Lecture 1A/1B Introduction to the Module/Accounting Flashcards
What is the Aim of Accounting?
Is to provide information that will improve the quality of decision making.
What is Accounting? (Financial accounting).
The external publishing of a company’s financial position and performance.
FA information is…. used in making investment decisions and widely used to predict corporate business success and failure.
What is Management accounting?
- Provides info internally to managers to help them measure and control processes within their business in a profitable manner.
Assits managers in:
- Strategy implementation
- Evaluation of the value added by different areas of the business.
What is Accounting? (Auditing and Assurance Services area).
- Monitors and adds credibility to the external reporting disclosures made by companies.
- Assurance services can also add credibility to non-financial information such as sustainability reporting.
Skills of an accountant may include:
- Critical thinking
- Collaboration with others
- Management of budgets and finance.
Financial Accounting and Managerial Accounting key differences…
Users:
FA - External
MA - Internal
Format:
FA - Regulated
MA - Any
Frequency:
FA - normally annual
MA - As required.
Content:
FA - dominated by historic information based on past transactions.
MA - forward looking.
What is the Role of a financial accountant?
- Prepares, reviews or audits the annual report and financial statements.
- Responsible for monitoring financial data, forecasting revenues and costs and prepare accurate statements.
A couple of users of financial statements:
- Potential investors
- Owners
- Employees
- Competitors
- Suppliers
- Lenders
Regulatory and Conceptual Framework:
International Accounting Standards Board (IASB).
Regulation:
- IASB responsible for setting international financial reporting standards (IFRS)
- Exists to harmonise accounting standards all over the world.
Conceptual framework:
- A document which sets out the concepts that underlie the preparation and presentation of financial statements.
- IFRS stems from concepts set out in the conceptual framework.
Conceptual framework in further detail:
Deals with issues such as:
- Qualitative characteristics of useful financial information.
- Concepts of capital and capital maintenance.
6 Characteristics of Good Quality Accounting information:
- Relevant
- Faithful representation
- Comparable
- Verifiable
- Understandable
- Timeliness.
Relevant and faithful representation are …
- Fundamental characteristics per the IASB conceptual framework.
Relevant…
- Info relevant it influences users economic decision making
- Informations relevance is affected by its nature and materiality.
Faithful representation…
FR info means it is:
- Free from material error
- Neutral
- Prudent
- Complete
Verifiable, Understandable, Timeliness, Comparable are…
enhancing characteristics per the IASB Conceptual framework.
Comparable…
- Financial information must be comparable through time (prior to other periods) and to other entities e.g competitors.
Verifiable…
- Info verifiable if there is an agreement between individual observers that the information is reliable
Understandable…
- Reasonable knowledge is assumed.
- Complex matters should not be omitted.
Timeliness…
- Financial statements need to be timely.
Why are financial statements important?
Show us how much profit or loss a business is making.
Revenue - expenses = profit/loss
Also, show us how much a business is worth:
Assets - Liabilities = Equity (worth)
Definition of revenue:
The value of goods or services sold during a period
Definition of expenses:
- Value of goods or services consumed in generating revenue.
3 examples of revenue and 3 examples of expenses:
Revenue:
- Sales
- Royalties
- Dividends received.
Expenses:
- Wages
- Tax
- Electricity.
Definition of assets:
- Resources owned/controlled by the business to give future economic benefit.
Definition of liabilities:
What the business owes (debts).
Equity is the investment by the owner…
3 examples of assets and 3 example of liabilities.
Assets:
- Property
- Machinery
- Trade receivables.
Liabilities:
- Trade payables
- Overdraft
- Shareholder’s capital.
Financial statements: Statement of Profit or Loss.
- illustrates the financial performance of a company.
PROFIT DOES NOT EQUAL CASHFLOW.
Profit vs Cash Flow.
Cash Flow = Cash inflows - Cash Outflows.
Profit = Revenue - Expenses.
Profit is not a measure of cashflow as a profitable business may need an overdraft.
Financial statements: Statement of financial position:
Illustrates the financial position of a. company and shows what a business is worth at a point in time.
Assets = Liabilities (balance sheet)
