KSB 111 Exam 2

10.2 The Role of Accounting

   Accounting is crucial for providing financial information to stakeholders, enabling informed business decisions. It acts as the "language of business".

   Two branches of accounting:

       Managerial Accounting:  Focuses on information for internal users like managers, helping them plan, control, and make decisions about the organisation.

       Financial Accounting: Prepares financial statements (income statement, balance sheet, statement of owner's equity, and statement of cash flows) for both internal and external users.  It follows Generally Accepted Accounting Principles (GAAP) to ensure accuracy and comparability.

   GAAP is essential for accurate financial reporting, enabling stakeholders to compare statements from different companies.

   Users of financial information:

       Internal: Managers, employees.

       External: Investors, creditors, government agencies (e.g., SEC, IRS), suppliers, and others interested in the company's performance.

   International Financial Reporting Standards (IFRS): An alternative accounting standard used by many companies outside the US, aiming for global consistency in financial reporting.

10.3 Understanding Financial Statements

   Financial Statements: Summaries of a company's financial activities over a specific period, including:

       Income Statement: Reports revenues, expenses, and net income (profit or loss).

       Balance Sheet: Shows assets, liabilities, and owner's equity at a point in time.

       Statement of Owner's Equity: Tracks changes in owner's equity over time.

       Statement of Cash Flows: Details cash inflows and outflows from operating, investing, and financing activities (discussed in Section 10.4).

   Accounting Equation:  Highlights the relationship between assets, liabilities, and owner's equity:

    Assets = Liabilities + Owner's Equity

    This equation underlies the balance sheet, where assets must equal the sum of liabilities and owner's equity.

   Preparation order of financial statements: Income Statement, Statement of Owner's Equity, Balance Sheet. This is because net income from the income statement is needed for the statement of owner's equity, and ending owner's equity is reported on the balance sheet.

   Breakeven Analysis: Determines the sales level required to cover all costs and avoid losses.

       Breakeven Point (in units) = Fixed Costs / Contribution Margin per Unit

       Contribution Margin per Unit = Sales Price per Unit - Variable Cost per Unit

## 10.4 Accrual Accounting

   Accrual Accounting: Recognises revenue when earned and  when incurred, regardless of when cash changes hands. This method provides a more accurate view of financial performance compared to cash-basis accounting, which records transactions only when cash is received or paid.

   Key Concepts:

       Inventory:  Represents goods purchased for resale and is reported as an asset on the balance sheet.

       Cost of Goods Sold: Represents the expense of goods sold during a period and appears on the income statement.

       Depreciation:  Allocates the cost of long-term assets (like equipment) over their useful life, appearing as an expense on the income statement.

   Classified Balance Sheet: Categorises assets and liabilities into current and long-term:

       Current Assets:  Expected to be converted into cash within one year (e.g., cash, accounts receivable, inventory).

       Long-Term Assets: Held for more than one year (e.g., property, plant, equipment).

       Current Liabilities: Due within one year (e.g., accounts payable, short-term loans).

       Long-Term Liabilities: Due in more than one year (e.g., long-term loans, mortgages).

   Statement of Cash Flows: Reports the movement of cash from operating, investing, and financing activities, providing insights into the company's cash management practices.

## 11.2 The Functions of Money

   Functions of Money:

       Medium of Exchange: Facilitates transactions by being widely accepted for goods and services.

       Measure of Value: Provides a common unit to express prices and compare values.

       Store of Value: Allows wealth to be held and used later, assuming money retains its value.

   Measures of Money Supply:

       M-1: Includes the most liquid forms of money: cash, checking account balances, and traveller's cheques.

       M-2:  Includes M-1 plus less liquid, near-cash items like savings accounts, time deposits, and money market mutual funds.

## 11.3 Financial Institutions

   Financial Institutions: Act as intermediaries, channelling funds from savers to borrowers, thereby facilitating financial transactions.

   Types of Financial Institutions:

       Depository Institutions: Accept deposits from customers:

           Commercial Banks: Offer various banking services, including checking and savings accounts, loans, and credit cards.

           Savings Banks:  Focus primarily on savings accounts and mortgage loans.

           Credit Unions: Member-owned institutions providing banking services similar to commercial banks but often with better rates and lower fees.

       Nondepository Institutions: Don't accept deposits but provide financial services:

           Finance Companies: Make loans to individuals and businesses, often specialising in higher-risk lending.

           Insurance Companies:  Provide protection against financial losses.

           Brokerage Firms:  Facilitate the buying and selling of securities (stocks, bonds, etc.).

           Pension Funds:  Manage retirement savings plans.

## 11.5 The Role of the Financial Manager

   Financial Plan: Outlines a company's capital needs, acquisition strategies, and repayment plans.

   Common Funding Sources:

       Personal Assets:  Investing personal savings or assets into the business.

       Loans from Family and Friends:  Borrowing from personal connections.

       Bank Loans:  Securing loans from financial institutions.

       Crowdfunding: Raising funds from a large number of individuals, often online, through platforms like Kickstarter and Indiegogo.

   Managing Accounts Payable: Efficiently handling payments to suppliers to maintain good relationships and optimise cash flow.

   Budgeting: Creating financial plans for specific periods, typically a year, to project revenues, expenses, and cash flow, helping in financial control and decision-making.

## 11.7 Financing the Going Concern

This section is mentioned in the sources but does not contain specific takeaways or information.