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