14) Topic 10

Introduction to Finance and Accounting

  • Prepared by Dr. Suresh Raja Manickam & Ms. Nur Shazliza Bt Mohd Azeman

Learning Outcomes

  1. Role of Accountants

    • Distinguish between public, private, management, and forensic accountants.

  2. Accounting Equation

    • Understanding its application in financial reporting.

  3. Financial Statements

    • Describe the three basic financial statements and their significance in business.

  4. Reporting Standards

    • Explain key standards and principles for financial statement reporting.

Key Functions of Finance and Accounting Department

  1. Financial Planning and Budgeting

    • Prepare financial plans and forecasts to operate within financial limits.

  2. Record Keeping and Reporting

    • Maintain financial records and produce performance statements.

  3. Cash Flow Management

    • Monitor cash inflows and outflows.

  4. Cost Control

    • Identify cost reduction opportunities.

  5. Financial Analysis

    • Analyze financial data for strategic decision-making.

What is Accounting?

  • A system for collecting, analyzing, and communicating financial information.

  • Bookkeeping involves recording transactions.

Accounting Information System (AIS)

  • Organized procedures for identifying, measuring, and retaining financial data.

Users of Accounting Information

  • Business Managers: Set goals and budgets.

  • Employees and Unions: Plan for compensation benefits.

  • Investors & Creditors: Evaluate returns and growth prospects.

  • Tax Authorities: Plan for tax inflows and liabilities.

  • Government Agencies: Ensure public duty fulfillment.

Types of Accountants

  • Controller: Manages all accounting activities.

  • Certified Public Accountant (CPA): State-licensed accountant.

Financial vs. Managerial Accounting

  • Financial Accounting: For external users.

  • Managerial Accounting: For internal users.

CPA Services

  1. Audit: Examine accounting systems.

  2. Tax Services: Tax preparation assistance.

  3. Management Advisory Services: Financial planning and other assistance.

The Accounting Equation

  • Equation: Assets = Liabilities + Owners’ Equity

  • Balances financial transactions.

Understanding Financial Statements

  • Balance Sheet: Details assets, liabilities, and owners’ equity.

Google's Balance Sheet Overview (2012)

  • Total Assets: $93,798M

  • Total Liabilities: $22,083M

  • Total Shareholders' Equity: $71,715M

Key Terms

  • Current Asset: Convertible to cash within a year.

  • Fixed Asset: Long-term use or value.

  • Liability: Debt owed to outside parties.

  • Retained Earnings: Earnings kept for business use.

Income Statements

  • Income Statement (Profit-and-Loss Statement): Lists revenues and expenses to show profit or loss.

Google's Income Statement Overview (2012)

  • Revenues: $50,175M

  • Net Income: $10,737M

Statements of Cash Flows

  • Describes yearly cash receipts and payments.

  • Illustrates how well a company manages cash inflow and outflow.

Importance of the Budget

  • A detailed statement of estimated receipts and expenditures.

Financial Analysis Techniques

  1. Solvency Ratio: Measures the ability to repay debt.

  2. Profitability Ratio: Evaluates potential earnings.

  3. Activity Ratio: Assesses asset usage efficiency.

Role of Financial Institutions

  • Facilitate fund flows among individuals, businesses, and governments.

Importance of Financial System in the Economy

  1. Efficient resource allocation.

  2. Capital formation.

  3. Liquidity management.

  4. Risk management.

  5. Economic stability and growth.

  6. Encourage savings and investments.

  7. Global financial integration.

Types of Financial Institutions

  • Commercial Banks: Offer deposits, loans, and payment services.

  • Investment Banks: Provide underwriting and asset management.

  • Insurance Companies: Risk management services.

  • Central Banks: Oversee monetary stability.

Key Roles of a Central Bank

  1. Monetary policy management.

  2. Issuing currency.

  3. Lender of last resort.

  4. Supervising financial institutions.

  5. Managing foreign exchange reserves.

  6. Serving as the government’s bank.

  7. Ensuring financial stability.