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
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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
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•
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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
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•
•
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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
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•
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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
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

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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