Accounting and Finance For

Managers
By
Mohammed S. (Assistant Professor)
2 Cr Hrs
 PART ONE
General Overview of Accounting and
Finance
Reading:
1. Warren et al. (2018) Accounting, 27 ed. (Chapter 1)
2. Jerry J. Weygandt, et al. (2012), Managerial accounting: Tools for business decision
making (Chapter 1)
3. Stephen A. Ross, et al. (2001), Fundamentals of Corporate Finance 5 th ed. (Chapter 1)
4. Michael C. Ehrhardt & Eugene F. Brigham (2011) Financial Management: Theory and
Practice, 13th ed (Chapter 1)
Contents
Introduction to accounting
Accounting information users
Financial, Cost & Management Accounting: User Perspective
The nature of finance
1.1. Introduction to Accounting
 Accounting can be defined as an information system that provides reports
to users about the economic activities and condition of a business.
 Its purpose is to communicate or report the results of business operations
and its various aspects.
 It is the process of identifying, measuring and communicating economic
information to permit informed judgments and decisions by users of the
information. 
 Hence, accounting is an information system that provides useful
information to users (decision makers).
 Accounting Activities and Users
Internal Users
 Cont’d…
External Users
Taxing authorities: Does the
company comply with the tax
laws?
Regulatory agencies: Is the
company operating within
prescribed rules?
Labor unions: Does the
company have the ability to pay
increased wages and benefits to
union members?
1.3. Accounting information Users..
• Accounting Information(AI): A Means to an End

• Accounting information is not an end , but is a means to an end

i.e. its final product is decision which is ultimately enhanced
by the use of accounting information, whether that decision
made by owners, management, creditors, government bodies,
labor unions ,etc.
1.4. Financial, Cost and Management Accounting
1) Financial Accounting
 Financial accounting information provides information about
the financial resources, obligations, & activities of an
enterprise that is intended for use primarily by external
decision makers.
Financial, Cost and Management Accounting
2) Cost Accounting
Cost accounting is a process of collecting, analyzing, summarizing and
evaluating various alternative courses of action.
Cost accounting provides the detailed cost information that management
needs to control current operations and plan for the future.
A type of accounting process that aims to capture a company's costs of
production by assessing the input costs of each step of production as well
as fixed costs such as depreciation of capital equipment.
Cost accounting information is commonly used in financial accounting
 information, and by managers to make decisions.
Financial, Cost and Management Accounting
3) Management Accounting
Managerial accounting, also called management accounting, is a field of
accounting that provides economic and financial information for managers
and other internal users.
It is for internal use & provides special information for managers.
Managers use this information in
Setting companies goals,
Evaluating the performance of departments and individuals,
Deciding whether to introduce a new line of products, and
Making virtually all types of managerial decisions.
Financial, Cost and Management Accounting
Generally, management accounting generates information that
managers can use to make sound decisions such as
• Financial,
• Resource allocation,
• Production &
• Marketing decisions.
Financial Accounting Vs Management Accounting
 There are both similarities and differences between managerial and
financial accounting.
 First, each field of accounting deals with the economic events of a
business.
 Thus, their interests overlap. For example, determining the unit cost of
manufacturing a product is part of managerial accounting.
 Reporting the total cost of goods manufactured and sold is part of
financial accounting.
 In addition, both managerial and financial accounting require that a
company’s economic events be quantified and communicated to
interested parties.
1.6. Finance
 The study of how to raise money and invest it productively.
 Virtually all individuals and organizations earn or raise money and
spend or invest money.
 Finance is concerned with the process, institutions, markets, and
instruments involved in the transfer of money among individuals,
businesses and governments.
 The general areas of finance are business, personal and public finance.
 Finance is important to individuals, business and government to achieve
their economic objectives.
 FINANCE uses accounting information as inputs to decision-making.
Finance…
Financial management defined:

It is an integral part of overall management. concerned with the

efficient use of an important economic resource namely, capital
funds”
“Financial Management deals with procurement of funds and
their effective utilization in the business”
In simple words, Financial Management as practiced by
business firms can be called as corporation Finance or
business Finance.
Finance…
Financial decisions in a firm
There are four broad areas of financial decision making in a firm.
These are:
1. Investment decisions (Capital budgeting)
2. Financing decisions (capital structure)
3. Liquidity decisions (working capital management/short
term asset mix decision)
4. Dividend decisions
Finance…
1. Investment decisions:
A firm’s investment decisions involve capital expenditures.
They are, therefore, referred as capital budgeting decision.
Capital investment is the allocation of capital to investment proposals
Involves commitment of funds to long term assets that would yield long
term benefits
Two important aspects of investment decision are:
 The evaluation of the prospective profitability of new investment, and
 The measurement of a cut-off rate against that the prospective return of
new investments could be compared.
Investment proposal should be evaluated in terms of both expected return and risk.

Finance…
2. Financing decisions:
Once a firm has decided the investment projects it wants to
undertake, it has to figure out ways and means of financing them.
This is the function of raising funds.
The central issue here is to determine the appropriate proportion
of equity and debt; the mix of debt and equity is called capital
structure.
The financial manager must strive to obtain the best financing mix
or the optimum capital structure.
The use of debt affects the return and risk of shareholders; it may
increase the return on equity funds, but it always increases risk as
well.
Finance…
3. Working capital management (Liquidity) decision:
Also referred as short term financial management that deals with current assets
and current liabilities.
Investment in current assets affect the firm’s profitability and liquidity.
Current assets should be managed efficiently for safeguarding the firm against
the risk of illiquidity.
If the firm does not invest sufficient funds in current assets, it may become
illiquid and therefore, risky; but it would lose profitability, as idle current assets
would not earn anything.
Conflict exists between profitability and liquidity while managing current assets
and hence it deals with proper trade-off between liquidity and profitability.
Finance…
4. Dividend Decision:
 The financial manager must decide whether the firm should
distribute all profits, or retain them or distribute a portion and
retain the balance.
 The proportion of profits distributed as dividends is called the
dividend payout ratio and the retained portion of profit is
known as the retention ratio.
 The optimum dividend policy is that one maximizes the
market value of the firm’s shares
Conclusion
Accounting provides useful information about the economic
activities of business organizations to decision makers
Finance uses accounting information
Almost all business activities directly or indirectly involve the
acquisition and use of funds.
Accounting & Finance is closely related with the main
functional areas of a firm (production, marketing and HRM)
and hence finance is considered as a life blood of any
organization.
Financial management will be discussed in a separate course.
 ?
1. Why accounting is being called as “the language of
business”? Discuss with practical examples.
2. Accounting information is a means to an end, not the end in
itself. Discuss
3. Discuss the difference and similarities between financial
accounting, managerial accounting and Financial
management.
4. How can you explain the contribution accounting & finance
in administering business?
End of Part I