.
Post Industrial Age:
Accounting is a need for decision making – information element.
The different between accounting
and bookkeeping:
Accounting:
“a process of identifying, recording, classifying and summarizing in a significant
manner and in terms of money, transactions and events which are, in part at
least, of a financial character, and interpreting the result thereof” (AICPA, 1961)
Bookkeeping:
“ only involves activities of collecting and recording financial data”
USERS OF
FINANCIALINFORMATION
Internal Users:
Managers who plan, organize and run the business
e.g. production supervisors, marketing
managers, and directors
Owners of the business
USERS OF FINANCIAL
INFORMATION continued
External Users:
Resource providers
e.g. investors, employees, creditors
Recipients of goods and services
e.g. customers, beneficiaries
Reviewers
e.g. regulatory
agencies, media, governments, trade unions, special interest groups
Accounting policies and
explanatory notes
Important additional notes to define statement prepared
e.g. accounting policies
Any additional information that is not shown in the financial statement will effect
the fairly presentation
Language of Business
Decision making tool
Create accountability and control
As an Information system
DECISION TOOLKIT
Are the business operations profitable?
Does the business rely mainly on debt or equity to
finance its assets?
Does the business generate sufficient cash from
operations to fund its investing activities?
Is the company using its assets effectively?
Is the company maintaining an adequate margin
between sales and expenses?
Can the company meet its short-term obligations?
Can the company meet its long-term obligations?
MANAGEMENT ACCOUNTNG
DEFINED
Management accounting is the presentation of
accounting information in such a way so as to
assist management in the creation of policy
and in the day-to-day operations of an
undertaking.
MANAGEMENT ACCOUNTNG
Objectives
To assist the management in promoting efficiency.
To interpret financial statements to enable the
management to formulate future plans.
To arrange for the systematic allocation of
responsibility for implementation of plants and
budgets.
To analyze monetary and non monetary transactions.
To compare the actual performance with plan &
identifying deviations and their causes.
To prepare budget covering all functions of business.
Need and importance of
management accounting
Creates harmony between the management & employees.
The management aims to control the cost of production and at the same time
increase efficiency of employers.
The separation of ownership from control and the divisionalized form of business
includes:
Emergence of capital markets and value-based management- tools for
measuring shareholder value
The link between shareholder value, strategy and accounting
the shift towards a decentralized, multidivisional business structure and the
measurement and management of divisional (i.e. business unit)
Capital and product market
What is debt?
funds that companies raise by borrowings from financiers
Both of these (equity and debt) constitute the capital employed in the business.
.
2000
X
FINANCIAL STATEMENTS
Definition: FRS 101
Income Statement:
Reports revenues less expenses for a particular period of time
Balance Sheet:
Definition:
Reports assets and claims to those assets atFRS 101
a particular point in time
A business
entity is
Vagabond separate from
Travel the personal
Agency
affairs of its
owner.
A Starting Point: Statement of Financial
Position
Vagabond Travel Agency
Balance Sheet
December 31, 2002
Assets Liabilities & Owners' Equity
Cash $ 22,500 Liabilities:
Notes receivable 10,000 Notes payable $ 41,000
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities $ 80,000
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total $ 300,000 Total $ 300,000
Assets
Vagabond Travel Agency
Balance Sheet
December 31, 2002
Assets Liabilities & Owners' Equity
Cash Assets are
$ 22,500 Liabilities:
Notes receivable 10,000 economic resources
Notes payable $ 41,000
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 that are owned by
Salaries payable 3,000
Land
Building
100,000
the business and
Total liabilities
90,000 Owners' Equity:
$ 80,000
Cost Principle
These accounting
Stable-Dollar principles support Going-Concern
Assumption cost as the basis Assumption
for asset valuation.
Objectivity
Principle
The Cost (Historical Cost) Principle
Accounting cost concept states that all assets are
recorded in the books of accounts at their purchase
price, which includes cost of acquisition,
transportation and installation and not at its market
price, i.e. original cost. It means that fixed assets
like building, plant and machinery, furniture, etc are
recorded in the books of accounts at a price paid for
them.
This is the figure that appears on the source
document for the transaction in almost
all cases.
The Going / Continuing Concern
ConceptThis concept states that a business firm will
continue to carry on its activities for an indefinite
period of time, i.e. every business entity has
continuity of life. Thus, it will not be dissolved in
the near future.
This is an important assumption of accounting, as
it provides a basis for showing the value of assets
in the balance sheet.
In this basis, assets are recorded based on their
original cost and not on market value. Assets are
assumed to be used for an indefinite period of
time and not intended to be sold immediately.
The Objectivity Principle
The objectivity principle states that
accounting will be recorded on the basis of
objective evidence, i.e. different people
looking at the evidence will arrive at the
same values for the transaction, and
accounting entries will be based on fact and
not on personal opinion or feelings.
•The source document for a transaction is
almost always the best objective evidence
available.
Stable-Dollar Assumption
Changes in Owners’
Equity
• Owners’ • Payments
Investments to Owners
• Business • Business
Earnings Losses
The Accounting Equation
Assets
Assets ==Vagabond
Liabilities ++ Agency
Travel
Liabilities Owners’
Owners’Equity
Equity
Balance Sheet
December 31, 2002
$300,000
Assets=
$300,000 = $80,000
$80,000 +Liabilities
+ $220,000
$220,000
& Owners' Equity
Cash $ 22,500 Liabilities:
Notes receivable 10,000 Notes payable $ 41,000
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities $ 80,000
Building 90,000 Owners' Equity
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total $ 300,000 Total $ 300,000
Let’s analyze
some
transactions for
JJ’s Lawn Care
Service.
On May 1, 2003, Jill Jones and her family
invested $8,000 in JJ’s Lawn Care Service and
received 800 shares of stock.
JJ's Lawn Care Service
Balance Sheet
May 1, 2003
Assets Owners' Equity
Cash $ 8,000 Capital Stock $ 8,000
Investments
Investments by by and
and payments
payments to to the
the owners
owners
are
are not
not included
included on
on the
the Income
Income Statement.
Statement.
JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2003
Cash flows from operating activities:
Cash received from revenue transactions $ 750
Cash paid for expenses (50)
Net cash provided by operating activities $ 700
Cash flows from investing activities:
Purchase of lawn mower $ (2,500)
Purchase of truck (2,000)
Collection for sale of repair parts 75
Payment for repair parts (150)
Net cash used by investing activities (4,575)
Cash flows from financing activities:
Investment by owners 8,000
Increase in cash for month $ 4,125
Cash balance, May 1, 2003 -
Cash balance, May 31, 2003 $ 4,125
JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2003
Cash flows from operating activities:
Cash received from revenue transactions $ 750
Cash paid for expenses (50)
Net cash provided by operating activities $ 700
Cash flows from investing activities:
Operating
Operating
Purchase activities
activities include
of lawn mower include$ the
the cash
(2,500)cash
effects
Purchase of truckof revenue and expense
effects of revenue and (2,000)
expense
Collection for sale of repair parts 75
transactions.
transactions.
Payment for repair parts (150)
Net cash used by investing activities (4,575)
Cash flows from financing activities:
Investment by owners 8,000
Increase in cash for month $ 4,125
Cash balance, May 1, 2003 -
Cash balance, May 31, 2003 $ 4,125
JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2003
Cash flows from operating activities:
Cash received from revenue transactions $ 750
Cash paid for expenses (50)
Net cash provided by operating activities $ 700
Cash flows from investing activities:
Purchase of lawn mower $ (2,500)
Purchase of truck (2,000)
Collection for sale of repair parts 75
Payment for repair parts (150)
Net cash used by investing activities (4,575)
Cash flows from financing activities:
Investing
Investing
Investment activities
activities include
by owners include the
the cash
cash 8,000
effects
Increase
effects of
in cash for
of purchasing
month
purchasing and
and selling
selling$ 4,125
Cash balance, May 1, 2003 -
Cash balance, May 31, 2003 assets.
assets. $ 4,125
JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2003
Cash flows from operating activities:
Cash received from revenue transactions $ 750
Cash paid for expenses (50)
Net cash provided by operating activities $ 700
Cash flows from investing activities:
Purchase of lawn mower $ (2,500)
Financing
of truck activities
Financing
Purchase activities include
include the
the cash
(2,000)cash
effects
Collection
effects of
for
of transactions
sale of repair parts with the owners
transactions with the 75
owners
Payment for repair parts (150)
and
and creditors.
Net cash used by investing creditors.
activities (4,575)
Cash flows from financing activities:
Investment by owners 8,000
Increase in cash for month $ 4,125
Cash balance, May 1, 2003 -
Cash balance, May 31, 2003 $ 4,125
Relationships Among Financial
Statements
Beginning End of
of period Time period
Balance Balance
Sheet Sheet
Income Statement
Statement of Cash Flows
Forms of Business Organizations
Sole
Sole
Proprietorship Partnership
Partnership Corporation
Corporation
Proprietorship
Reporting Ownership Equity in the
Balance Sheet
Sole
Sole
Ow ner's equity:
Proprietorship
Proprietorship Jill Jones, capital $ 8,000
Partners' equity
Jill Jones, capital $ 4,000
Partnership
Partnership
Bill Jones, capital 4,000
Total partners' equity $ 8,000
Owners' equity
Capital stock $ 7,000
Corporation
Corporation
Retained earnings 1,000
Total stockholders' equity $ 8,000
The Use of Financial Statements by
Outsiders
Two
Two concerns:
concerns:
Creditors Solvency
Solvency
Profitability
Profitability
Investors
The Need for Adequate Disclosure
Thank You