LECTURE ONE

INTRODUCTION
OUTLINE

 Financial Data/ Financial Statements

 Accounting Process
 Definition of Accounting
 Purpose of Accounting
 Users of Accounting Information and their informational needs
 Characteristics of Good Accounting Information
 Forms of Accounting
Financial Data

 Accounting focus on financial data.

 Financial data are Assets, Capital and Liabilities of a company.
 Assets are resources of the companies.
 Companies derive economic benefits from these Assets.
 Examples of assets of a company are Buildings, Motor Vehicles, Office Computers,
Inventories, Cash in Hand and Cash at Bank.
 Funds use to acquire assets come from two sources- Capital and Liabilities.
Financial Data

 Funds from the owners of a business are called Capital.

 Funds from outsiders of a business are called liabilities. Examples of outsiders are
Financial Institutions like Banks and suppliers or creditors.
 Financial data are also known as Financial Position.
 The Assets, Capital and Liabilities constitute Accounting Equation.
 The Accounting Equation is: Assets=Capital + Liabilities
 The Accounting Equation forms the foundation of Accounting.
Financial Data

 The Financial Position are use to generate reports in Accounting.

 These reports are known as Financial Statements.
 The set of Financial Statements are:
1. Balance Sheet or Statement of Financial of Financial Position
2. Income Statement or Profit or Loss Account or Statement of Financial Performance
3. Cash Flow Statement or Statement of Changes in Financial Position
4. Statement of Changes in Equity
5. Notes to the Accounts
Financial Data

 Financial Statements are prepared by Accountant.

 In the preparation of the Financial Statements, the Accountant follow some rules,
principles and assumptions.
 These rules, principles and assumptions are:
1. Accounting Concepts
2. Accounting Conventions
3. Accounting Standards
4. Accounting Policies
5. Accounting Bases
Financial Data

 The Financial Statements prepared by the Accountant are checked by Auditors.

 Auditors express their opinions on the Financial Statements.
 These opinions are the true and fair view of the Financial Statements.
 Until otherwise specified, auditors are external auditors.
 There are Internal Auditors and External Auditors.
 Internal Auditors are mostly employees of the company but external auditors are not.
Financial Statements

 Accountants mostly analyze the Financial Statements to the understanding of users.

 They use Ratios to analyze these Financial Statements.
 The main areas of analysis are:
1. Short-Term Solvency or Liquidity
2. Long-Term Solvency or Gearing or Leverage
3. Profitability
4. Efficiency or Asset Utilization
5. Market Outlook
Short-Term Solvency or Liquidity

 This is the ability of the company to pay its short-term debts when they fall due for
payment. Short-term debts are debts payable within one year. Examples are electricity
bills, taxes and creditors.
 Short-term debts are paid by short-term resources. Examples of short-term resources are
cash in hand, cash at bank and debtors.
 Liquid companies are able to pay their short-term debts when they fall due.
 Examples of short-term solvency or liquidity ratios are current ratio, acid test ratio and
quick ratio.
Long-Term Solvency or Gearing or Leverage

 This is the ability of a company to pay its long-term debts when they fall due for payment.
Long-term debts are payable after one year. Example is 5-Year Long from the Bank.
Equity or capital funds are use to pay long-term debts.
 Gearing or leverage is the matching of equity or capital funds to long-term debts or
liabilities.
 If a company’s capital or equity is more than its debts or liabilities, the company is lowly
geared or leveraged. Highly geared company is the one with high proportion of debts or
liabilities than equity or capital.
 Debt to Equity Ratio is an example of long-term or gearing ratio
Profitability

 This is the ability of a company to make profit.

 Profit = Income – Expenses
 Profitability determines the survival of a company
 Examples of profitability ratios are Net Profit Margin, Gross Profit Margin and Cost
Income Ratio.
Efficiency or Asset Utilization

 This is the optimal or wise use or judicious use of the assets of the company.
 Examples of efficiency ratios are Debtors’ Collection Days, Creditors’ Payment Days and
Stock Turnover.
Market Outlook

 This is the attractiveness of the company to potential or existing shareholders.

 Existing shareholders buy more shares of the company if the company is attractive.
 Potential shareholders invest in companies with good market outlook in order to obtain
returns on their investment.
 Examples of market ratios are Earnings per Share, Dividend per Share and Dividend
Payout Ratio.
Accounting process

 Accounting is art. This art involves:

1. Collecting
2. Analyzing
3. Recording
4. Summarizing
5. Presenting
6. Interpreting and
7. Communicating financial data expressed in monetary terms.
Definition of accounting

 Accounting is the art of collecting, analyzing, recording, summarizing, presenting,

interpreting and communicating financial data expressed in monetary terms into
information for use by users of accounting information or other parties for decision-
making or control.
 The initial stage of accounting involving collecting, analyzing and recording financial data
expressed in monetary terms is called Book Keeping.
Purpose of Accounting

 The primary purpose of Accounting is to provide information to the users of Accounting

Information for decision making or control.
Users of Accounting Information and their informational
needs

 The principal users of Accounting are:

1. Management
2. Lenders and Creditors
3. Potential and Existing Shareholders
4. Employees of Trade Union
5. Government Agencies
Other users of accounting information

 Customers
 Community
 Financial Analyst
 Budget Analyst
 Donor Agencies
 Non-Governmental Organizations (NGOs)
 Media
Users of Accounting Information and their informational
needs

 The users can also be divided into Internal Users and External Users
 Internal Users are Management and Employees
 The others are External Users.
Management

 Management is in charge of the day to day running of the company.

 They are interested in all aspects of the company. These are:
 Short-term solvency or liquidity
 Long-term solvency or gearing or leverage
 Profitability
 Efficiency or Assets Utilization
 Market Outlook
Lenders and Creditors

 Lenders provide long-term funds or loan to the company. Examples of Lenders are
Debenture Holders, Banks or Financial Institutions.
 Creditors provide short-term goods and services to the company on credit to be paid
mostly in the short-term. Examples of Creditors are Accounts Payables, Bills Payables.
 Lenders and Creditors are interested in the solvency of a company.
 Creditors are interested in the liquidity and Lenders are interested in both liquidity and
long-term solvency of a company.
Potential and Existing Shareholders

 Potential and existing shareholders are interested in the earnings or profitability of the
company.
 They are also interested in the market outlook and solvency of the company.
employees

 Employees are interested in the security of jobs and the continued existence of the
company.
 They are interested in the profitability, efficiency and solvency of the company.
Government agencies

 Examples of Government Agencies are Ghana Revenue Agency (GRA) and Registrar
Generals Department.
 GRA are interested in the profitability of the company for Tax purposes.
Characteristics of good Accounting Information

 According to the Conceptual Framework issued by the International Accounting Standard

Board (IASB), there two fundamental qualitative characteristics of Accounting
Information. These are relevance and faithful representation.
 There are four additional enhancing qualitative characteristic namely:
1. Comparability;
2. Verifiability
3. Timeliness; and
4. Understandability
relevance

 Relevant financial information is capable of influencing the decisions made by

users of the financial statements.
 The Conceptual Framework recognizes that financial information is capable of
making a difference in decisions if it has a ‘predictive value’, ‘confirmatory value’ or
both.
 Predictive value refers to financial information with predictive value as a tool
employed by users of financial statements in making their own predictions.
 Confirmatory value refers to feedback about previous evaluations.
relevance

 Materiality is an entity-specific aspect of relevance based on the nature or

magnitude (or both) of the items which the information relates in the context of an
individual entity’s financial report.
 An item is material if its omission or misstatement would influence decisions that
users make on the basis of financial information about a specific reporting entity.
Faithful representation

 Faithful representation encompasses both relevance and faithful

representation.
 Faithful representation contains three characteristics according to the
Conceptual Framework:
• complete;
• neutral; and
• free from error.
comparability

 The Conceptual Framework refers to comparability being the qualitative

characteristic that enables users to identify and understand similarities in, and
differences among, items.
 It identifies that a comparison needs two items, for example a current year’s
financial information and a preceding year’s financial information.
verifiability

 The Conceptual Framework recognises that verifiability helps assure users that
information faithfully represents the economic phenomena it purports to represent.
 It suggests that different users (observers) could reach consensus, albeit not
complete agreement, relating to whether a particular depiction is a faithful
representation.
 It recognises two methods of verification:
 Direct and Indirect
verifiability

 Direct verification can be achieved by direct confirmation, such as cash counts.

 Indirect verification is achieved by verifying the inputs to a model or other
technique and re-calculating the outputs using the same methodology.
timeliness

 The Conceptual Framework recognises that the older the information, the less
useful that information, dependant on users’ needs (older information may be
useful to users’ when assessing trends).
 It acknowledges that decision-makers need information available in time to be
capable of making informed decisions.
understandability

 This concept works on the basis of classifying, characterising and presenting

information clearly and concisely.
 If this is achieved, information becomes understandable.
 The Conceptual Framework recognises that financial reports are prepared for
users who have a reasonable knowledge of business and economic activities and
who review and analyse the information diligently.
 Despite this, however, the Framework also recognises that even such well-
informed users may need advice to understand information about complex issues.
Forms of accounting

1. Financial Accounting
2. Cost and Management Accounting
3. Tax Accounting
4. Auditing
5. Public Sector Accounting
Financial accounting

 Focuses on the stewardship function of management by generating reports that explain

how financial resources made available by lenders and owners have been applied for the
business of the enreprise. •
 Financial Accounting deals mainly with the recording of historical data and the preparation
of reports on past events.
Cost and management accounting

 Focuses on providing information to management to be used for planning, control and

decision making purposes.
 The emphasis is on making estimates about the cost and benefits of future events so as to
ensure that the enterprise achieves its objectives.
Tax accounting

 Is concerned with arranging the tax issues of individuals and organizations.

 It involves the computation of tax obligations as well as advising on various ways of
carrying on business so as to minimise the tax obligation of organizations.
 Tax Accountants also provide services to government institutions in charge of revenue
mobilization for the state.
 They help the assessment of taxes.
auditing

 This branch of Accounting provides assurance to various users of financial statements that
the financial statements show the true and fair view about the financial position, financial
performance and cash flow of the business entity.
Public sector accounting

 Is the branch of Accounting that concentrate on public sector organizations such as central
government, local government and statutory corporations.
 It comprises the various forms of Accounting in public sector organizations.
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