ACCA BT – Accounting & Finance Functions Comprehensive Notes

The Accounting Function

• Accounting = systematic recording, reporting and analysis of financial transactions.
• Large organisations split the accounting department into specialised sub-functions:
– Financial accounting
– Management accounting
– Treasury & finance
– (Supporting systems, audit, information management etc.)

Financial Accounting Function

• Core purpose: produce annual financial statements in line with applicable standards/legislation and give information to external & internal stakeholders.
• Transaction flow (normal sequence):
Transactions → Books of prime entry → Ledger accounts → Trial balance → Financial statements.
• Five books of prime entry:

1. Purchase day book

2. Sales day book

3. Cash book

4. Petty-cash book

5. Journal
   • Main year-end statements:
   – Statement of Profit or Loss (SPL / SOPL)
   – Statement of Financial Position (SOFP)
   – Statement of Cash Flows (SOCF) plus SOCE/SOCIE when required.
   • Stakeholders & their information needs:
   – Owners/shareholders ⇒ profitability, stewardship
   – Management ⇒ planning, control
   – Banks ⇒ repayment capacity
   – Employees ⇒ job security, wages
   – Suppliers/Customers ⇒ solvency, continuity
   – Government/regulators ⇒ legal & tax compliance.
   • Large/quoted companies must circulate statements to shareholders and appoint external auditors who opine on “true and fair view”.

Management Accounting Function

• Objective: assist managers to plan, direct & control by measuring, analysing, interpreting and communicating information in an easily usable form.
• Flexible data sources: uses financial records plus any internal/external data judged useful.
• No statutory format; common outputs:
– Cost schedules/standard cost cards
– Budgets
– Variance reports
– Break-even analysis, pricing models, key-factor analysis, etc.

Cost Schedules

• List per-unit costs (materials, labour, overheads).
• Support: pricing decisions, break-even calculations, key-factor (constraint) analysis.

Budgets

• Quantitative plans of future revenues/costs based on forecast volumes and standard costs.
• Advantages remembered with CRUMPET:
C – Co-ordination
R – Responsibility/authority
U – Utilisation of resources
M – Motivation/behaviour influence
P – Planning/looking ahead
E – Evaluation/appraisal
T – Telling/communication.
• Drawback: estimates rarely match reality → requirement for variance analysis.

Variance Reports

• Compare budgeted vs actual results; highlight significant favourable/adverse variances.
• Management investigates causes to:
– Prevent repeat adverse results
– Replicate favourable outcomes
– Realign actuals to targets.

Financial vs Management Accounting

• Audience: Financial ⇒ internal & external; Management ⇒ internal only.
• Time-focus: Financial uses mainly historic data; Management can be past, present, future.
• Frequency/format: Financial annually & regulated; Management as-needed & flexible.
• Standards: Financial must follow GAAP/IFRS; Management has no compulsory standards.

Treasury & Finance Function

• Corporate handling of funds, currencies, cash-flow and financing strategy.

Key Roles

• Working capital management – always maintain sufficient cash.
• Cash management – cash budgets, overdrafts.
• Financing – manage borrowings & investments to minimise interest and maximise returns.
• Foreign currency – hedge or manage FX risk.
• Tax management – legally minimise tax liabilities.

Working Capital Formula

$(\text{Working Capital}=\text{Current Assets}-\text{Current Liabilities})$

Pros/Cons of Holding Large vs Small Balances

• Inventory: +Immediate supply to customers / –High holding & obsolescence risk.
• Trade receivables: +Customer goodwill / –Bad-debt risk, cash tied up.
• Cash: +Pay creditors promptly / –Could earn more invested elsewhere.
• Trade payables: +Preserve cash / –May lose discounts & goodwill.

External Finance

• Debt finance: repay with interest; increases gearing; tax-deductible interest; no loss of ownership but requires security.
• Equity finance: sell ownership stake; no mandatory dividend; useful when insufficient collateral; dilutes control; dividends not deductible.

Tax Avoidance vs Evasion

• Avoidance = legal planning to reduce tax (ethical debate).
• Evasion = illegal misrepresentation; criminal offence.

Relationship Between Accounting & Other Functions

Purchasing (Procurement)

• Co-ordinate on credit terms, maximum prices, payments, data capture, inventory levels & budgeting.

Production

• Co-ordinate on cost measurement/allocation, budgets & forecasts, cost-vs-quality decisions, raw-material levels.

Marketing

• Joint work on sales budgets, advertising spend (cost/benefit), pricing (cost-plus or market-based), market-share analysis.

Service Provision

• Service characteristics: Intangibility, Inseparability (simultaneous production & consumption), Perishability, Variability.

Legal & Regulatory Framework

Bodies to Whom Companies Are Accountable

• Company registrars (e.g. UK Companies House).
• Tax authorities (income tax, VAT).
• Other regulators (consumer, environmental, sector-specific).
• Requirement to keep records usually ≥ 7 years.

Company Legislation (UK example: CA2006)

• Must prepare “true and fair” financial statements: follow standards, disclose sufficient detail, avoid material misstatement.
• Directors (delegated to FD/CFO) are responsible. Failure → criminal offence, fines, share suspension, tax penalties, qualified audit opinion, reputational damage.

International Regulation

• Diverse national GAAP led to IFRS Foundation and IASB to harmonise standards globally; interpretations issued by IFRIC.

Fraud & Fraudulent Behaviour

Definitions

• Fraud = intentional deception for financial/non-financial gain ("theft by deception").
• Error = unintentional mistake.
• Irregularity = contravention of rules.
• Misstatement = incorrect statement (can be error or fraud).

Fraud Triangle (Prerequisites)

1. Dishonesty/integrity lapse

2. Opportunity (weak controls)

3. Motivation/pressure.

Risk Indicators

• Management domination, complex structures, poor morale, no leave, lavish lifestyles, inadequate segregation, lack of monitoring.

Example Frauds

• By management: asset misappropriation, false insurance claims, personal use of assets.
• By employees: sales-ledger theft, dummy purchase invoices, skimming small amounts, payroll ghost employees.
• By third parties: false billing, bank-account scams, advance-fee fraud, Ponzi schemes.

Fraudulent Financial Reporting (“creative accounting”)

• Recording fictitious entries, manipulating estimates, timing recognition, altering records, window-dressing, off-balance-sheet items.

Money Laundering

• Turning “dirty” into “clean” money through three stages:
– Placement
– Layering
– Integration.
• Offences: laundering, failure to report. Penalties: up to $5$ years + fines.

Implications of Fraud

• Loss of assets, fines, shareholder confidence erosion, finance difficulties, potential collapse.

Prevention & Detection – Internal Control System

Five Components

1. Control environment (culture, ethics).

2. Risk assessment process.

3. Information system.

4. Control activities (authorisation, reconciliations, physical safeguards, segregation of duties, IT general & application controls).

5. Monitoring.
   • Control categories: Preventive, Detective, Corrective.
   • Management/Board/Audit-committee duty: establish, review & enforce controls.

Data & Information Fundamentals

• Data = raw facts (numbers, letters, events).
• Information = processed data with meaning for decision-makers.
• Types of data: quantitative, qualitative; primary vs secondary.
• Characteristics of good information – ACCURATE:
– Accurate
– Complete
– Cost-effective
– Understandable
– Relevant
– Adaptable
– Timely
– Easy to use.

Information Systems & IT

• IS = organised processes for information provision; IT = equipment for data capture/storage/transmission/presentation.

Hierarchy of Systems

• Transaction Processing System (TPS) – day-to-day data for operational managers.
• Management Information System (MIS) – turns TPS data into tactical reports.
• Decision Support System (DSS) – semi-structured decision help, combines internal & external data.
• Executive Information System (EIS) – strategic summaries for senior execs.
• Expert Systems (ES) – rule-based specialised knowledge accessible to non-experts (law, tax, medical, banking).

Common Software Applications

• Spreadsheets – analysis, single lists, graphing.
• Databases – large multi-user raw-data storage.
• Accounting packages – automate transaction recording & reporting.

Advantages of Computerisation

• Speed, accuracy, high-volume capability, cost efficiency, handling complexity, improved presentation, system integration, readily available additional reports.

Integrated Reporting ((6) Capitals)

• Financial, Manufactured, Intellectual, Human, Social & Relationship, Natural capitals: reports provide broader performance picture including sustainability & environmental impact.

Auditing

Internal vs External Audit

Internal Audit Tasks

• Review controls & risk management, special assignments (fraud), operational efficiency studies, policy compliance.
• Limitations: independence compromised, resource constraints, possible suppression of findings.

External Audit Pros & Cons

• Benefits: assurance, insight, credibility for lenders/investors.
• Costs: audit fee, management time, possible qualified opinion if issues found.

Internal Control & Internal Check (Detailed)

• Internal control = processes effected by management to provide reasonable assurance re: objectives – orderly operations, safeguarding assets, preventing/detecting fraud/error, accuracy of records.
• Internal check = allocation of tasks so work of one person automatically checked by another.

Detailed Control Activities Examples

• Authorisation levels, comparisons & analytics, trial balance & control accounts, reconciliations, physical security, IT general controls (access, backups, disaster recovery), application controls (input, processing, output validation), segregation of duties (authorise–record–custody).

IT & Control

• Financial controls (data integrity), operational controls (automated production checks).
• General controls: hardware security, software configuration, change control, disaster recovery.
• Application controls: validation, edit checks, batch totals.

Key Equation Recap

$(\text{Working Capital}=CA-CL)$

Ethical & Practical Take-aways

• Strong ethical culture (“tone at the top”) underpins all controls.
• Honest staff + limited opportunity + low motivation = minimal fraud risk.
• Legal compliance saves fines, reputation and audit qualifications.
• Integrated, computerised information systems boost speed and decision quality but require robust IT controls.
• Effective budgeting (CRUMPET) links objectives, motivates staff and provides yardsticks for variance analysis.
• Treasury must balance liquidity, profitability and risk (currency, tax, gearing).
• Stakeholder needs guide the form and content of financial reports — from core statements to integrated sustainability disclosures.