Chapter 6 Flashcards
Purpose of Financial Accounting
- identifies, measures, records and communicates information
- provides financial information to stakeholders
- ensures the publication of statutory accounts
Content of Statutory Accounts
- narrative reports from chairman and chief executive
- strategic reports covering strategy, business model, risks and corporate responsibility
- legal requirements
- financial accounts
Components of Financial Statements
- balance sheet
- income statement
- cash flow position
Companies Act 2006
Requirements:
- adequate accounting records
- accounts preparation duties for directors
- consistent financial reporting within a group
Financial vs Management Accounting
Financial : external focus, records transactions and presents financial statements to stakeholders
Management : internal focus, uses financial and other data to aid managers in fulfilling responsibilities
Financial Accounting
- relies on daily transactional data for financial statements
- reports financial impact of events organisation wide
- based on historical transactions, not future
- regulated by law (Companies Act 2006)
- audited by external bodies
Management Accounting
- uses transactional data plus other info
- segmented information
- includes historical data but emphasises forecasting
- no external regulatory constraints
- kept private, not disclosed publicly
Owners
Individuals, members, partners or shareholders
Needs financial information to assess the performance of the business and decide on capital investments
Directors and Managers
Responsible for overall management of the business
Uses financial information to evaluate strategic objectives and resource efficiency
Employees
Interested in job security
Uses financial information to assess organisational performance and wage stability
The Public
Potential investors, pressure groups and job seekers
Interested in monitoring the organisation’s activity and performance
Other Bodies
- tax authorities
- financial analysts
- creditors and lenders
- competitors
- brokers
- customers
Shareholders Equity
Represents shareholders’ stake in the company
Total Assets - Total Liabilities
Regulatory Capital
Regulatory Capital : equity + long term debt
Deprectiation
Allocation of tangible asset costs over its useful life
Reflects value usage and impacts profit calculation
The Accounting Equation
Assets = Equity + Liabilities
Double-Entry Principle
Records financial transactions reflecting two-fold effects
Ensures the accounting equation remains balanced
Balance Sheet
Statement of net wealth at a specific time
Assets = Equity + Liabilities
Difference between assets and liabilities is shareholders’ equity
Assets
Non-Current Assets : held for more than one year (goodwill, property, investments)
Current Assets : used within twelve months (stock, cash, debtors)
Liabilities
Non-Current Liabilities : payable after twelve months
Current Liabilities : payable within twelve months
Long-Term Sources of Finance
- bank loans
- mortgages
- bond issues
- shares
- retained profits
Income Statement (Profit and Loss Account)
Shows profit or loss over the financial year
Total Income - Total Expenses = Profit
Gross Profit
Turnover - Cost of Sales
Components of Profit
Financial Income
Financial Costs
Overheads
Taxation
Movement in Equity
Reserves increase with profit, decrease with dividends
IFRS requires reporting movements (foreign currency adjustments etc)
Insurance Broker Accounts
Revenue from commission and client fees
Balance Sheet :
Non-Current Assets - office equipment, property
Current Assets - bank premiums, commissions owed
Liabilities - premiums owed to insurers, business loans
Insurance Company Accounts
Include 2 years data for comparison
Differ from broker accounts in complexity and regulations
Profit vs Cash Flow
Profit - difference between total income and total expenses
Cash Flow - movement of cash inflows and outflows
Importance of Financial Statements
Cash Flow : shows ability to generate cash
Income : reflects trading conditions
Balance : demonstrates financial strength (assets vs liabilities)
Format of Cash Flow Statements
Operating : cash generated by trading activities, including tax
Investing : cash inflows/outflows from investments
Financing : changes in loans, share capital and dividends payments
Management Accounting Purpose
- helps design systems align with business objectives
- provides information on key operations like costs, procurement, sales and performance
- aids decision-making to achieve business goals
Budgets and Zero-Based Budgeting
Annual budgets set for profit and cost centres
Primarily used for financial control
Increase/Decrease in Cash and Cash Equivalents
Sum of operation, investing and financing cash flows shows net change in cash
IFRS requires insurance companies to include long-term business cash flows
