Financial Accounting Notes

Learning Outcomes

• Understand the main users of financial accounts.
• Identify differences between financial accounting and management accounting.
• Get introduced to key financial statements.

Main Users of Financial Information

• Customers: Assess product viability and pricing.
• Competitors: Analyze market positioning.
• Employees: Understand job security and company health.
• Government: Monitor compliance and taxation.
• Community Representatives: Evaluate social responsibility.
• Investment Analysts: Make informed investment decisions.
• Suppliers: Gauge reliability and creditworthiness.
• Lenders: Assess risk for loan approval.

Differences Between Management and Financial Accounting

Main Areas of Difference

• Nature of Reports Produced:

  • Management: Specific purpose reports.
  • Financial: General purpose reports.

• Level of Detail:

  • Management: Detailed information.
  • Financial: Broad overview.

• Regulations:

  • Management: No stringent rules.
  • Financial: Must adhere to established accounting guidelines.

• Reporting Interval:

  • Management: Reports are short and frequent.
  • Financial: Generally annual reports.

• Time Orientation:

  • Management: Focused on historic and future data.
  • Financial: Primarily historic.

• Range and Quality of Information:

  • Management: Financial and non-financial data.
  • Financial: Mostly financial data, objective and verifiable.

Changes to Business Environment

• Sophisticated Consumers: Increasing demand for quality and service.
• Global Economy: Impacts competition and supply chains.
• Rapid Changes in Technology: Necessitates adaptation in accounting practices.
• Deregulation of Markets: Alters competitive landscape.
• Increasing Pressure to be Competitive: Drives innovation and efficiency.
• Increasing Volatility of Markets: Affects financial planning and risk management.

Characteristics of Financial Statements

• Comparable: Consistent data across periods.
• Consistent: Uniform application of accounting principles.
• Understandable: Clearly presented information.
• Reliable: Accurate and trustworthy data.

Key Areas of Focus for the Term

• Learn to use financial information rather than prepare it.
• Understand the main reports that constitute financial statements and their construction.
• Familiarize with the regulatory framework governing report preparation.
• Learn how to compare results and performance across different businesses.

Major Financial Statements

1. Statement of Earnings / Income Statement:

   • Shows wealth generated from trading. Formula:
     $ext{Wealth} = ext{Sales Value} - ext{Cost of Goods Sold}$

2. Balance Sheet:

   • Illustrates wealth and form of assets versus claims.

3. Statement of Cash Flows:

   • Tracks movements of cash within the business.

Example: Starting a Bottled Water Business

Day 1 Cash Movement

• Opening Cash: £25
• Cost per Bottle: £0.25
• Total Bottles Purchased: 100
• Sales Price per Bottle: £0.50
• Total Bottles Sold: 80

Cash Movement Calculation

• Opening Cash: £25
• Cash from Sales: 80 x £0.50 = £40
• Less Cash Paid: 100 x £0.25 = £25
• Closing Cash:
  $£25 + £40 - £25 = £40$

Income Statement for Day 1

• Sales Revenue: 80 x £0.50 = £40
• Cost of Goods Sold: 80 x £0.25 = £20
• Profit:
  $£40 - £20 = £20$

Accumulated Wealth at Day 1's End

• Assets:
  • Cash: £40
  • Stock of Goods: 20 x £0.25 = £5
• Total Assets:
  $£40 + £5 = £45$
• Capital:
  • Cash Introduced: £25
  • Retained Earnings: £20
• Total Capital:
  $£25 + £20 = £45$

Questions?

• Open discussion for any unclear topics or queries regarding financial accounting or key statements.