CH12
* Finance: P 246
* Accounting concepts and principles:
Financial statements are prepared at the end of period to present the results for the period
and the period – end financial position to the orgnisation internal and external stakeholders.
* Fundamental accounting concept and principles:1- Consistency
- To prevent orgnisation using different methods to present more picture of the orgnisation,
similar items should be treated in similar ways within accounting period to the next.
2- Conservation or prudence)‫(حذر‬
Revenues and cost are recognized in the period in which they are earned or incurred rather
that when money is received or paid.
3- Going concern:Orgnisation will continue with its activities. Valuations of the orgnisation assets and liabilities
differ from the break up values.
4- Materiality, aggregation)‫ (تجميع‬and offsetting )‫(تعويضات‬
- Each material item and its (value that should be aggregated or combined) should be
presented separately in the financial statement.
- Assets and liabilities and income and expenses should not be offset.
5- Congruence: )‫ (انسجام‬The opening balances sheet for financial year must correspond)‫(تطابق‬
to the closing balance sheet for the preceding financial year.
* Profit or not for profit
Economic sector
Public
Not for profit
Private
Government and government Non government orgnisation
department, local, authorities, charities,
armed forces and schools.
For profit
Statewhich
include
owned
in
some
public
railways – airlines.
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trade
unions
pressure groups
enterprise, Soles
trade,
countries companies,
partnerships
producer
utilities consumer cooperative.
and
* Not for profit financial survival: For a not profit orgnisation to survive and grow, revenues must equal expenditure and loan
repayments.
- Long term finance must be sufficient to finance fixed and not current assets.
* Not for profit financial statement:- Not profit orgnisation prepare financial statements in which revenues for financial period are
matched against cost.
- Not for profit orgnisation usually prepare balance sheet to help to evaluate the situation of
the orgnisation.
- Non for profit orgnisation use budgets to plan for expenditure.
* Differences between business and not for profit orgnisation:1- The prices charged by not profit orgnisation to their recipient's maybe normal rather than
reflecting market.
2- In public services the budget may have a special legal status.
- Democracy implies that government orgnisation should be publicly accountable.
* Assets and liabilities:* Assets are something which an orgnisation owns.
- There are two kinds of assets
1. A fixed asset is part of structure of the orgnisation.
- A fixed assets constitute)‫ )تشكل‬the orgnisation capacity
- The value of fixed assets will be the major part of orgnisation assets.
2. Current asset is one that is short term; it is one that will be used in orgnisation
operation within one year (raw material).
- The composition of current assets will change.
* Liabilities: - is a debt that orgnisation owes.
- There are two kinds of liabilities:1. A long term liability is one that is due for repayment in more than one year time.
2. Current liability: - is a debt that is due for repayment with in on year.
* Net worth:- is the value of the assets, less the value of liabilities as recorded in the books
account that show the net book value.
* Intangible assets:Tangible Like equipment or intangible assets like the reputation of an orgnisation.
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* The balance sheet:- The balance sheet is the financial account that shows the book value of orgnisation assets
and it liabilities at particular time.
- It provides a financial snapshot of the orgnisation.
* Understanding the profit statement:- The profit statement shows the income that the orgnisation has earned from its activities
during a particular period and the expenditures it has incurred.
* Earnings: - The income shows the total money value of the sales contracts that have been
made with the customers.
- Profit: - Describe the increase in wealth of a orgnisation that has been brought about by
orgnisation activities.
- Bad Debt: - The customer who not pay.
* Cash account: - The cash account shows the cash that orgnisation has received and the cash that
orgnisation has paid.
* The flow of cash
- During any particular trading period, the orgnisation will receive payments.
- The purpose of the cash account is to record each payments to the orgnisation(inflow of
cash) or from the orgnisation(outflow of cash).
*The stock of cash
- the outflow is greater than inflow so the stock of cash will fall and the organisatin may
become overdrawn at the bank. The cash will rise when the inflow greater than outflow.
* Budgeting:Budgeting is published forecast of how an orgnisation resource is to be used in the best
possible way to achieves objectives.
- Budget state how resources will be committed to the activities or projects to be carried out.
* Benefits of budgeting:- Budget is a quantities statement (number) for d defined period of time that includes
expenses, assets, liabilities and cash flows and planned revenues.
1. The budget provides a frame work for planning.
2. Budget is a repeated and interactive process involving a number of people who share
in its creation.
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3. The budget provides the basis for monitoring progress and allows corrective action to be
taken.
4. The budget helps the managers to justify their use for resources.
5. The budget provides a steady pressure to improve performance.
6. Facilitates control- compare actual result with the target set in budget.
* Types of budget:Incremental
Budget based on the Simple and useful if the Expenditure patterns might
)‫)االضافية‬
previous year's actual or conditions are static.
exhibit
budgeted figures.
effect' with dips or surges
a
'hockey
stick
in expenditure as the yearend
approaches.
New
ideas might be ignored.
Zero- base
Targets, inputs, outputs Complacency and the Time consuming.
and
activities
planned
and
are 'hockey stick effect' can
justified be overcome.
from first principle each
time the budget is set.
Continuous
Budgets are update at The budget is always up
There may be a sense that
(or rolling)
the end of each sub- to data. Future costs
the goalposts are being
period (e.g. monthly or and revenues can be
moved.
quarterly).
forecast more
accurately.
Fixed
The
budget
envisaging
is
only
level of activity.
set Simple and useful when Monitoring actual
one the
activity
level
is performance against the
known
budget is difficult .
* Working Capital: - Describe how day to day activities of an orgnisation are funded.)‫(ممولة‬
- Working capital = Current assets – Current liabilities.
- Current assets (Stock + debtors +cash in the bank and in hand)
- Current liabilities (Creditors + accruals)‫ (المستحقات‬+ bank overdraft)‫)سحب على المكشوف‬
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* Managing the working capital cycle: Stock
Creditors
Debtors
Cash
Working Capital Cycle
- The orgnisation has cash to pay for its creditors.
- It must not have too much cash tied up in stock and it must receive payments from its
customers.
- It is important to manage the quantity of holding stock.
- Orgnisation have a management department of debtors, it is their responsibility to ensure
that goods are sold on credit only for paying customer.
- The management of creditors is balancing act. Orgnisation need to hold on to their cash to
pay as late as possible without affecting their relationship with suppliers.
* Understanding depreciations)‫(تخفيضات‬
- Depreciation: used to describe process of charging, overtime, the cost of long life asset to a
profit or income and expenditure statement.
*Methods of depreciation: 1. The cost could be charged in equal amounts each year.
2. The constant proportion is charged each year for reducing balance.
* Noted that

The higher charge for depreciation in a year, the lower the declared profit.

The cash amount will show the outflow of cash at the time the new asset is paid for.

The subsequent chargers for depreciation will not represent cash outflow.
* Different types of costs:- Fixed cost:Cost that not affected by changes in orgnisation.
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- Variable cost: Costs that increase or decrease depend on activities that rise or falls in orgnisation, Variable
cost are within mangers control than the fixed one.
- Direct cost:Costs that attach or attribute directly to a particular activity.
- Indirect cost:Costs that can't be attach or attribute directly to a particular activity (advertising in
newspaper, overhead cost).
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* Marginal analysis:- Marginal analysis can be used to ascertain an equilibrium level of activity and to identify the
slight adjustment that need to reach this level.
* Marginal cost and marginal revenue:- Marginal cost for product or services is the additional cost of one extra unit of output.
- Marginal revenue is the additional revenue that results from the sale of one more item.
*Ratio analysis: - Orgnisation financial performance can be explained from financial statement.
- More information can be collect by farther analysis of the data.
- These data can be used to calculate financial ratios such as
Return on Capital Employed (ROCE)
Return on investment (ROI)
Asset ulilisation Ratio (AUR)
Return On Sales (ROS)
* Some important points about financial ratio are
1. They are useful when assessing performance.
2. They should contribute to the board profile of an orgnisation it should never be in
isolation.
3. To understand ratios, those interpreting them should have a feel for orgnisation they
related to.
4. Other performance indicators are essential in assessing the performance of an
orgnisation.
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* Return on capital employed: - )‫(العائد من راس المال البشري‬
- This ratio compares the operating that an orgnisation made from its trading activities with
the material assets (the capital) that the orgnisation devoted to these activities
- The ration can be described as: -
ROCE=
Operating Profit
Capital employed in business
* Using the ratio: ROCE ratio can be used to compare the return on capital employed in one period with the
return in a previous period.
- The ratio can be used to compare the return that the orgnisation has achieved with the
returns that a competing orgnisation has achieved.
* Asset utilisation Ratio (AUR) and Return on Scales (ROS): AUR compare the Value of the sales (turnover) with the material assets (the capital)
employed in the business
AUR=
Value of sales
Capital employed in business
* Return ON Sales (RON): -
ROS compares the operating profit with the total value of the sales (the turnover)
ROS=
Operating Profit
Value of sales
* The relationship between the three ratios
ROCE=AUR*ROS
* Margins and make- ups: - Margin used to describe the profit earned as a percentage of the sales value.
- Mark up used to express the amount added on to cost to arrive at the selling as percentage
of cost.
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