Introduction to Finance & Accounts
A2 Module 4Marketing, Accounting & Finance
Definitions & Assumptions
Accounting– The collection, recording, compiling and forecasting
of financial information Financial Accounting Management Accounting
Definitions & Assumptions
Financial Accounting– Gathering and publishing information of financial
record.– All limited companies publish their accounts each
financial year– These accounts are available at Companies’ House
Definitions and Assumptions
Management Accounting– Accounting statements produced for management
purposes– Planning, decision making review and control
Overview
Why businesses need accounts Major accounting documents Users of published accounts Raising Finance Accounting today
Why do businesses need accounts?
Management Accounting– Ensures firms keep a careful check on their cash
flow/working capital– Gives the opportunity to plan ahead– Identify costs/selling price– Work out break even/profit points– Measure how well staff are performing– Control expenditure
Why do businesses need accounts?
Financial accounts– To obtain bank loans/finance– Auditing purposes (by a range of external users)
Management Accounting V Financial Accounting
Management Accounting Financial AccountingFocuses on the present and the future
Reports what happened in the past
Is for internal users Is for external users
Needs to be easy to use, relevant and up to date
Needs to be reliable, accurate and consistent
Is ruled by managers’ requirements
Is ruled by accounting conventions and legal requirements
Covers departments and divisions Covers the whole firm
Major Accounting Documents
Financial accounting– Balance sheet– Profit & loss account– Cash flow statement
Balance sheet
A snapshot of a firms assets, liabilities and sources of capital– What is the business worth?– Can it afford to expand?– Is it a safe investment?
Profit & Loss Account
The level of profit made in the most recent trading period
Profit = Revenue – Costs/expenses– Is the firm trading successfully?– Are the senior managers proving effective?– Is it likely to be a profitable investment?
Cash flow statement
This appears in the published financial accounts of public limited accounts only
Where cash has come from & where iit has been used over the past year– How easily was the firm able to find the cash to
finance its recent activities?– Was the finance generated from within the
business, or was outside finance needed?
Major Accounting Documents
Management accounting– Cash flow forecasts– Budgets– Contribution statements– Investment appraisal– Break-even charts
Cash flow forecasts
An estimate of what the firm’s bank account will look like in the each month of the coming year
If an overdraft is predicted, financial arrangements can be made
Budgets
Financial plans which can be set for costs and/or revenues
Used to coordinate, motivate and control the key activities within a business in the coming year
Contribution statements
Set out the contribution to overheads made by each division or department of a firm
Helps make decisions about allocating resources between different parts of the business– More capital to finance expansion of the most
profitable product area
Investment appraisal
These calculations help decide whether a prospective investment project is financially attractive– Buying new machinery– Building a new factory etc
Break even charts
Indicate revenues and costs, and therefore profit at all possible levels of output
They enable a break even point, where neither a profit nor a loss are made
Used in decision making:– Pricing– Cost cutting– Expansion
Top Related