Accounting for Managers.

Corporate MBA
Faculty of Economics & Business
Universiti Malaysia Sarawak
Kota Samarahan
AP Michael Tinggi
ACMA (UK) , CGMA(UK/US), CA(M),
MBA(Kentucky)
Accounting for Managers.
Corporate MBA
Faculty of Economics & Business
Universiti Malaysia Sarawak
Kota Samarahan
Topics
 The Accounting Theory and Model, Introduction
to Company accounts and Reporting
 Managerial Accounting and Cost Volume Profit
Analysis
 Managerial Accounting, budget and effect on
firms performance
 Cash Flow
 Measuring Corporate performance
 Contemporary issues, corporate governance ,
managing for Working Capital, Growth &
Profitability
 Texts/Study Materials
 Financial Accounting Managerial by Charles T.Horngren,Pearson
Education International.
 Atkinson, A.A., Kaplan, R.S., Matsumura, E.M. and Young,
S.M. (2012). Management Accounting - Information for
Decision making and Strategic execution. London: Pearson
Education Ltd.
 Accounting for Managers by Paul M.Collier, Aston Business
School, John Wiley & Sons
 Accounting for Managers (2nd edition) by William J.Bruns, Jr.,
Harvard Business School, South-Western College Publishing
 Wood, F. and Sanster A.,(2012). Business Accounting Volume 2,
10th edition., Pearson Education Limited
 Accounting for Managers by William H. Webster, Mcgraw-Hill.
 Managerial Accounting (3rd edition) by Jerry J.Weygandt, Donald
D. Kieso & Paul D. Kimmel, John Wiley & Sons, Inc.
Evaluation
 Case Studies =20%
 Final Exam = 35%
 Individual Assignments(2)=20%
 Group Assignment (1) =25%
 TOTAL =100%
Week1.1
The Accounting Theory and
model
# 1: The Accounting Theory and model

 Accounting Theory and Model

 Measurement
 Historical cost
 Current cost accounting
 Revenue and Recognition
 Expenses and Matching
 Profit & Earning Management
 Measurement of assets and liabilities
 Exercises
 Introduction : CommonQuestions
Asked by Internal Users

What is the cost of manufacturing

each unit of product?
Is cash sufficient to
pay bills?

Which product line is the most

Can we afford to give employee profitable?
pay raises this year?
 Introduction: Common Questions
Asked by External Users

How does the company compare

Is the company earning in size and profitability with its
satisfactory income? competitors?
What do we
do if they
catch us?

Will the company be able to pay its debts as they come due?
Introduction :Why businesses
exist ?
 To provide goods or services to customers
in exchange for a financial reward (profit)

Survival

Social
Growth Responsibility
Introduction: Business
Environment
Introduction: Global ssues and
Financial Reporting at the cross
road !!!!!
Profit inflation,
Hiding of debts &
Abnormal accounting practices
 Off balance sheet recording
 More asymmetric cost
 Example of scandals/ failures
 - Enron, an energy trading business based in Texas, which was accused of entering
into complicated financial arrangements in an attempt to obscure losses and to
inflate accounting profits. Off balance sheet debts.
 - WorldCom, a major long distance telephone operator in the US, which was
accused of reclassifying RM3.90b of expenses so as to falsely inflate the profit
figures that the reported to its owners (shareholders) and to others.
 - 2008 Subprime crisis in US – Company like American Motors.
 In Malaysia,
 - 2005, Transmil Air reported revenue loss as capitalized expenses for trading
operation 2003 and 2004.
 - Sime Darby lost RM2.1 billion (Star, 2010)
 - Restructuring/ Privatizing Malaysia Airlines for strategic failure (2014)
 - 1MDB company 2015-2018 RM42 billion company?? Contemporary issue. What
happen? Change of political landscape 2018.
 -Severe loss in local currency value (2015/2016). What is the major cause?
Accountability Issues
 accountability entails
both a narration of what
 ‘the capacity and willingness
transpired and a
reckoning of money
to give explanations for
– Boland & Schultze
conduct, stating how one has
discharged one’s
responsibilities … an  Accountability to:
explaining of conduct with a  Shareholders &
credible story of what financiers
happened, and a calculation  Stakeholders
and balancing of competing – Customers, suppliers,
bankers, non-
obligations, including moral governmental,
ones’ employees, government,
society
– Boland & Schultze
Accounting history
 Due to trade between tribes (3600 BC), (Stone, 1969)
 Ancient Egypt (Pharaoh’s central finance dept)-to
account for supply and disbursement of
commodities
 14th century, due to maritime trade in the Italian
city-states of Florence, Genoa & Venice
– First book on accounting (work of a monk, Luca Pacioli
1494)
– Much of the language of accounting is derived from
Latin roots
– Debtor (debitum), assets (adsatis), liability(ligare),
capital(caput), account(computare), profit(profectus),
sterling(sterlino), shilling(scellino)
Continued
 Industrial Revolution 1870, (US, Great Britain &
Germany). Growth due to;
– Separation of ownership from management (British
Companies Act since 1850s)
– Exercising control over managers by absent owners
– Decentralisation & divisionalisation
– Financial accounting & management accounting
(Chandler, 1990)
 Information revolution
– Growth of service industries
Quotation #1
 Transparent accounting plays an important
role in maintaining the vibrancy of our
financial markets.

 Alan Greenspan
Chairman, Board of Governors of
The Federal Reserve Board
Quotation #2
 The single most important innovation
shaping the (American capital) market was
the idea of generally accepted accounting
principles(GAAP). We need something
similar internationally. !!!
Lawrence H. Summers
Former Secretary of the Treasury.

 Where do we move from here…IFRS????

Quotation #3
 The quality of information we now receive
from companies in the U.S. is about the best
we have ever seen and exceeds that of
almost any other nation.
Abby Joseph Cohen as Chair, Investment
Policy Committee Goldman, Sachs & Co.
* Is there a truth to above statement in the light of
sub-prime crisis?
* Why Sarbanes- Oxley Act 2002. Why American
need this act?
Corporate governance issues
 Corporate Governance at global stage
 Malaysian Corporate Governance, 2001,
2007 (Revised), 2012 and 2017 (Revised)
 Company’s Act Revised (2016)
 How effective is our corporate governance.
Who thus it serves? Why we need it?
 Accountability in all aspects

Source
Transaction documents Analysis
or event

Reporting
Trial balance Recording &
posting
Accounting ?
 Is a collection of systems and processes
used to record, report and interpret business
performance transactions.
 Account-an explanation or report in
financial terms about the transactions
 It enables managers to satisfy the
stakeholders in the organisation that they
have acted in their (stakeholders) best
interests rather than themselves
Accounting
 ‘the process of identifying,  Accounting as a process
measuring and communicating
economic information to permit – Capturing, recording,
informed judgements and decisions summarising, reporting,
by users of the information’ interpreting
– American Accounting  Economic information
Association, 1966
– Financial & non-financial
– Adopted by Wood & Sangster,
2009  Support informed
 “A service activity whose function judgements & Decisions
is to provide quantitative – Broad spectrum of users
information, primarily financial in
nature, about economic entities
that is intended to be useful in
making economic decisions.”
—American Institute of
Certified Public
Accountants (AICPA)
What is the “purpose” of
Accounting?
 Financial reporting should provide information
that is useful to present and potential investors and
creditors and other users in making rational
investment, credit, and similar decisions.
 The information should be comprehensible to
those who have a reasonable understanding of
business and economic activities and are willing to
study the information with reasonable diligence.
 Financial reporting should provide information to
help present and potential investors and creditors
and other users in assessing the amounts, timing,
and uncertainty of prospective cash flows.
 Financial reporting should provide information
about the economic resources of an enterprise, the
claims to those resources (obligations of the
enterprise to transfer resources to other entities
and owners’ equity), and
 The effects of transactions, events, and
circumstances that change its resources and claims
to those resources.
Overview of Corporate Financial
Statements
Or . . . What are all those
numbers anyway?
Financial Statements show;
 Financial Position at the end of the period;
 Earnings for the period;
 Cash flows during the period; and
 Investments by and distributions to owners
during the period
 Assets and Liabilities owned by the firm.
Details
 Financial Position at the end of the period;
– Balance Sheet
 Earnings for the period;
– Income Statement
 Cash flows during the period;
– Statement of Cash Flows
 Investments/distributions from/to owners
– Statement of Retained Earnings !!
 Assets and Liabilities
– Specially reporting business assets and risk.
Financial statements provide a
valuable profile of a firm’s . . .

– business environment;
– assets and liabilities;
– operating activities; and
– cash inflows and outflows
Accounting theory and Model
 In general there has been a lack of accepted accounting
theory (Wood and Sangster, 2012).
 Despite the indifference there has been some accounting
theories that have been developed.
 The accounting theories
 i, History of financial accounting theory – Pacioli accounting
theory which initiated the double entry system which was used
until today.
 ii, Basic accounting theory which incorporates the basic concept
and principles of accounting (accrual, going concern, consistent,
conservatism, materiality)
 iii, Cost accounting theory – aimed at efficient resource utilisation
 iv, Positive accounting theory – Branch of academic research that
seeks to explain and predict accounting practices.
 v, Normative accounting theory – seeks to derive and prescribe
optimal accounting standard, in an attempt to derive rules based
on logical reasoning at a given objectives.
Accounting Theory - continue
 Critical accounting theory – aim at bridging the structuralist
view, and provides means for understanding reality to be translated
into progress for the growth of societies.

 Contract Theory in managerial accounting

- Contract theory takes as given that people within a group can have
preferences which are in conflict and that each group member will act in his
own self-interest, which may lead to inefficient allocation of capital within the
firm.
Accounting Model
Set of basic assumptions, concepts, principles and procedures
that determine the methods of recognizing, recording,
measuring and reporting an entity's financial transactions

 Basic accounting model

- Financial statements consist of a Balance Sheet and Profit & Loss
Statement. These two reports act as a “container” for all your business
transactions. Each transaction is recorded according to a set of rules
called “The Accounting Model”.
 Fundamental Accounting Model
-The balance sheet is based on the following fundamental accounting
equation :
- Assets = Liabilities + Equity
- This model has been used since the 18th century. It essentially states
that a business owes all of its assets to either creditors or owners,
where the assets of a business are its resources, and the creditors and
owners are the sources of those resources.
 Horizontal Model Accounting Vs Vertical Model Accounting

- the vertical model arranges financial statements elements from top to

bottom on a page. Horizontal, on the other hand, is so named because

it arranges financial statements elements horizontally across a page. In
the horizontal model, the balance sheet is presented to the left,
followed by the income statement, and the statement of cash flows.

• Cost Model Accounting – Which is based on historical Cost

- In most countries, primary financial statements are prepared on the

historical cost basis of accounting without regard either to changes in

the general level of prices or to increases in specific prices of assets
held, except to the extent that property, plant and equipment and
investments may be revalued."¹
Accounting Model - continue
 Growth Accounting Model
- Growth accounting is a procedure used in economics to measure the
contribution of different factors to economic growth and to indirectly
compute the rate of technological progress, measured as a residual, in
an economy. This methodology was introduced by Robert Solow in
1957.
- The technique has been applied to virtually every economy in the
world and a common finding is that observed levels of economic
growth cannot be explained simply by changes in the stock of capital
in the economy or population and labor force growth rates.

 Mark-to-Model Accounting
- Refers to the practice of pricing a position or portfolio at prices determined
by financial models, in contrast to allowing the market to determine the price.
Often the use of models is necessary where a market for the financial product
is not available, such as with complex financial instruments
Accounting concept and
principles
 Have been the product of accounting theory
and model
 With more structured and inductive
research and practice, the concepts become
more significant and essential .
The Entity Concept

A business is to be treated as an
independent entity, distinct from
its owner(s). The financial statement
provides information about the affair
of the business only
(separate legal entity – case of Solomon
vs Solomon 1896 – A doctrine of
corporate personality)
Monetary Measurement

• FA concerns only with items

which can be quantified &
expressed in dollar terms.
• Monetary unit of measurement
is relatively stable.
Historical Cost

Assets and services acquired

should be recorded at their
actual (historical) cost. However
FRS 136 require its carrying
value, after considering its
impairment.
Going Concern

The entity will continue

to operate in the future.
Matching

• Revenues earned in that

period is matched against the
expenses incurred in that
period
Consistency

 There are alternative choice of

treatments but once the choice is
made, the principle required that
the chosen treatment to be applied
consistently to all items of the
same type in the same accounting
period . For easy comparison
purposes
Prudence

 To be prudent, accountant must

choose a method that tend;
 Understate revenue, profit &
assets
 Overstate expenses, losses and
liabilities
Materiality & Accrual

 Materiality - Information will be

regarded
as material if it is likely to have an
influence on the decisions made
by the users
 Accrual - Under accrual method of accounting, income
is reported at the time it is earned, whether or not it has
 been received. Likewise, expenses are reported at the
time they are incurred, whether or not the expense has
 been paid
 Accounting for changing price levels
* Change in price levels can lead to both profit and asset valuation
figures being far from reality
* The greater the rate of change in price levels , the greater the
distortion.
According to wood (2012), in both periods of inflation and deflation,
financial statement on historical cost accounting would lead to
misleading information disclosure.
Current cost accounting – Statement which allow for accounting for the
effect of changing price .
 Profitability and Measurement-
Components of Retained
Earnings
Revenues for
the period
–
Expenses for
the period
Start of End of
the period = the period
Beginning Net income Ending
+ Dividends
balance of (or Net loss) balance of
or – for the =
retained for the retained
– period
earnings period earnings
Profit & Loss (Statement of Income)
 One of the three most important financial
statements
 Prepared from the Trial Balance
 Required by the Companies Act 1965
 Measures an organisation’s performance
 Presents an organisation’s income and expenses over a
period of time
 Income less the expenses incurred of an
organisation over a period of time, gives profit
 INCOME - EXPENSES = PROFIT
Therefore,
 Profit and loss account shows an organisation’s

income and expenses over time

 Gross profit from trading

 Net profit after purchases and expenses

 Profit involves matching revenues earned with

expenses incurred

 Profit is a subjective figure

Measurement - Balance Sheet
 One of the two most important statements

 Prepared from a trial balance

 Required by the Companies Act 1965

 A collection of the assets, liabilities and capital of

an organisation at a particular point in time

Cont- Balance Sheet
 Focuses on assets, liabilities and capital

Assets - Liabilities = Capital

 A snapshot of a business’s net assets at a particular point

of time
 By formally defining assets and liabilities the balance sheet
drives the profit and loss account
 Assets are items owned or leased
 Liabilities are amounts owed
 Capital represents funds belonging to the owner
Main Components of Balance Sheet
1. Fixed Assets
- Used to run business in long-term
2. Current Assets
- Short-term
3. Current Liabilities
- Amounts falling due within a year
4. Long-term Creditors
- Amounts borrowed, repayable after more than a year
5. Capital
- Amount business owes to the owner
6. Profit
- Income less expenses
7. Drawings
- Owner’s living expenses
Fixed Assets
* Continuing operations
* Four types : Land and Buildings
: Plant and Machinery
: Fixtures and Fittings
: Motor Vehicles
 Normally valued at historical cost less depreciation

 Depreciation spreads the purchase cost across the asset’s life

 Accumulated depreciation

 Two methods of depreciation:

i, Straight-line

ii, Reducing balance

 Many companies may revalue their Fixed assets .

Current Assets

i, Stock
 Three types:
i, Raw Materials
ii, Work in Progress
iii, Finished Goods
 Valued at lower of cost and net realisable value
ii Debtors
 Sales where customers have not yet paid
 Doubtful debts: element of uncertainty
 Bad debts: definitely not be paid
iii, Prepayments
 Goods or services paid in advance
iv, Cash and Bank
 Actual money
Current Liabilities

i, Creditors

 Purchases where suppliers have not yet paid

ii, Accruals

 Amounts owing for services

iii, Bank Loans/overdraft

 Bank owed money (short-term)

Current assets less current liabilities equals working capital

Long-term Creditors

 Liabilities repaid after more than one year

5. Capital Employed

£
Opening Capital 80,257
Add Profit 8,350
88,607
Less Drawings 9,366
Closing Capital 79,241
Limitations

 Balance sheet is a collection of individual assets

and liabilities which are not valued at market
value . (Improvement are made with the
applicability of FRS)
 Significant assets are missing (assets do not
meet qualifying characteristics)
Measurement – Information content from
financial statement.

 Ratios are calculated from the balance sheet

 Liquidity looks at cash position

 Long-term capital structure looks at the extent

to which a company relies on external
borrowing
 reveals investment and financial position.
Therefore,
 A balance sheet shows the assets, liabilities and capital

at a point in time

 Missing assets and inconsistently valued assets impair a

balance sheet’s usefulness

Summary of Financial Statements

 Profit links the profit and loss account and balance

sheet

i, Income less expenses equals profit

ii, Closing capital less drawings and opening capital

equals profit
iii, Balance sheet
iv, Cash Flow.
Measurement information from Financial
Statement. Common questions asked?
- How can the amount of wealth generated for a particular firm be
assessed?
- Is generating wealth the same as making profit?
- Does generating wealth mean having more cash at the end of the
period than at the start?
- Is the wealth of the business the same the wealth of the owner?
- What cash movement took place over a particular period of time?
- How much wealth (ie profit) was generated or lost over the
period? Profit is defined as the increase in wealth arising from
trading activities (Atrill & Mclaney, 2008)
- What is the accumulated wealth of the business at the end of that
period and what form does the wealth take?
Profit Determination

A. Determine cost of sales

B. Sales less cost of sales gives gross profit

C. Total expenses

D. Determine net profit

• Overall gross profit less expenses gives net profit

Revenue/Expenses Recognition
Adheres to the:
• Revenue Recognition Principle
• Matching Principle
• Revenue recorded only when earned not
when cash is received
• Expense recorded only when incurred
not when cash paid
Adjusting entries make the: revenue recognition
&matching principles HAPPEN :Types of Adjusting
Entries

– Prepayments:
• Prepaid expenses: Expenses paid in cash and
recorded as assets before they are used or
consumed.
• Prepaid/Unearned Revenues: Cash received and
recorded as liabilities before revenue is earned
– Accruals:
• Accrued revenues: Revenues earned but not yet
received in cash or recorded. Thus treat as assets.
• Accrued expenses: Expenses incurred but not yet
paid in cash or recorded. Treat as liabilities.
Prepayments

• Prepaid expenses. Cash or other asset has

been spent but the item acquired has not
been used or consumed
• Prepaid income/revenue. Cash has been
collected before revenue is earned
• You can start with the trial balance to
find information to adjust prepayments. -
Accrual
• Revenue has been earned, but not
collected
• Revenues earned but not yet
received in cash or recorded at
the statement date
• Expenses were incurred, but not
yet paid
• Expenses incurred but not yet
paid or recorded at the statement
date.
Income statement to incorporate Adjustments
i, Stock
Goods not sold, and shall be taken out from the business
sales to reflect the true value of the cost of goods sold.

ii, Accruals
Expenditure or income pending settlement – reflected
in the current year in profit and loss and current
asset/liabilities in the balance sheet)
Adjustment impact profit and balance sheet figures

iii,Prepayments
Expenditure paid/income received in advance. To be
removed in the income statement as it belongs to future
expenses or income.
Adjustment impact profit and balance sheet figures.
Adjustments - continue
Example: Mary Christmas
i, Electricity three bills for year ($300, $400, $550) $600 owing
ii, Rent $1,500 paid this year including $300 in advance

Draw up Trading and Profit and Loss Account and Balance Sheet
entries

Trading and Profit and Balance Sheet

Loss Account
Expenses Current Assets
Electricity 1,850 Rent prepaid 300
Rent 1,200 Current Liabilities
Electricity owing 600
Adjustments - continue

iv,Depreciation
- Conventionally defined as, an attempt to allocate cost or
fair value of an asset over its expected useful life, and the
depreciation charge for the year represent an expenses,
which in turn its incorporation would undermine profit
earned for the same year.
- Non cash flow. If cash flow is the basis for firm
performance measurement, depreciation will be added
back , does increase the value of cash inflow accrued to the
firms.
- In an intended action to replace assets, depreciation
provision would provide cushion to ensure that liquid
funds are set aside by the business specifically for that
Adjustment - continue
£
Premises 80,000

Machine 75,000

Office Furniture 12,000

Computer 1,500

Motor van 6,000

Depreciation is 10% on cost (straight line method)

Trading and Profit and Loss Account (year 1)

Expenses £
Depreciation on premises 8,000

Depreciation on machine 7,500

Depreciation on office furniture 1,200

Depreciation on computer 150

Depreciation on motor van 600

Adjustments - continue
v, Bad and Doubtful Debts
In a prudence concept , revenue which are deemed not collectable or may
not be able to be collected shall be removed to eliminate any elements of
profit overstatement effect.
 Bad debts. Debts from debtors will not be collected

 Doubtful debts. Debt from debtors may not be collected

i, Bad Debts
Enter twice : Profit and loss account and balance sheet.

A business with £4,800 debtors with bad debts £320

Profit and Loss Account £
Expenses
Bad debts 320
Balance Sheet
Current Assets
Debtors less bad debts
(£4,800-£320) 4,480
 Adjustments - continue
ii, Provision for doubtful debts
Enter twice a. Increase/decrease in provision in profit and loss account
b. Deduct provision from debtors in balance sheet

A business with £4,800 debtors (last year £2,400)

Doubtful debt provision 10%
£
Profit and Loss Account
Expenses
Increase in doubtful debt provision 240
Balance Sheet
Current Assets
Debtors less provision for doubtful debts
(£4,800-£480) 4,320
Issues in measuring assets and
Liabilities
* Inclusion of assets and liabilities in financial statement
*has been debated for years.
*Assets and liabilities are resources /claims of the business
and to qualify as assets & liabilities of the company it
must have possession of the following traits;
- A probable future benefit
- The business must have exclusive rights to control the
benefit
- The benefit must arise from some past transaction or
events
- The assets must be capable of measurement in
monetary terms
Exercises