Introduction to

Financial Accounting
& Reporting
The only difference between an optimist
and a pessimist is that the latter usually
has more information!
 The Context of Accounting & Financial
Management
 The main aims of accounting and financial reporting
are:

 1. To derive an annual profit (or loss) in the ‘Income

Statement’ and presenting the assets and liabilities in
the Statement of Financial Position and...

 2. To keep control of the day-to-day monetary

transactions receipts and payments so that money owed
by customers and money owing to suppliers can be
controlled.
Session 1 - Learning Objectives

 understand the context and role of accounting &

linkages with finance
 identify the main users of accounting information
 understand the nature of financial decision making
 distinguish between financial accounting and
management accounting
 understand what makes accounting information useful
and the limitations
 Notes
 3. International Financial Reporting
Standards.

 Sometimes you will come across different

terminolgy in real accounts and in the press.
Why study accounting?
Knowledge of accounting techniques
and concepts will help you.....

A) as a manager within an organisation

 i) understand and use financial information

intelligently to:

 manage operations and

 make judgments and decisions about a third
party organisations (suppliers, as business
partners, etc.)
A) as a manager within an organisation

 ii) understand how accounting information

about value and performance is understood
by people outside the company

 iii) understand and interpret financial

information within a strategic context and
make decisions about investment in
corporate undertakings
 B) as a stakeholder in an organisation

 Is your salary, career, shares, etc., safe?

 Plus……..

 C) Every member of the management team

is expected to be multi-disciplined

Can you see the ‘big picture’

 Semester 2
capital structure financial
sources of finance management short term decision making
mang't of working capital management long term decision making
accounting cost classification
full cost pricing
budgeting

Subject
Financialoverview
Framework
29/04/2002 - v6

Position Statements
Income Statements
financial accounting
financial & reporting
absolute numbers cash flow statements
evaluation
ratio analysis accounting concepts
types of firm

45
 Question - Why isn’t accounting straightforward?

It’s about
people!!

Because…..

Accounting is socially constructed!

Not in handout
Not in handout
Exercise 1 - Pictures of organisations
 Choose an organisation you are familiar with
and briefly explain it to a friend? E.g. Tesco, or
ASDA, Virgin Atlantic Airways, maybe
Loughborough University?
Successful or under pressure?
UK or global?
Full service or now also ‘Jack’s
Ethical? Products/services/accounting?
Not in handout
Not in handout
Not in handout
Not in handout
 Views of Loughborough?
Loughborough
University of the Year 2018/19, The Times)

How were the base figures derived?

Did you look at the accounts?

Not in handout
 Pictures of business (4Ps)

 The Physical Picture

 The Product Picture

 The People Picture

Whose viewpoint might we wish to represent?

 And…...
 The Phinancial Picture

 This is the company in terms of money.

 How much it is worth?
 How much profit it makes?
 How much cash it generates?
 And…...
 The Financial Picture

 This is the company in terms of money.

 How much it is worth?
 How much profit it makes?
 How much cash it generates?

Question - Why is money the common denominator?

Question - Why is money the
common denominator?

 It is the primary measure for stakeholders

in most organisations

 It aligns with shareholders’ and lenders

expectations

Question – What other views might there be?

 Other pictures of business
Use of IT & information systems.
E.g. Airline ticketing system Processes special to the firm – how
we make things! E.g. Rolls Royce.

What our products

They way we are organised are used for. Strength
and the culture. E.g. SAS. of our order book.
E.g. Rolls Royce.
Not in handout
 A bowl of
vegetables?

Not in handout
 F. W. Woolworth

Opened last
week

No old stock!!

Trading for 50
years on the
same site!!

Not in handout
 What is the accountant’s role?
 To convert the other pictures into money.

 For example, IT systems, Processes, Premises,

Organisation structures, Customers, People
skills, etc.

 But, we should always ask whether these things

be faithfully represented as money?
 Accounting as an information system
What do we need? Enter data into the Cost per thousand Compile report -
system. filled compared to show graph to
Invoices from last month and management
suppliers e.g. Cost of bottles budget

Information Information Information Information

identification recording analysis reporting
 Accounting is….

 1. Identifying information.
 What information do we need?
 Where is it?

 How do we capture it?

 2. Recording financial data

 resulting from monetary transactions
 Accounting is….
 3. Analysing the output.

 Interpreting and translating the other 3 pictures

into money.

 4. Information reporting

 Summarising and presenting the data as financial

information in the most appropriate format.
Example of need for subjective
judgement

How much is the computer worth?

If it cost £10 million 2 years ago....

 The supplier said 20 years.

 The computer manager, said 10 years.
 The Managing Director assumed of 7 years.
 The accountant says 4 years!
 The Marketing Department says it’s worthless as they
are planning to keep up with a competitor’s system
costing £30 million.
Preferring the accountant’s view
If it cost £10 million 2 years ago....

 It is now halfway through it’s useful life (2 out of 4 years)

and is therefore worth:

 50% of £10m = £5m

 Note for later topics: £2.5m of depreciation charge has

been expensed when arriving at profit in both years 1
and 2.
Tea break
Exercise – what is the purpose of
accounting
 Exercise – what is the purpose of
accounting
 To express all the different views in pounds and
pennies so as to present the financial picture in an
appropriate, meaningful and clear way.

Roman abacus Inca Quipu

Finance and Accounting -
Definitions
 Finance
 Finance is the impact of money on the business.
 The science of managing money?

 Process of using money to:

 produce and sell goods to earn profit,

 pay a return on the original investment and..
 Reinvest (plough back) money into the business.
1. Finance in this module means:
 Is the impact of money on the business

 the process of deciding on what is an appropriate

capital structure for an organisation and then…

 securing appropriate funds in terms of;

 the time the funds are required for.
 against the security required
 at the lowest possible cost.

A financier is a pawn broker with imagination!

Arthur Wing Penero
 2. Accounting
 Is the preparation of financial information

 comprised of financial and management

accounting.

 ‘financial reporting’ when referring to

presenting information to external parties
 3. Stewardship
 Responsibility for preserving and accounting for
assets entrusted to a manager by their owner.
 Terminology warning!
Finance also means….

 The whole role of the accounting and finance

function/activities within an organisation.

Why is this?

 Because that’s the way it is!

Public perception - finance v. accounting?

Not in hand out

 Users of financial information

 Exercise 3
 Make a list of the people you think would be
interested in the financial information.

 Suggest the nature of their interest.

 What is the concern of each group?

Type of user Interest in financial reports?

 Main users of financial information

Owners Customers Competitors

Employees and
Managers their
representatives
Business
organisation
Not really within the
Lenders company although Government
employed by it – info.
supplied would be as
external users
Investment Community
Suppliers representatives
analysis
 Recap - Who’s interested in what?

suppliers &
customers

Analysts & competitors

Directors
&
managers

Gov’t & general

public

Employees Owners &

& unions lenders
b) What is the concern of each group?

 Answer
 Directors: …………………………………………………………………………………………
 ……………………………………………………………………………………………………
 Analysts & lenders………………………………………………………………………………
 ……………………………………………………………………………………………………
 Employees…………………………………………………………………………………………
 ……………………………………………………………………………………………………
 Shareholders………………………………………………………………………………………
 ……………………………………………………………………………………………………
 Suppliers & Customers……………………………………………………………………………
 ……………………………………………………………………………………………………
 Government………………………………………………………………………………………
 ……………………………………………………………………………………………………
 General Public………………………………………………………………………………………
 ……………………………………………………………………………………………………
 Recap - What is the concern of each group?

 Answer

 Directors: Are shareholders happy with our performance?

Have we achieved our bonuses?
 Analysts What’s the story and prospects?
 Lenders: Will we get our money back?
 Employees Will we get paid?
 Shareholders Is it a good investment? Risk, Return and the
Readies
 Suppliers Will we get paid? Long term relationship?
 Customers Can the company meet warranties?
 Competitors Should we enter this market, invest in or buy the company?
 Government What tax is due? Is support necessary?
 General Public Has too much profit been made? What about
society impacts?
Types of accounting
 Types of accounting

 1. Financial accounting – keeping the score:

 is concerned with providing economic information to

'outsiders’ i.e. users external to the organisation.
 gives a general overview of financial position and
performance.
 It is not normally specific or detailed in nature.
 Uniform fashion through common concepts and
standards
 Types of accounting

 2. Management accounting – making the

score

 is concerned with providing economic

information to managers of organisations.
 designed for decision making;
 to help managers to plan and control the activities
of the organisation.

 Note: information should be provided in a format,

frequency, and volume to meet the needs of the
managers. CIMA provide an advisory framework.
Financial and management accounting
Financial Management
accounting accounting
Nature of
reports General Specific
produced purpose purpose

Detailed
Level of detail Overview information

Highly
Restrictions Not regulated
regulated

Reporting Annual/Semi-
annual Monthly/Weekly/Daily
interval

Time horizon Backward looking Forward looking

Primarily Monetary and non-

Range of monetary items
information monetary information
measured on an greater reliance on
objective basis subjective information
 Summary
 Accounting is the collection of mechanisms and concepts
that allow us to record financial data, and then turn it into
meaningful information to assess the financial situation.

 Finance is the way in which an organisation raises money and

deploys it to make a return for the investors.

 Financial reporting helps external users to make decisions

about investing in the company or entering into a contractual
relationship.

 Management accounting helps managers within the business

to make better decisions and to control operations.
 Self-Learning exercises
 Complete the sentences

 True False

 MCQs

 Utility of accounting information

 Past exam questions x 2

 The Utility of Accounting Information
Self-learning exercises
 What makes accounting information useful?
 What could make it useless or misleading?
 Why is the information required. In what format and
how often?
 What could make it better information?
 why do you need it? In what format?
 Is it useful?
 What are its attributes? Or…
 What prevents it being useful?
 What could make it better information?
 For your chosen manager
 What decisions/actions might they need to take?
 What makes accounting information useful?
‘Telling me clearly what is
‘Being right going wrong and by how
and not much…
wrong!’ without me having to wade
through masses of data to
find it myself! (management
by exception)’

‘Having it available in real ‘Having more

time or if not…… detail available if
I need it.’
on my desk by Tuesday of
the week following each (drilling down)
week’s production.’
 What could make it useless or misleading
‘Being wrong or out of date
or incomplete because
somebody’s been rushing.’

‘Not being focussed on my

needs

– I don’t want to know what

despatch are doing unless it is
going to affect my department
in some way.’
 Why is it required?

‘To identify any

problems that ‘To look for cost
have occurred savings through
or are likely to new ways of
occur (trend).’ doing things.’

‘To keep costs bang in line

with the budget – or below if
possible while keeping
quality up.’
What could make it better?

‘Real time
information – at
my desk or
wherever me and
my mobile phone
are!’
 Carriage inwards Raw materials – price variations

Some direct labour

Cost of Revenue
Water
 Capital investment large
scale & depreciation
over how many years?
Power & heat accruals

Largely automated computer controlled equipment

How long will this last compared to brewing equipment?
maybe 40-50 years old and still going strong?
Seasonal variations in cost & activity levels
are closing stocks – representative of normal
at balance sheet date?
Varying demand levels? Inventory turnover?
Special products beer of the month?
Working capital
cycle.
Who are the
stakeholders?
 end

If money could talk it would probably say

‘goodbye’.
 Exercises
 How do you think the directors might want to present the
accounts?

 Whose interests might be compromised if they had free rein?

 What could be done to protect all stakeholders?

 Can accounting really help the situation?

 Or could it simply make the directors’ view more ‘scientific’

and trustworthy?
 Role of Accounting in Management
 Managers need to make good decisions

 Accounting can assist managers to better understand the

problems

 BUT also need to consider how the business is financed

 AND organisations must carefully manage their cashflows

 High quality financial information within accounting

information system essential

 Not forgetting the limitations of accounting information

 Exercise
Identify the accounting information needs of
typical managers within the organisation.
e.g. For a brewery, the production manager or the
sales manager.
Or, for the sales director of an airline

Suggest the reason they need the information

Example – Airline Sales Director
will need to know..
 Cost per passenger mile & per trip

 Profitability per flight?

 Cost effectiveness and efficiency of sales department - for

planning and budgets for control?

 Competitor information costs, profits etc.?

 Ticket sales to break even and meet the target profit?

 Which strategies and tactics are best?

– cost v. benefits of new route launches
Cost of planes?
Routes? Landings?
Turnarounds?
Staff?
Meals?
Cost v. benefits of new route
promotions and launches?
What capacity is available?
What capacity utilisation factor can
be expected?

+ Cost of cancelled flights in pay

disputes, bad weather, etc.

See A&M p.242 for airline example

Self–learning exercises - Financial accounting
Generic information requirements

•Relevant – say, to the production dept.

•Reliable – accurate enough to make decisions

with but fast enough to make decisions before
things go too wrong!

Comparable - with previous week/budget

•Understandable – to manager and their staff

•Cost v. benefit – reasonable given cost of

understanding the problem and benefit of the
solution.

Materiality – significant to the activity being

reported upon.