Introduction to Accounting and Finance

chapters 1, 2 and 4

What is accounting?

The process of identifying, measuring, and communicating information to permit informed judgements and decisions by the users of the information

Who are the users of accounting information?

User groups can be split into internal users and external users. Internal users include owners, employees and managers. External users include competitors, investors, government

How useful is accounting information?

• Helps reduce uncertainty about the financial position and performance of a business

• Provides insights into availability of funds for paying owners, repaying loans and rewarding employees

• Supports informed decision-making regarding business operations and financial strategies

What are the four sequential stages of an accounting information system?

1. Information identification

2. Information recording

3. Information analysis

4. Information reporting

What is management accounting?

Providing information for management to aid planning, control and decision making

What is financial accounting?

Recording of monetary transactions and the preparation of financial statements

What are the characteristics of management reporting?

• Mainly internal users

• Any format

• Completed as required

• Can include forecasts

• Any level of detail

• No rules

• Financial and non-financial information

What are the characteristics of financial reporting?

• Mainly external groups

• Standard formatting

• Annually

• Historic

• Summarised

• Rules

• Financial information

What is finance?

How a business raises funds from investors and then uses those funds to make investments

What are the 4 key management tasks related to finance?

1. Investment appraisal

2. Managing and controlling resources

3. Capital market operations

4. Financing decisions

What is investment project appraisal?

Evaluates the profitability and risk of new long-term projects to help managers make informed decisions and prioritise accepted projects

What is managing and controlling resources?

Uses financial tools to ensure actual performance aligns with planned performance for accepted investment projects

What are financial decisions?

Identifies and evaluates various sources of finance, balancing, long and short term sources, and considering internally generated finance like profits

What are capital market operations?

Involves raising new finance through capital markets, understanding how securities are prices, and anticipating market reactions to investment and financing plans

What kinds of business ownerships exist?

• Sole proprietorship

• Partnership

• Limited company

What is sole proprietorship?

A form of business where an individual operates a business on their own account

What is a partnership?

A form of business where there are at least two individuals carrying on a business with the intention of making a profit

What is a limited company?

A form of business that is granted separate legal existence from that of its owners

What are accounting conventions?

One of the generally accepted rules that accountants follow when preparing financial statements.

What is the business entity convention?

A convention that holds that the business and its owners are treated as separate and distinct

What is historic cost convention?

The accounting convention that holds that assets should be recorded at their historic/acquisition cost

What is the prudence convention?

The accounting convention that holds that caution should be exercised when preparing financial statements. When faced with uncertainty, accounts should understate assets and income and overstate expenses and liabilities.

What is the going concern convention?

The accounting convention that holds that financial statements should be prepared under the assumption that a business will continue operations for the foreseeable future, unless there is evidence to the contrary

What is the dual aspect convention?

The accounting convention that holds that each transaction has two aspects and both must be recorded in the financial statements