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Accounting and Finance

Introduction

Trefor McElroy
September/October 2017

Voettekst van presentatie

LEARNING OUTCOMES

You should be able to:

Explain the nature and roles of

accounting and finance

Identify the main users of financial information

and discuss their needs

Distinguish between financial accounting and

management accounting

Explain why an understanding of accounting and

finance is likely to be relevant to your needs
Forms of business organisation
• Sole trader

• Partnership

• Limited Liability
Partnership

• Limited Company
Private – Ltd
Public - plc

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Changes in the business environment

Increasing sophistication of
customers

Development of a global economy

Rapid changes in technology

Deregulation of domestic markets

Increasing pressure from owners for

competitive returns

Increasing volatility of
financial markets
Stakeholders

There are lots of groups of people who have an interest in any

particular company – they are often called stakeholders.
What stakeholders can you think of?
And what information do they want?
Some of this information can be found in company accounts
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 The accounting information system

Information Information Information Information

requirement recording collating reporting
 Definition of Accounting

• ` The process of identifying, measuring and communicating

economic information to permit informed judgements and decisions
by users of the information.’

• (American Accounting Association 1966)

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Internal and external users

Management Accounting is concerned with providing, recording and

communicating information to internal users of the company who need
detailed information about past performance and expected future
performance .
Management accounting informations is also used for planning and
control purposes

Financial Accounting aims to do the same for external users.

Generally, detailed information is not made available to
these groups. But, summarised information on past
performance is available in the form of Financial
Statements
The qualities that influence the usefulness of accounting information

COST
CONSTRAINT Qualities

Fundamental Enhancing

Faithful
Relevance
representation

Predictive Confirmatory Freedom

Completeness Neutrality
value value from error

Materiality
threshold

Understand-
Comparability Timeliness Verifiability
ability
The three main financial statements

1. The balance sheet – assets, liabilities, capital

2. The profit and loss account (income statement)

- incomes, expenses, profit
3. The cash flow statement – cash inflows and outflows
Regulation

When drawing up financial statements, accountants need to follow lots

of rules and regulations.
Why so many rules?
Who sets them?
Sources of external accounting rules for a UK public limited company
listed on the London Stock Exchange

External International
Company Financial
law accounting
rules Reporting
Standards

Stock Exchange rules

imposed by FSA
 Principles underpinning a framework of rules

Disclosure Framework
Fairness
of rules

Accountability
 The UK Corporate Governance Code

Every listed company should have a board of directors

There should be a clear division of responsibilities

between the chairman and the chief executive officer

Non-executive directors should challenge and help

develop proposals on strategy

There should be a balance of skills, experience,

independence and knowledge

The board should receive timely information

Appointments to the board should be the subject of

rigorous, formal and transparent procedures
Source: www.frc.org.uk.
 The UK Corporate Governance Code (continued)

All directors should submit themselves to re-election at

regular intervals

Remuneration levels should be sufficient to attract, retain

and motivate directors of the appropriate quality

There should be formal and transparent procedures for

developing policy on directors’ remuneration

The board should present a balanced and understandable

assessment of the company’s position and prospects

The board should try to ensure that a satisfactory

dialogue with shareholders occurs

Source: www.frc.org.uk.
 The UK Corporate Governance Code (continued)

Boards should use the annual general meeting to

communicate with investors

The board should define the company’s risk appetite and

tolerance and maintain a sound risk management system

Formal and transparent arrangements for financial

reporting and internal control should be in place

The board should formally and rigorously examine its

own performance each year
The relationship between the shareholders, the directors and the
auditors

Directors

review
account
elect

report

Shareholders elect Auditors

 Accounting and Finance

Accounting....
..... Captures data
records and classifies
summarises and reports
interprets and communicates.....
............ Past information

The rules of accounting try to ensure that ....

...............Past information is a guide to future
performance

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 Accounting and Finance

Finance is concerned with decisions about the future.

In particular:

• 1. What to INVEST in?

• 2. How to FINANCE the investment?

• 3. What to do with the PROFITS?

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What you need to know – important aspects
of accounting and finance

How accounting reports should be

read and interpreted

How financial plans are made

How investment decisions are made

How businesses are financed

Summary of introduction

1. Accounting information is produced to help stakeholders make

decisions.
2. Financial accounting reports to stakeholders external to the
company; management accounting reports to internal users.
3. The three main financial accounting statements are subject to
significant legal and accounting regulation.