ACCOUNTING FOR

BUSINESS DECISION
MAKING
(MBSA 1413/ MRC 1413/
MRF 1023/ MRD 1023)

Introduction to Accounting
 INTRODUCTION TO ACCOUNTING

Understanding the financial statements: reading and interpreting

annual report
 Financial Statements
• Income Statement – income for the period between two
balance sheet dates
• Balance Sheet – organization’s financial position at a point in
time
• Retained Earnings Statement – shows how income and
dividends for the period have changed the organization’s
retained earnings - made up of dividend payments, the sale or
repurchase of stock and changes resulting from the reporting
of profits or losses
• Statement of Cash Flows – how cash was obtained during the
period and how it was used – important for lender and
investors as they can access to the cash needed to pay off its
debts
Financial statements
Income •Measures the performance of the company.
•Report the revenues and expenses.
Statement
Balance •Also known as statement of financial position/ condition.
•the financial status of the company at a point in time.
sheet •Net worth of the company.

Example Statement of •A summary of cash receipts and cash payments.

•Liquidity

cash flow •Consists of 3 sections: (1) operating activities, (2) investing activities
and (3) financing activities.
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ges/FAQ%209.31.aspx
 Contents of annual report

• Income statements/ P &L

Corporate • vision, mission, values account
information • background • Balance sheet
Financial • Statement of changes in
statements equity
• Statement of cash flows
• Notes to the FS
• corporate structure
Corporate
• board of directors
profile
• management teams

• Directors’ report
• Statement by director
• statement of CG Others • Statutory declaration
Corporate
• audit committee report • Independent auditors’ report
governance
(CG) • statement of internal • Notice of AGM
control
 Financial statements

Income statement
Turnover – revenue
Gross profit
Operating cost
Profit from operation
 Difference between P+L and
comprehensive income
• Income Statement: profit and loss items.
• Statement of Comprehensive income: This statement
starts with the profit or loss as calculated under
Income statement and contains components of other
comprehensive income. Simply this statement
contains such line items which are not recognized in
profit or loss and if disclosed under Income Statement
then it might mislead users of financial statements as
they may consider them as regular line items. (do not
stem from the company's regular business activities
and operations)
 Difference between P+L and
comprehensive income
– The components of other comprehensive income
include:
• changes in revaluation surplus (see IAS 16 Property,
Plant and Equipment and IAS 38 Intangible Assets);
• actuarial gains and losses on defined benefit plans
• gains and losses arising from translating the financial
statements of a foreign operation
• gains and losses from investments in equity
instruments measured at fair value through other
comprehensive income
• the effective portion of gains and losses on hedging
instruments in a cash flow hedge (see IAS 39).
 Financial statements

Balance sheet
Assets
Liability
Equity

Assets = Liabilities + Stakeholder Equity

 Financial statements

Statement of changes in equity

New issuance
Dividends
Changes in the Premium accounts
Changes in the Capital Reserve
accounts
Changes in the Distributable profits
• What is equity
– Share Capital
– Retained Earnings
– Accumulated Other
Comprehensive income
 Statement of Changes in Equity
 shows all changes in owner’s equity for a
period of time.
 provide readers with the useful information
on how the capital or fund of an entity is
utilized and used.
 shows the movements of equity and
accumulated earnings and losses, the
readers can depict on where the company’s
equity came from and where did it go.
 Statement of Changes in Equity
 It includes:
– a) profit or loss for the period;
– b) each item of income and expense for the period that is
recognized directly in equity, and the total of those items;
– c) total income and expense for the period (calculated as the
sum of (a) and (b)), showing separately the total amounts
attributable to equity holders of the parent and to minority
interest; and
– d) for each component of equity, the effects of changes in
accounting policies and corrections of errors recognized in
accordance with IAS 8.
 Statement of Changes in Equity
• The following amounts may also be presented on
the face of the statement of changes in equity, or
they may be presented in the notes: [IAS 1.97]
• (a) capital transactions with owners;
• (b) the balance of accumulated profits at the
beginning and at the end of the period, and the
movements for the period; and
• (c) a reconciliation between the carrying amount
of each class of equity capital, share premium and
each reserve at the beginning and at the end of
the period, disclosing each movement.
 Cash Flow

Cash flow statement

Cash in flows
Cash outflows
Net cashflow profit
Dividend and interest paid
Repayment of loans
 Cooking the books

“Every company in the country is fiddling its

profits. Every set of published accounts is based
on books which have been gently cooked or
completely roasted. The figures which are fed
twice a year to the investing public have all been
changed in order to protect the guilty. It is the
biggest con trick since the Trojan horse. . . In fact
this deception is all in perfectly good taste. It is
totally legitimate. It is creative
accounting.”
(Griffiths,1986:1)
 Creative Accounting

• Accounting practices that follow required

laws and regulations, but deviate from what
those standards intend to accomplish.
Creative Accounting (2)

Opportunity for creative accounting:

1. Choice of accounting method
2. Bias estimates and prediction
3. Enter into artificial transaction
4. Timing of genuine transactions

(Amat et al. 1999)

 Creative Accounting (3)

“Numbers don’t lie, people lie about numbers.”

Kevin Day
 Creative Accounting (4)

• Choose between a policy of writing off

development expenditure as it occurs and
amortising it over the life of the related
project
• Estimation of an asset's useful life to calculate
depreciation
• Arrangement is made to sell an asset to a
bank then lease that asset back for the rest of
its useful life.
 Creative Accounting (5)

• An investment of £1 million at historic cost

which can easily be sold for £3 million, being
the current value.
• Managers are free to choose in which year
they sell the investment and so increase the
profit in the accounts.
Annual Report