Accounting and Financial Information

 

UNIT 1: ACCOUNTING AND FINANCIAL INFORMATION

(Read pgs 331 to 351 of Fundamentals of Business, 2nd Ed. By Stephen J. Skripak)

 

TOPIC 1: INTRODUCTION AND TERMINOLOGIES

Accounting is often called “the language of business” because it communicates so much of the information that owners, managers, and investors need to evaluate a company’s financial performance. These people are stakeholders in the business and are interested in the activities of the company.

 

The financial futures of owners and other investors may depend heavily on strong financial performance from the business, and when performance is poor, managers may be replaced or worst still and the business may be forced to close down. It is for this reason that proper financial records have to be maintained.

 

 

TOPIC 2: GENERAL DEFINITIONS AND TERMINOLOGIES

 

Accounting

Assets

Liabilities

Balance Sheet

Income Statement

Accounts Payable

Accounts Receivable

Debit

Credit

Debtor

Creditor

Fixed Asset

Ledger

 Purchases

 

Carriage inwards

Carriage outwards

Double entry bookkeeping

Drawer

Dual aspect concept

Sales

Trial Balance

CASH FLOW STATEMENT

PURCHASING MIX

WORKING CAPITAL

 

TOPIC3: THE ROLES OF ACCOUNTING

Management Accounting   

Management accounting refers to the processes and procedures implemented for internal decision making and reporting within an organization. 

 

The four major types of internal management decisions are:

 

1.    Financial Decisions—determine what amount of capital (funds) are needed to run the business and whether to secure these funds from owners or creditors.

2.    Resource Allocation Decisions—identify how the total capital of a business is to be invested.

3.    Production Decisions—decides what products are to be produced, by what means, and when.

4.    Marketing Decisions—establishes selling prices and advertising budgets; determining the location of a business's markets and how to reach them.

 

Financial Accounting

Financial accounting is responsible for preparing the following

i.                   Financial Statements (Balance Sheet) i.e. assets, liabilities and owner’s equity

ii.                Income Statement (Trading, Profit & Loss) i.e. sales, purchases and running cost of the business at given period.

iii.             Cash flows— summarize a company’s past performance and evaluate its current financial condition.

In preparing financial statements, financial accountants adhere to a uniform set of rules called generally accepted accounting principles (GAAP)—the basic principles for financial reporting issued by an independent agency called the Financial Accounting Standards Board (FASB).

 

TOPIC 4: THE USERS OF FINANCIAL ACCOUNTING INFORMATION

·       Owners and Prospective Owners. Has the business earned satisfactory income on its total investment?

·       Creditors and Lenders. Should a loan be granted to the business?

·       Employees and their Unions. Does the business have the ability to pay increased wages? Customers. Does the business offer useful products at fair prices?

·       Governments. Is the business, such as a local public utility, charge a fair rate for its services? How much tax does the business owe?

 

·       The General Public. Is the business providing useful products and gainful employment for the local citizens without causing serious environmental problems?

 

·       The Press. Financial statements are a great place for a reporter to find background information to flesh out a story about a company.

 

 

TOPIC 5: BOOKS OF ORIGINAL ENTRY

Sales Journal (Day Book) is used to record the credit sales of goods normally traded by the business.

Purchase Journal (Day Book) is used to record the credit purchases of goods normally traded by the business.

Purchases Return Journal (Day Book) records all of the purchased returned to your suppliers.

Sales Return Day Book records all your sales that have been returned to you by your customers.

The General Journal has several uses these include entries for the following:

 

 

TOPIC 6: ACCONTING CONCEPTS AND CONVENTIONS

·       Going concern concept – assumption that business will continue in operation for the foreseeable future.

·       Matching or Accruals Concept - the concept states that costs and revenues should be matched one with the other, and dealt with in the accounting period to which they relate.

·       Prudence Concept- revenues and profit are not reported and recognised in the financial statements unless realized.

·       Consistency Concept - states that a business should be consistent in its accounting treatment of similar items.

·       Duality Concept - that every transaction has two effects.

·       Substance over from convention - where there is a difference between the real effect of a transaction (substance) and its legal form (form), the real effect should be recognized in the financial statements rather than the legal form provided this is legally possible.

·       Accounting Period Convention - for accounting purposes, the lifetime of the business is divided into arbitrary periods of a fixed length, usually one year.

·       Historical Cost Convention - all values in accounting are based on the historical costs incurred.

·       Realization Concept - realization takes place when goods or services are put to the customer and he or she incurred liability for them.

·       Money Measurements Concept - financial accounting can record a piece of equipment but cannot record (recognize) the worthiness of the employees of the business

·       Business entity concept - business entity is seen as being separate from its owner(s) regardless of its legal status.

·       Objectivity Convention - financial statements should be as objective as possible i.e. transactions are to be recorded objectively as historical events.

 

 

TOPIC 7: THE FUNCTION OF FINANCIAL STATEMENTS

1.    Income Statement

·       Cost of goods sold

·       Operating expenses

·       Gross profit

·       Net profit

 

 

2. Balance Sheet

·       Assets

·       Liabilities

·       Owner’s equity

 

 

 

Text Box: Self-Reflection Questions 1. What is the difference between Management Accounting and Financial Accounting? 2. Who are the users of financial accounting information? 3. What does the Balance Sheet report?

 

Text Box: TRUE OR FALSE 1. ____ Financial accounting helps with decisions made inside an organization. 2. ____ Typically, a sole proprietor will be able to raise money easier than a corporation. 3. ____ Employees are not users of the information provided by financial accounting. 4. ____ An entity that loans a company money is referred to as a “shareholder.” 5. ____ Investors who hold investments in a stock longer than a year may enjoy a tax benefit. 6. ____ Corporations are required by law to pay dividends to their shareholders. 7. ____ Purchasing stock is typically a riskier investment than opening a savings account.

 

Text Box: Self‐Reflection Question Beatrice Moyo is to prepare a financial analysis that will help her company improve results. For example, she tracks trends in departmental compliance with their budgets. Which of the following best describes her role? IS IT: Investment Analyst; Financial Reporting Specialist; Managerial Accountant or Financial Accountant

 

Text Box: Self‐Reflection Question Which financial statement should you consult if you want to see the amount of money a company spent on advertising in 2018? Is it: Statement of Cash Flow; Balance Sheet; Statement of Cost of Goods Sold or Income Statement

 

Assignment 1

Now you need to complete a unit assignment.  
Write this assignment ready for submission by 27 May 2020

 

Text Box: Describe the users of financial accounting information. In your own words describe how this information is important to each user. (This essay must typewritten on Times New Roman 12, and 1.5 line-spacing)