introduction to accounting
how are businesses organised? in larger limited companies, owners are not involved in daily runnings of the business. who is?
a board of directors is appointed to manage the business
How useful is accounting information?: financial information should reduce uncertainty about what?
about - the financial position - the financial performance of a business
the changing face of accounting: the internationalisation of businesses has created the need for what?
accounting rules
weighing up the costs and benefits: why does the value of information decline eventually?
additional information becomes less relevant or because of the problems that a decision maker may have in processing the sheer quantity of information provided
what are the main advantages and disadvantages that should be considered when deciding between a sole proprietorship and a partnership?
advantages of a partnership - sharing the burden of ownership - opportunity to specialise - ability to raise capital where this is beyond one person disadvantages of a partnership - risks of sharing ownership of a business with unsuitable individuals - limits placed on individual decision making that a partnership will impose
what are the main advantages and disadvantages that should be considered when deciding between a partnership and a limited company?
advantages of partnership - ease of setting up - degree of flexibility in conduct - degree of flexibility in restructuring and dissolution - freedom from administration burdens imposed by law disadvantages of partnership - not possible to limit liability of all of the partners
Sole proprietorship: which user groups can demand information?
banks
Comparability: how can comparability be enhanced?
by making clear the policies that have been adopted in measuring and presenting information
Comparability: how is comparability achieved?
by treating items that are basically the same in the same manner for accounting purposes
Comparability: this quality enables users to identify what?
changes in the business over time
What is accounting?: accounting is concerned with what?
collecting, analysing and communicating financial information
How useful is accounting information?: financial information should help to answer questions concerning what?
concerning the availability of funds to pay owners a return, to repay loans, to reward employees etc
the conflicting interests of users: give another example of conflict
conflict between lenders and owners - funds loaned to a business not used for the purpose that they have been agreed - lenders may use accounting information to check that the funds have been applied in an appropriate manager and that the terms of the loan agreement have not been broken
the conflicting interests of users: give an example of conflict
conflict between managers and the owners of a business - managers may use the wealth of the business to award themselves large pay rises
reliability: accounting should be free from what?
error or bias
relationship between costs and the value of providing additional accounting information: what happens to the benefits of accounting information?
eventually decline
management accounting and financial accounting: what retains some influence over management accounting?
financial reporting cycles
management accounting and financial accounting: explain 'reporting interval'
financial reports produced on an annual basis, some large businesses produce half-yearly reports and some quarterly - management reports are produced more frequently, some being daily, weekly or monthly. Special purpose reports are prepared when required
management accounting and financial accounting: explain 'time orientation'
financial reports reflect the performance and position of the business for the past period management reports provide information concerning future performance as well as past performance
How useful is accounting information?: there is no close substitute for the information provided by the ................
financial statement
accounting as an information system: explain the sequential stages of the accounting information system
first two stages are concerned with preparation the last 2 stages are concerned with using the information collected
the statement of cash flow is important in identifying what?
identifying the financing and investing activities of the business over a period of time. It sets out how cash was generated and how cash was used during a period
Limited company: why is the liability of owners limited?
individuals subscribing capital to the company are liable only for debts incurred by the company up to the amount that they have agreed to invest
reliability: what is the problem often faced in accounting with reliability and relevant?
information may be reliable but not relevant and visa versa
in the UK and throughout much of the industrialised world, what is the major form of business unit?
limited company
evidence of the usefulness of accounting: the cost of producing additional accounting information is justified on what grounds?
the grounds that people find it useful
evidence of the usefulness of accounting: there is evidence that businesses choose to produce accounting information that exceeds .................
the minimum requirements imposed by accounting regulations
reliability: when trying to get a balance between relevance and reliability, what should be the overriding consideration?
the needs of users
Limited company: what provides the opportunity to create a very large-scale business?
the number of people who subscribe capital and become owners may be unlimited
Comparability: this quality helps users to evaluate what?
the performance of a business in relation to similar businesses
but is it material?: what determines whether information is material or not?
the type of information the amounts of information involved
Sole proprietorship: what is the legal relationship between owner and the business?
they are not separate, if the owner dies the business dies
What is accounting?: what is the ultimate purpose of the accountant's work?
to give people better financial information on which to base their decisions
What is accounting?: what is the purpose of accounting?
to help people who use this information to make more informed decisions
the conflicting interests of users: how might owners use accounting information when they have a conflict of interest with managers?
use it to check whether the pay and benefits of managers are in line with agreed policy
Relevance: why is the role of accounting in confirming past events important?
users often wish to check the accuracy of earlier predictions that they have made
how are businesses organised? - for limited companies, finance comes from where?
- owners (shareholders) via direct cash investment to buy shares and through owners allowing past profits to be reinvested - lenders who earn interest on loans - suppliers of goods and services being prepared to supply on credit
Partnership: what are the similarities with a sole proprietor?
- quite small - easy to set up with no formal procedures required (not necessary to have a written agreement) - partners can agree whatever arrangements suit them - can be restructured and dissolved by agreement
what has been the result of accounting scandals?
- undermined the credibility of financial statements - stricter regulations
but is it material?: we also have to consider whether information is material or significant. Explain this
- we should ask whether its omission or misrepresentation in the accounting reports would really alter the decisions that users make - if information is not material than it might interfere with the users' ability to interpret the financial results
who are the users of accounting information?: what kind of decisions would the government make?
- whether they should pay tax/ how much? - whether financial support is needed - assess profits, sales revenues and financial strength
who are the users of accounting information?: what kind of decisions/ factors would investment analyst suppliers consider?
- whether to advise clients to invest in PI - assessment of the likely risks and future returns associated with PI
who are the users of accounting information?: what kind of decisions would suppliers make?
- whether to continue supplying them based on the ability to pay for any good or service supplied
who are the users of accounting information?: what are important factors in the decisions of lenders?
- ability to pay interest and to pay the principal sum
Sole proprietorship: how much flexibility does the owner have?
- can decide the way in which business is conducted - can restructure - can dissolve the business whenever
How useful is accounting information?: what kind of information might be gleaned from these sources for an investment analyst?
- can provide information on new products or services being offered - can offer information on management changes - offers information on new contracts offered and rewarded - offers information on the competitive environment - offers information on new technology - offers information on changes in legislation - offers information on changes in interest rates and future levels of inflation
weighing up the costs and benefits: what are the problems of the model of costs and benefits in practice?
- costs are difficult to quantify (salaries of accounting staff are easy to calculate but less direct costs such as the cost to the user's time spent analysing and interpreting information are harder) - economic benefits of the information are hard to assess. - weighing up costs and benefits is subjective
management accounting and financial accounting: what factors have caused businesses to resist providing other users with the same detailed and wide ranging information available to managers?
- fears of losing competitive advantage - user ignorance concerning the reliability of forecast data
management accounting and financial accounting: explain 'range and quality of information'
- financial reports concentration on information that can be quantified in monetary term. place greater emphasis on use of objective, verifiable evidence - management reports produce more reports that contain information of a non financial nature such as physical volume of inventories, number of sale orders received, number of new products launched, physical output per employee etc. uses information that is less objective
the conflicting interests of users: why might there be a conflict of interest between government and owners?
- governments may wish to check that the profits made from a contract are not excessive
Limited company: why is there a cap on the liability of the owners?
- limit risk - produce greater confidence to invest
management accounting and financial accounting: explain 'nature of reports produced'
- management accounting reports are more specific purpose reports and are designed with a particular decision in mind or for a particular manager
management accounting and financial accounting: who has better access to information and why?
- managers have more control over the form and content of the info they receive - other users have to rely on what managers are prepared to provide or what the financial reporting regulations require
management accounting and financial accounting: can you think of any areas of overlap between the information needs of managers and those of other users?
- managers will be interested in receiving a historical overview of business operations - other users will be interested in receiving info about the future, such as planned profits and sales or product innovations
management accounting and financial accounting: Some people say that management accounting has suffered as a result of regulatory requirements of financial accounting. Explain why this argument has lost its force
- modern management accounting systems tend to provide managers with information that is relevant to their needs rather than what is determined by external reporting requirements
for an insurance business, what sort of decisions are likely to be made about the business by employees as a group and what factors will they consider?
- whether to continue working for them - whether to demand higher rewards - likely to be interested in future plans, profits and financial strength of the business
weighing up the costs and benefits: what are the key characteristics that influence the usefulness of accounting information?
1. comparability 2. reliability 3. understandability 4. relevance - materiality - cost/benefit
who are the users of accounting information?: who are the main users of financial information relating to a business? (10)
1. customers 2. competitors 3. employees and their representatives 4. government 5. community representatives 6. investment analysts 7. suppliers 8. lenders 9. managers 10. owners
give two notorious cases of managers providing misleading financial reports to investors
1. enron 2. WorldCom
accounting as an information system: what features should an accounting information system have?
1. identifying and capturing relevant information 2. recording the information collected in a systematic manner 3. analysing and interpreting the information collected 4. reporting the information in a manner that suits the needs of users
the changing face of accounting: over the past 25 years, why has the environment within which businesses operate become increasingly turbulent and competitive?
1. increasing sophistication of customers 2. development of a global economy 3. rapid changes in technology 4. deregulation of domestic markets (electricity, water and gas) 5. increasing pressure from owners 6. increasing volatility of financial markets
management accounting and financial accounting: accounting has what 2 distinct strands?
1. management accounting 2. financial accounting
How useful is accounting information?: What other sources of information might an investment analyst use in an attempt to gain an impression of the financial position and performance of a business?
1. meetings with managers of the business 2. public announcements by the business 3. newspaper and magazine articles 4. websites, including the website of a business 5. radio and TV reports 6. information-gathering agencies 7. industry reports 8. economy-wide reports
management accounting and financial accounting: what are the main differences between management accounting and financial accounting?
1. nature of the reports produced 2. level of detail 3. regulations 4. reporting interval 5. time orientation 6. range and quality of information
why can accounting scandals occur?
1. pressures on managers to meet unrealistic expectations of investors to meet continually rising profits 2. greed 3. reflects an economic environment
providing a service: to meet the user's needs, accounting information should possed what key qualities? (4)
1. relevance 2. reliability 3. comparability 4. understandability
Relevance: accounting information must be able to influence decisions. how can information be relevant?
1. relevant to the prediction of future events 2. relevant in helping to confirm past events
how are businesses organised? a board is charged with what 3 main tasks?
1. setting overall strategy and direction of a business 2. monitoring and controlling activities 3. communicating with owners and others connected with the business
What kinds of business ownership exist?: what are the 3 main arrangements?
1. sole proprietorship 2. partnership 3. limited company
what are the 3 principal financial statements?
1. the statement of financial position (balance sheet) 2. the income statement 3. state of cash flows
Limited company: what are the obligations on such companies, caused by limited liability?
1. to start up a limited company, documents of incorporation must be prepared that set out the objectives of the business 2. a framework of regulation exists which affects their affairs e.g. annual financial reports , annual general meeting of the owners to approve the reports 3. a copy of the annual financial reports must be lodged with the registrar of companies for public inspection - financial affairs enter public domain 4. larger limited companies often must have their annual financial reports audited - an independent firm of accounts examined the annual reports and underlying records to see whether they are true and fair and comply with rules
the changing face of accounting: the frameworks and principles that have been developed try to address what fundamental questions?
1. who are the users of financial accounting information? 2. what kinds of financial accounting reports should be prepared and what should they contain? 3. how should items be measured?
give 2 examples of large limited companies
M&S, Tesco
management accounting and financial accounting: explain 'regulation'
management reports are for internal use only and there are no regulations from external sources concerning the form and content of the reports they can be designed to meet the needs of particular managers
management accounting and financial accounting: explain ;level of detal
management reports often provide managers with considerable detail to help with a particular operational decision
Sole proprietorship: a sole proprietor has unlimited liability. Explain
no distinction between the proprietor's personal wealth and that of the business if there are business debts that must be paid
Partnership: what is the legal status?
not recognised as separate entities and so contracts with third parties must be entered into in the name of individual partners. they have unlimited liability
Sole proprietorship: number of businesses?
often large
Sole proprietorship: what is size like?
often small as measured by sales revenue or number of staff
Limited company: owners of limited companies are not involved in day-to-day running of a business. therefore, when will they only invest?
only when there is a clear limit set on the level of investment risk
the conflicting interests of users: conflict between user groups is most likely to occur over what?
over the way in which the wealth of the business is generated and/or distributed
evidence of the usefulness of accounting: arguments and evidence leave unanswered the question of whether information produced actually affects .............
people's behaviour
evidence of the usefulness of accounting: there are arguments and evidence that accounting info is at least ............ as being useful to users. numerous surveys have asked users to rank importance of accounting information in relation to other sources of information for decision making purposes. What did these studies find?
perceived - users rank accounting information very highly
the changing face of accounting: to obtain an advance, businesses have become more customer driven. what impact has this had on management accounting information?
provides details of customers and the market, such as customer evaluation of services provided and market share
what information does the income statement provide?
provides information concerning the wealth created by a business during a period.
the statement of financial position provides what information?
provides information concerning the wealth held by a business at a particular point in time and the claims against this wealth
management accounting and financial accounting: define management accounting
seeks to meet the accounting needs of managers
management accounting and financial accounting: define financial accounting
seeks to meet the needs of all of the other users identified
Sole proprietorship: which sector are they mainly in?
services
Sole proprietorship: owners must produce accounting information to satisfy ............... What is the legality of this?
taxation authorities - no legal requirement to produce accounting information for other user groups
weighing up the costs and benefits: why may we not produce a piece of information despite it meeting all the conditions?
the costs of producing may be greater than the potential benefit of having the information
providing a service: the quality of the service provided is determined by what?
the extent to which the needs of the various user groups are met
accounting as an information system: how can we view accounting as part of the business's total information system?
users, both inside and out, have to make decisions concerning the allocation of scarce economic resources. to ensure that these resources are efficiently allocated, users need economic information it is the role of the accounting system to provide information and this involves information gathering and communication
to gain more insights about the business we analyse statements using what?
using financial ratios and other techniques
Sole proprietorship: define
where an individual is the sole owner of a business
Partnership: define
where at least 2 individuals carry on a business together with the intention of making a profit
relationship between costs and the value of providing additional accounting information: what is the optimal level of information provision?
where the gap between the value of the information and the cost of providing it is at its greatest
evidence of the usefulness of accounting: in which situation can the impact of accounting information be observed and measured?
where the shares are traded on the stock exchange - when a business makes an announcement concerning its accounting profits, prices of shares and the volume of shares change significantly - suggests that investors change their views about the future prospects of a business as a result of new information
relationship between costs and the value of providing additional accounting information: what happens to the cost of providing information?
will rise with each additional piece of information
Sole proprietorship: is it easy to set up? why?
yes no formal procedures required and operations can commence immediately
