Contents
Financial Accounting
Rationale
Financial Accountancy (or Financial Accounting) is the branch of accountancy concerned with the preparation of financial statements for external decision makers, such as stockholders, suppliers, banks and government agencies. The fundamental need for financial accounting is to reduce principal-agent problem by measuring and monitoring agents' performance.
The accounting equation (Assets = Liabilities + Owners' Equity) and financial statements are the main topics of financial accounting.
A financial accountant must equal assets with liabilities and owner’s equity. The balance sheet (or the statement of financial position) is the financial statement that summarizes the assets, liabilities, and owners’ equity of the company.
- International Accounting Standards Board
- Official website of the ACCA
- Institute of Chartered Accountants
- American Academy of Financial Management Board of Standards
- Financial Accounting Standards Board
- American Institute of Certified Public Accountants
- Accounting Basics Basic Accounting Concepts, Financial Statements, Double Entry System
Learning Outcomes
1. Students will understand how finance fits into a firm’s organisation and the relationship between financial managers and their counterparts in accounting, marketing, production, and personnel.
2. Students will understand the goals of a firm and how financial managers can contribute to the attainment of these goals.
3. Students will learn to analyse financial statements through the use of ratios and how this analysis can be used by management to improve the firm’s performance and by investors when they set values on the firm’s stock and bonds.
4. Students will understand the environment and markets within which businesses operate.
5. Students will learn how investment risk is measured and how it affects investment returns.
6. Students will clearly understand the time value of money and its impact on the value of the firm. Tools of time value that should be mastered are time lines, formulas, tables, and the financial calculator.
7. Students will know the different types of bonds and stocks, how bond prices and stock values are established, and how investors go about estimating the rates of return they can expect to earn.
8. Students will know how to use decision rules to make capital budgeting decisions.
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Teaching and Learning Resources
Click on the titles below
From Decisions to Financial Statement - Review of Basic Concepts
- The Accounting Environment
- Accounting reports: their nature and uses
- Managerial Decisions and Financial Statements
Accounting concepts and conventions
In drawing up accounting statements, whether they are external "financial accounts" or internally-focused "management accounts", a clear objective has to be that the accounts fairly reflect the true "substance" of the business and the results of its operation.
The theory of accounting has, therefore, developed the concept of a "true and fair view". The true and fair view is applied in ensuring and assessing whether accounts do indeed portray accurately the business' activities.
To support the application of the "true and fair view", accounting has adopted certain concepts and conventions which help to ensure that accounting information is presented accurately and consistently.
Accounting Conventions
The most commonly encountered convention is the "historical cost convention". This requires transactions to be recorded at the price ruling at the time, and for assets to be valued at their original cost.
Under the "historical cost convention", therefore, no account is taken of changing prices in the economy.
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Comparative
International Accounting
8th
Edition Check the availability and buy your books from our Bookshop. |
Transactions, Recording, and How Financing Decisions are Reflected in Financial Statements
Tutorials
- Classification and analysis of transactions
- The recording focus
- Inventory transactions
- Underlying assumptions of the historical cost accounting system
- End of period adjustments
- The principles applied: owners' equity
- The structure and content of financial reports
- Statement of cash flows
- Financing Decisions - Introduction and Equity Decisions
- Financing Decisions - Debt
- Financing Decisions - Leasing
- Financing Decisions - Reducing Outstanding Equity and Debt
Readings
The Financing Decision
Achieving the goals of corporate finance requires that any corporate investment be financed appropriately.[13] The sources of financing are, generically, capital self-generated by the firm as well as debt and equity financing sourced form outside investors. As above, since both hurdle rate and cash flows (and hence the riskiness of the firm) will be affected, the financing mix will impact the valuation of the firm (as well as the other long-term financial management decisions). There are two interrelated decisions here: 1. Management must identify the "optimal mix" of financing—the capital structure that results in maximum value. (See Balance sheet, WACC, Fisher separation theorem; but, see also the Modigliani-Miller theorem.) Financing a project through debt results in a liability or obligation that must be serviced, thus entailing cash flow implications independent of the project's degree of success. Equity financing is less risky with respect to cash flow commitments, but results in a dilution of share ownership, control and earnings. The cost of equity is also typically higher than the cost of debt (see CAPM and WACC), and so equity financing may result in an increased hurdle rate which may offset any reduction in cash flow risk.[14] |
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2. Management must attempt to match the long-term financing mix to the assets being financed as closely as possible, in terms of both timing and cash flows. Managing any potential asset liability mismatch or duration gap entails matching the assets and liabilities according to maturity pattern ("Cashflow matching") or duration ("immunization"); managing this relationship in the short-term is a major function of working capital management, as discussed below. Other techniques, such as securitization, or hedging using interest rate- or credit derivatives, are also common. See Asset liability management; Treasury management; Credit risk; Interest rate risk.
One of the main theories of how firms make their financing decisions is the Pecking Order Theory, which suggests that firms avoid external financing while they have internal financing available and avoid new equity financing while they can engage in new debt financing at reasonably low interest rates. Another major theory is the Trade-Off Theory in which firms are assumed to trade-off the tax benefits of debt with the bankruptcy costs of debt when making their decisions. An emerging area in finance theory is right-financing whereby investment banks and corporations can enhance investment return and company value over time by determining the right investment objectives, policy framework, institutional structure, source of financing (debt or equity) and expenditure framework within a given economy and under given market conditions. One last theory about this decision is the Market timing hypothesis which states that firms look for the cheaper type of financing regardless of their current levels of internal resources, debt and equity.
Financial Management and How Investment Decisions are Reflected in Financial Statements
Tutorials
- Accounting and financial management
- Financial statement analysis
- Investment Decisions - Investing in Productive Assets
- Investment Decisions - Investing in Other Firms' Debt
- Investment Decisions - Investing in Other Firms' Equity Securities
Readings
Managerial finance is the branch of finance that concerns itself with the managerial significance of finance techniques. It is focused on assessment rather than technique.
The difference between a managerial and a technical approach can be seen in the questions one might ask of annual reports. One concerned with technique would be primarily interested in measurement. They would ask: are moneys being assigned to the right categories? Were generally accepted accounting principles GAAP followed?
One concerned with management though would want to know what the figures mean.
1. They might compare the returns to other businesses in their industry and ask: are we performing better or worse than our peers? If so, what is the source of the problem? Do we have the same profit margins? If not why? Do we have the same expenses? Are we paying more for something than our peers?
2. They may look at changes in asset balances looking for red flags that indicate problems with bill collection or bad debt.
3. They will analyze working capital to anticipate future cash flow problems.
4. Managerial finance is an interdisciplinary approach that borrows from both managerial accounting and corporate finance.
Sound financial management creates value and organizational agility through the allocation of scarce resources amongst competing business opportunities. It is an aid to the implementation and monitoring of business strategies and helps achieve business objectives.
External links
Conceptual Frameworks: How Operating Decisions are Reflected in Financial Statements
Tutorials
- Sources of authority in accounting
- A conceptual framework for financial accounting and reporting
- Assets and expenses
- Operating Activities - Revenue and Expense Recognition
- Revenue
- Preparing for Sales - Building Up Inventory and Establishing Credit Policy
- Liabilities
- Taxes
- Special Compensation Arrangements
Readings
Business operations are those ongoing recurring (cyclic) activities involved in the running of a business for the purpose of producing value for the stakeholders. They are contrasted with project management (business change managers are responsible for bridging the gap between the projects and business operations[1]), and consist of business processes.
The outcome of business operations is the harvesting of value from assets owned by a business. Assets can be either physical or intangible. An example of value derived from a physical asset like a building is rent. An example of value derived from an intangible asset like an idea is a royalty. The effort involved in "harvesting" this value is what constitutes business operations cycles.
Accounting Information Systems
Tutorials
- Appraisal of the historical cost system
- Alternative accounting systems
- Accounting information systems and internal control
Readings
An accounting information system (AIS) is a system.
Accounting information systems are composed of six main components:[1]
People: users who operate on the systems
Procedures and instructions: processes involved in collecting, managing and storing the data
Data: data that is related to the organization and its business processes
Software: application that processes the data
Information technology infrastructure: the actual physical devices and systems that allows the AIS to operate and perform its functions
Internal cointrols and security measures: what is implemented to safeguard the data
- History
- Software architecture of a modern AIS
- Advantages and implications of AIS
- How to effectively implement AIS
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Accounting
Information Systems Check the availability and buy your books from our Bookshop. |
Appendices
- Managerial decision making and the accountant
- Costing systems
- Cost concepts for management decisions
- Accounting for long-term management planning
- Accounting for short-term management planning
- Accounting for management control
- Comprehensive Review Problem: Reviewing Transactions and Preparing Financial Statements
- The Time Value of Money - A Review
Recommended Text
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Essentials
of Accounting for Governmental and Not-for-Profit Organizations, Seventh Edition Authors: John Engstrom, Northern Illinois University Check the availability and buy your books from our Bookshop.
|
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Management
Decisions and Financial Accounting Reports,
2e Check the availability and buy your books from our Bookshop. |
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Financial
Accounting: Financial and Organisational Decision Making
Check the availability and buy your books from our Bookshop.
|
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Fundamentals of Financial Management by James Van Horne and John Wachowicz. Check the availability and buy your books from our Bookshop. |
Resources
- Introduction to Financial Management
- Valuation
- Tools of Financial Planning and Analysis
- Working Capital Management
- Investment in Capital Assets
- The Cost of Capital, Capital Structure and Dividend Policy
- Intermediate and Long-term Financing
- Special Areas of Financial Management
- Glossary
Articles
- China State-owned Assets Management System Reform Entering New Stage
- The financial and operating performance of China's newly privatized firms.