Financial and Management Accounting 3 Cr Hrs Meseret M. (PhD) COURSE OBJECTIVE/OUTCOMES Upon completion of this course students should be able to: Use accounting processes, business information and support systems to monitor issues, problems and opportunities affecting business Understand the purpose, content and format, of financial statements and the methods used by accountants to prepare these statements Understand the implications of financial reports and their role in the development of effective governance mechanisms Cont’d... Analyse and interpret financial statements so as to extract information about past operations and to develop expectations about future outcomes Explain the role of management accounting information in managerial decision-making accounting techniques and apply basic management Identify and explain accounting issues that arise in the workplace and their implications for business behaviour and resource allocation decisions. COURSE CONTENTS (A breif) Chapter 1: General overview of Financial & Management Accounting Introduction to accounting Accounting information users Financial, Cost & Management Accounting: User Perspective The nature of finance The Nature of Business Types of organizations COURSE CONTENTS (A breif) Chapter 2: Financial Statements & the Accounting Equation • • • • • • Accounting standards Conceptual Framework for financial accounting and reporting Transaction Analysis The Accounting Cycle Accruals and Deferrals Reporting Financial Results COURSE CONTENTS (A breif) Chapter 3: Financial statement analysis • Financial statements • Annual reports • Ratio analysis Cont’D.. Chapter 4: Introduction to managerial and cost accounting • • • • • • Brief introduction to cost and management accounting Basic cost concepts and cost behavior Job and Process Costing System Activity costing — another way to measure costs Cost flow and physical flow Preparation of Cost of Goods Manufactured Report Cont’D.. Chapter 5: Cost -Volume Profit Analysis • Break-Even Analysis • Contribution Margin Analysis • Target Profit Analysis Chapter 6: Relevant Information and Short-term Decision Making • • • • Make or Buy Decisions Accept or Reject Special Orders Continue or Discontinue Business lines Sell or Process Further, and other similar matters TEACHING AND LEARNING STRATEGIES • • • • Lecture Problem demonstration Seminar Case study review problems Assessment 1) Assessment item 1: Financial accounting cases…...…………...…………………….……….20% 2) Assessment item 2: Managerial accounting cases………...………...………...………...………30% 3) Final exam ………………….……………... ……...………...………...………...………...……. 50% Text Books 1. Warren et al. (2009) Accounting, 23 ed. 2. Michael C. Ehrhardt & Eugene F. Brigham (2011) Financial Management: Theory and Practice, 13th ed 3. Weygandt, Kimmel & Kieso (2019) Financial Accounting with International Financial Reporting Standards 4th ed.John Wiley & Sons, Inc. 4. Warren, Reeve & Duchac (2018) Accounting, 27th ed. 5. Jerry J. Weygandt, et al. (2012), Managerial accounting: Tools for business decision making 6th ed. John Wiley & Sons, Inc. CHAPTER ONE General Overview of Financial and Management Accounting Reading: 1. Warren et al. (2018) Accounting, 27 ed. (Chapter 1) 2. Jerry J. Weygandt, et al. (2012), Managerial accounting: Tools for business decision making (Chapter 1) 3. Stephen A. Ross, et al. (2001), Fundamentals of Corporate Finance 5th ed. (Chapter 1) 4. Michael C. Ehrhardt & Eugene F. Brigham (2011) Financial Management: Theory and Practice, 13th ed (Chapter 1) Contents Introduction to accounting Accounting information users Financial, Cost & Management Accounting: User Perspective The nature of finance The Nature of Business Types of organizations Introduction to Accounting Accounting can be defined as an information system that provides reports to users about the economic activities and condition of a business. Its purpose is to communicate or report the results of business operations and its various aspects. It is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information. Hence, accounting is an information system that provides useful information to users (decision makers). Accounting Activities and Users Internal Users Cont’d… External Users Taxing authorities: Does the company comply with the tax laws? Regulatory agencies: Is the company operating within prescribed rules? Labor unions: Does the company have the ability to pay increased wages and benefits to union members? Development of Accounting Discipline • According to some beliefs, though this may seem to be an exaggeration, the • • • • • very art of writing originated in order to record accounting information. Accounting records can be traced back to the ancient civilizations of China, Babylonia, Greece and Egypt. Accounting was used to keep records regarding the cost of labour and materials used in building great structures like the Pyramids. During 1400s, accounting grew further because the needs for information of merchants in the Venis City of Italy increased. The first known description of double entry book keeping was first published in 1494 by Lucas Pacioli. Lucas Pacioli was a mathematician and a friend of Leonardo da Vinci. Development of Accounting Discipline.. Situations/ conditions that led to a rapid growth in accounting: i. The industrial revolution: necessitated the development of more sophisticated accounting system, rather than pricing the goods based on guesses about the costs. ii. The increase in competition and mass production of goods: led to the rise of accounting as a formal branch of study. iii. The emergence of corporation (in the 19th century): companies came up in many areas of infrastructure like the railways, steel, communication, etc. As the complexities of business grew, ownership and management of business was divorced. Thus, managers had to come up with well-defined, structured systems of accounting to report the performance of the business to its owners. iv. Government has had a lot to do with more accounting developments: The Income Tax; Government decisions relating to education, health, economic planning, for which it needs accurate and reliable information. Accounting information Users.. • Accounting Information(AI): A Means to an End • Accounting information is not an end, but is a means to an end i.e. its final product is decision which is ultimately enhanced by the use of accounting information, whether that decision made by owners, management, creditors, government bodies, labor unions ,etc. Financial, Cost and Management Accounting 1) Financial Accounting Financial accounting information provides information about the financial resources, obligations, & activities of an enterprise that is intended for use primarily by external decision makers. Financial, Cost and Management Accounting 2) Cost Accounting Cost accounting is a process of collecting, analyzing, summarizing and evaluating various alternative courses of action. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future. A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step of production as well as fixed costs such as depreciation of capital equipment. Cost accounting information is commonly used in financial accounting information, and by managers to make decisions. Financial, Cost and Management Accounting 3) Management Accounting Managerial accounting, also called management accounting, is a field of accounting that provides economic and financial information for managers and other internal users. It is for internal use & provides special information for managers. Managers use this information in Setting companies goals, Evaluating the performance of departments and individuals, Deciding whether to introduce a new line of products, and Making virtually all types of managerial decisions. Financial, Cost and Management Accounting Generally, management accounting generates information that managers can use to make sound decisions such as • Financial, • Resource allocation, • Production & • Marketing decisions. Financial Accounting Vs Management Accounting There are both similarities and differences between managerial and financial accounting. First, each field of accounting deals with the economic events of a business. Thus, their interests overlap. For example, determining the unit cost of manufacturing a product is part of managerial accounting. Reporting the total cost of goods manufactured and sold is part of financial accounting. In addition, both managerial and financial accounting require that a company’s economic events be quantified and communicated to interested parties. Finance The study of how to raise money and invest it productively. Virtually all individuals and organizations earn or raise money and spend or invest money. Finance is concerned with the process, institutions, markets, and instruments involved in the transfer of money among individuals, businesses and governments. The general areas of finance are business, personal and public finance. Finance is important to individuals, business and government to achieve their economic objectives. FINANCE uses accounting information as inputs to decision-making. Finance… Financial management defined: It is an integral part of overall management. concerned with the efficient use of an important economic resource namely, capital funds” “Financial Management deals with procurement of funds and their effective utilization in the business” In simple words, Financial Management as practiced by business firms can be called as corporation Finance or business Finance. Finance… Financial decisions in a firm There are four broad areas of financial decision making in a firm. These are: 1. Investment decisions (Capital budgeting) 2. Financing decisions (capital structure) 3. Liquidity decisions (working capital management/short term asset mix decision) 4. Dividend decisions Finance… 1. Investment decisions: A firm’s investment decisions involve capital expenditures. They are, therefore, referred as capital budgeting decision. Capital investment is the allocation of capital to investment proposals Involves commitment of funds to long term assets that would yield long term benefits Two important aspects of investment decision are: The evaluation of the prospective profitability of new investment, and 1. The measurement of a cut-off rate against that the prospective return of new 2. investments could be compared. Investment proposal should be evaluated in terms of both expected return and risk. Finance… 2. Financing decisions: Once a firm has decided the investment projects it wants to undertake, it has to figure out ways and means of financing them. This is the function of raising funds. The central issue here is to determine the appropriate proportion of equity and debt; the mix of debt and equity is called capital structure. The financial manager must strive to obtain the best financing mix or the optimum capital structure. The use of debt affects the return and risk of shareholders; it may increase the return on equity funds, but it always increases risk as well. Finance… 3. Working capital management (Liquidity) decision: Also referred as short term financial management that deals with current assets and current liabilities. Investment in current assets affect the firm’s profitability and liquidity. Current assets should be managed efficiently for safeguarding the firm against the risk of illiquidity. If the firm does not invest sufficient funds in current assets, it may become illiquid and therefore, risky; but it would lose profitability, as idle current assets would not earn anything. Conflict exists between profitability and liquidity while managing current assets and hence it deals with proper trade-off between liquidity and profitability. Finance… 4. Dividend Decision: The financial manager must decide whether the firm should distribute all profits, or retain them or distribute a portion and retain the balance. The proportion of profits distributed as dividends is called the dividend payout ratio and the retained portion of profit is known as the retention ratio. The optimum dividend policy is that one maximizes the market value of the firm’s shares The Nature of Business • A business is the activity of making one’s living or making money by producing or buying and selling products (goods and services). • The objective of most businesses is to maximize profits. • But some organization operate with an objective other than to maximize profit. E.g. governmental units Types of Business • Manufacturing businesses: change basic inputs into products that are sold to individual customers. E.g. Coca-cola, Sony, Nike, General Motors Cont… • Merchandising businesses: also sell products to customers. However, rather than making the products, they purchase them from other businesses. E.g.Wal-Mart,Amazon.com Cont… • Service businesses: provide services rather than products to customers. E.g.Air Lines, Hospitals, Bus Forms of Business Organizations • There are three forms of business organizations Proprietorship Partnership Corporation Cont… Proprietorship is owned by one individual and usually managed by the owner Abebe’s Advantage ease in organizing low cost of organizing Disadvantage limited source resources unlimited liability of financial Cont… Partnership is owned by two or more individuals. Abebe & Marta’s Advantage More financial resources than a proprietorship. Additional management skills. Disadvantage Unlimited liability. Cont… Corporation is organized under state or federal statutes as a separate legal entity. A & M, Inc. Advantage The ability to obtain large amounts of resources by issuing stocks. Limited liability Disadvantage Double taxation. Conclusion Accounting provides useful information about the economic activities of business organizations to decision makers Finance uses accounting information Almost all business activities directly or indirectly involve the acquisition and use of funds. Accounting & Finance is closely related with the main functional areas of a firm (production, marketing and HRM) and hence finance is considered as a life blood of any organization. Financial management will be discussed in a separate course. ? 1. Why accounting is being called as “the language of business”? Discuss with practical examples. 2. Accounting information is a means to an end, not the end in itself. Discuss 3. Discuss the difference and similarities between financial accounting, managerial management. accounting and Financial 4. How can you explain the contribution accounting & finance in administering business? End of Chapter I