Lecture 3 Topics
• Financial Vs. Management accounting
• Accounting Conventions (Rules)
• Profit Vs. Cash Flow
1
Financial Vs. Management accounting
• Reports – general or specific, external/internal
• Level of detail – aggregate vs. considerable detail
• Regulations – no adherence in mgt accounting
• Reporting interval – yearly vs. Daily
• Time orientation – past vs. Present and future
• Range & quality of information – monetary vs.
2
Accounting Conventions
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Historical Cost – acquisition cost
Going Concern – for the foreseeable future
Business Entity – business & owner separate
Dual Aspect – 2 aspects to each transaction
Prudence – exercise caution, recognise expected
losses. If in doubt choose the lower reported profit
• Money measurement – convert to a common
measure
• Accruals/Matching – estimate accruals and
prepayments
3
Accounting conventions
• Realisation – record when legal title passes
• Materiality – don’t follow rules to
absurdity
4
Historical Cost
• Assets included at original cost
• Reliable evidence to support figures
• Current values may be more relevant but are
more subjective
• Where NRV of current assets falls below
cost, use NRV
• NRV = SP – selling costs
5
Going Concern
• Business will continue in operation into the
foreseeable future
• No intention to liquidate
• Value of assets and liabilities otherwise
affected
6
Business Entity
• Business and owners treated as separate and
distinct
• Owners are seen as claimants of the
business
7
Dual Aspect
• Each transaction has two aspects
• Ensures Balance Sheet balances
8
Prudence
• FS should err on the side of caution
• Both actual and anticipated losses are
recorded in full
• Profits are not recognised until realised
reasonably certain that profit will be received
• Prudence prevails over other conventions
9
Stable Monetary Unit
• Assumes that money will not change in
value over time
• Ignores inflation
• High inflation, BS understated
• Revaluations of Land and Buildings
10
Balance Sheet
Non-current Assets
Premises
Motor Vehicles
Current Assets
Inventories
Debtors
Bank
Current Liabilities
Creditors
Net current assets
Total assets less current liabilities
Non-current Liabilities
Loan
Total assets less liabilities
Equity
Share capital
Other reserves
Accumulated revenue
€
110,000
5,000
115,000
3,600
600
13,000
17,200
2,000
15,200
130,200
50,000
80,200
20,000
60,000
200
80,200
11
Accruals Convention
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•
•
•
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Look at transaction/ activity date
Not cash transaction
Revenues may not represent cash received
Expenses may not represent payments made
Net profit will not equal net cash generated
for the period
12
Profit Vs. Cash Flow
• Revenues earned are recorded in I/S
• Expenses incurred are recorded in I/S
• Cash received in CFS
• Cash paid in CFS
• Profit may not equal cash generated
13
Interpreting the Balance Sheet
• Allows financial position of entity to be
examined
• Can assess liquidity of business
• Can observe mix of assets
• Can evaluate financial structure of entity
14