W02_L2_managementAccounting2023(1)

Course Overview

• Course: comp3219 Engineering Management and Law Management Accounting and Company Finances

• Instructor: Dr. Sarah Hewitt (previously Vahid Yazdanpanah)

• Based on slides by Andy Gravell

• Date: October 2024

Objectives

• Covers fundamental topics in accounting and finance, including:

  • The fundamental accounting equation

  • Differences between financial and management accounting

  • Financial report standards and expectations

  • Company planning, control, and budgeting

  • Costs, cost centres, variable and fixed costs

  • A practical cost accounting exercise

  • Perspectives on the balanced scorecard, ethics, and externalities

• Aim: Provide understanding and vocabulary for discussions with accountants rather than training as an accountant.

Background Reading

• Recommended Text: Atrill & McLaney (2018/9), Accounting and Finance for Non-Specialists (11th edition)

  • Available in printed and electronic formats at the library

  • Important chapters include:

    • Measuring and Reporting Financial Position

    • Relevance and Behaviour of Costs

    • Full Costing

    • Budgeting

    • Capital Investment Decisions

    • Introduction chapter for background information

Fundamental Accounting Equation

• Equation: Assets = Liabilities + Equity

  • Example: Borrowing for a car increases both assets and liabilities.

  • Selling shares increases cash and shareholder equity.

• Maintained by double entry bookkeeping:

  • Each transaction recorded as a credit and a debit.

  • Ensures balances satisfy the accounting equation.

Bookkeeping and Company Accounts

• Importance of maintaining accurate accounts:

  • Manages cash flow, tracks assets, equities, and liabilities.

  • Poor bookkeeping leads to unpaid taxes, fines, and potential fraud.

• Small firms may outsource data entry to specialists.

• Popular packages for data entry: Intuit Quickbooks, Sage Accounting, Zoho Books, Freshbooks.

• As companies grow, they typically hire in-house accounting staff responsible for:

  • Accounts payable/receivable

  • Payroll

  • Reporting & financial statements

  • Financial control, tax and compliance

Two Main Branches of Accounting

• Financial Accounting:

  • Produces annual reports for public and shareholders.

  • Must be audited for correctness.

  • Used by investors for decision-making regarding shares.

• Management Accounting:

  • Provides up-to-date and confidential data.

  • Supports performance monitoring and management decision-making.

• Other types include tax accounting, forensic accounting, and accounting information systems.

Financial Reports

• Balance Sheet: Displays assets, liabilities, and equity at a specific moment.

• Profit and Loss Report: Shows income versus expenses over time.

• Equity Statement: Reflects retained earnings.

• Cash Flow Statement: Reports on operational costs and investments.

• Reports generally assume "going concern" status of the company.

  • Red flags for insolvency include inability to pay debts on time.

  • Liquidated assets often sell for less if in a hurry.

International Financial Reporting Standard (IFRS)

• Fundamental qualitative characteristics:

  • Relevance

  • Faithful representation

• Enhancing qualitative characteristics:

  • Comparability

  • Verifiability

  • Timeliness

  • Understandability

• IFRS standards adopted in over 140 jurisdictions, including the UK.

• U.S. adheres to its own Generally Accepted Accounting Principles (GAAP).

Financial Analysis

• Importance of analyzing financial data before investment or transactions.

  • Metrics to consider:

    • Market Capitalization (market cap)

    • Earnings Per Share (EPS)

    • Beta (volatility measure)

• The University of Southampton does not operate as a typical company with shares.

Management Accounting

• Focused on analyzing information for business strategy and success.

  • Forward-looking compared to financial accounting.

  • Relies on predictive models rather than historical data.

• Financial data is increasingly available on-demand.

Planning and Control

• Establishes objectives and can generate conflict between stakeholders.

• Strategic Decisions: Long-term plans to achieve organizational goals.

• Operating Decisions: Short-term budgets to implement strategies.

• Requires constant monitoring and control to ensure objectives are met.

Budgeting Approaches

• Top-down: Senior managers dictate expectations, emphasizing strategy.

• Bottom-up: Lower levels provide input on capabilities and resources needed, emphasizing operations.

• Participatory: Budget negotiated across levels, leading to potential compromises.

Benefits of Budgets

• Authorizes spending and promotes forward-thinking.

• Aids in controlling costs and motivating managers towards performance.

• Coordinates the activities of different departments within the business.

Costs

• Avoidable Costs: Can be eliminated by choosing one alternative over another.

• Unavoidable Costs: Costs that cannot be changed regardless of managerial decisions.

Cost Centres

• Defined parts of an organization where costs are tracked and aggregated.

  • Examples: Departments or specific activities like assembly or inspection.

• Useful for accountability and cost allocation.

Classification of Costs

• Costs vary with activity; categorize as:

  • Fixed: Constant costs regardless of activity level.

  • Variable: Costs that fluctuate with production levels.

Cost Accounting and Profit Model

• Profit model: π = pq - (F + wq)

  • Where:

    • π = profit, p = sales price, q = quantity sold, F = fixed costs, w = variable cost per unit.

• Break-even analysis helps in understanding pricing strategies.

Cost Accounting Exercises

• Practical exercises proposed to apply cost accounting concepts.

• Encouragement to present findings in a structured table format.

Balanced Scorecard

• Emphasizes the importance of measuring broader performance metrics beyond financial aspects.

• Traditional measures like ROI could mislead strategies.

Ethics and Externalities

• Consideration of social, environmental, and ethical impacts of corporate decisions.

• Requires transparency and accountability for external costs.

International Transfer Tax

• Discussion on global tax implications of multinational corporations.

• OECD proposals for fair taxation among nations.

Conclusion

• Upcoming discussions on exercises and practical applications of cost accounting.