Accounting and
Financial Management
ACC5502
Course Overview
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Introduction
• Module 1:Introduction to accounting and business structures
• Module2: Business sustainability, ethics and corporate
governance
Financial Accounting
• Module 3:The process of accounting and the balance sheet
• Module 4: The income statement
• Module 5: Statement of cash flows
• Module 6: Financial Statement Analysis
Management Accounting
• Module 7: Budgeting
• Module 8: CVP analysis
• Module 9:Costing in an entity
• Module 10: Performance Measurement
Finance
• Module 11: Capital Investment Decisions
• Module 12: Financing the Business
Activity
A friend runs a clothes boutique. She has
asked you for a substantial loan. What
information would you like to know before
making your decision?
Activity Continued
Your friend has provided you with the
following information;
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Sales
Costs
Profit
$75,000
$55,000
$20,000
How could the information be changed
to make it more useful?
Module One: Introduction to
Accounting
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What is accounting?
• collection, analysis and communication
of economic information
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What is the role of accounting
information?
• Decision making
• Planning
• Control
Module One: Introduction to
Accounting
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Who uses accounting information
• Both internal users and external users
• Managers
• Resource providers – owners, lenders, suppliers,
employees
• Recipients of goods and services - customers
• Reviewers – auditors, government, unions, competitors,
special interest groups
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Uses of accounting information
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Efficient use of resources
Long term stability
Liquidity – short term survival
Compliance
Social responsibility
Module One: Introduction to
Accounting
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Accounting information system
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Identification
Recording and analysis
Reporting
Decision Making
Characteristics of accounting information
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Relevance
Reliability
Comparability
Understandability
Cost/benefit
Module One: Introduction to
Accounting
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The planning process
The control process
Planning
Organising
Controlling
Directing
Module One: Introduction to
Accounting
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Objectives of Business
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Maximise profit
Maximise shareholder return
Own your own business
Financial survival
Growth
Wealth enhancing
Financial stability
Best in the business
To do something you enjoy
Satisficing
Financial versus Management
Accounting
Aspect
Financial accounting
Management accounting
(1) Focus
External Reporting
Internal Reporting
(2) Nature
General Purpose (Range of Users)
Specific Purpose (Particular Need)
(3) Level of Detail
Aggregate Overview
Underlying Detail
(4) Regulation
Professional, Industry or Statutory Requirements
Flexible to meet individual business or managers
needs
(5) Frequency
Maybe limited to annual or semi-annual production
Timely reporting to facilitate management control
(6) Time horizon
Restricted largely to past historic information
Incorporates future expectations and non financial
information
(7) Examples
Balance Sheet; Profit and Loss Statement;
Cashflow Statement
Budgets; Standards; Variances
Main Financial Accounting Reports
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General Purpose Financial Reports
• Profit and Loss Statement or Income
Statement
(Statement of Financial Performance)
• Balance Sheet
(Statement of Financial Position)
• Cash Flow Statement
(Statement of Cash Flow)
Further Issues
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Accounting versus bookkeeping
• Bookkeeping is strictly the recording
and summarising of financial
transactions and preparing basic
financial reports
• Bookkeeping is part of a much larger accounting
function
What does an auditor do?
• A financial statement auditor independently and
objectively assesses the fairness of accounting reports
• Auditing is designed to add value and improve an
entity’s operations
• It evaluates and improves the effectiveness of risk
management, control and governance processes in an
entity
Limitations of Accounting
Information
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Time-lag in the distribution of the
information to users
The historical nature of accounting
information (financial information is
from past data and is therefore often
outdated)
Subjectivity of information – e.g.
firms can choose a particular
depreciation method
Cost of providing accounting
information
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Information costs – costs of
gathering, storing, preparing,
analysing and disseminating
information
Proprietary information costs – costs
in releasing private company
information
Changes in accounting
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Corporate collapses
Multi-national global focus
International Financial Reporting Standards
Traditional areas of accounting
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Public accounting
Private sector
Government and non profit sector
New areas of accounting
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Forensic accounting
Personal Financial planning
Ecommerce
Social and environmental accounting
International accounting (transfer pricing and financial
derivatives)
Professional Accounting
Associations
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CPA Australia
ICAA – Institute of Chartered
Accountants
NIA – National Institute of
Accountants
CIMA – Chartered Institute of
Management Accountants
ACCA – Association of Chartered
Certified Accountants
Common Business Structures
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SoleTrader
Partnership
Company
Trust
SoleTrader
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A Sole Trader
• Owns, controls and manages his/her
enterprise
• Therefore responsible for all debts and
decides on what to do with all profits
• Is not a separate legal entity
SoleTrader
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Advantages
• Easy and cheap to establish and wind
down
• Minimum regulatory requirements
• Flexible decision structure (owner
makes decisions)
• Owner claims all profits (& losses)
SoleTrader
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Disadvantages
• Unlimited liability for all business debts
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Including negligent acts of employees
• Limited Life
• Limited access to funds
• Pay be paying more tax compared to
company
• Limited skill and time
• Non-legal status may restrict business
SoleTrader
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Financial Reports
• Income less expenses
• One Capital account
• No taxation shown
• Net Profit/Loss added to capital account
SoleTrader
Income
Sales
Less Expenses
Cost of goods sold
Gross profit
Less Operating expenses
Admin. Expenses
Rent
Wages & salaries
Net Profit
$
5000
2500
2500
300
400
400
1100
1400
SoleTrader
Owner’s Equity
Capital
+ net profit
$
5000
1400
$
6400
Partnership
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A partnership is the relationship that exists
between two or more persons who carry on
business ‘in common’ with a view to generating a
profit
Is not a separate legal entity (but is a separate
accounting entity)
Does not pay tax – individual partners pay tax
Unlimited liability for debts
Not bound by any formal business reporting
requirements
Assets co-owned and shared
Partnerships
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Agreement between partners can be written, oral
or implied by action
Profits and Losses shared according to agreement
Normally separate records kept for contributions
(capital), withdrawals (drawings) and share of
undistributed profits
Partnership Agreements
• Business name
• Each partners contribution, values, responsibilities,
profit/loss entitlement
• Procedures for admission, dissolution and dispute
• Bookkeeping requirement
• Any issue not covered will be decided by law
Partnerships
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Advantages
• Easy and simple to set up
• Informal business structures
• More access to capital
• Pooling of knowledge, skills, time
• Possible taxation advantages (income
splitting)
Partnerships
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Disadvantages
• Unlimited Liability
• Mutual agency – each partner an agent
of the business and each other
• Limited Life
• Limited access to funds
Partnerships
Income
Sales
$
5000
Less Expenses
Cost of goods sold
2500
Gross profit
2500
Less Operating expenses
Admin. Expenses
300
Rent
400
Wages & salaries
400 1100
Net Profit
1400
Distribution to partners (assume
equally)
Salary
Tyronne
700
Raymond
700 1400
Partnerships
Partners’ Equity
Capital –Tyronne
Capital – Raymond
Current – Tyronne
Current – Raymond
$
8000
4000
700
700
$
12000
1400
13400
Company
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Separate legal entity (all the rights of an
individual person; can sue and be sued)
Governed by Corporations Act
• Accounting Standards
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Creation application and ongoing reports
lodged with Australian Securities and
Investment Commission (ASIC)
Company
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At least one owner
Normally many owners that own a
‘share’ of the company
Constitution
Limited Companies have perpetual
life
Limited Companies can be public or
private
Company
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Types of Companies
• Propriety Companies (Pty Ltd)
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Limited by shares
Minimum 1 and maximum 50 shareholders
One or more directors
Common for SMEs and family owned
• Public Companies (Ltd)
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Either
• Limited by shares
• Limited by guarantee
• No liability companies – shareholders not responsible to repay
any uncalled portion of their shares
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Large in size and highly regulated
• Unlimited Company
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Shareholders have no limits placed on their liability
Company
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Advantages
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Limited liability for shareholders
Promotes risk taking
Specialist skilled management
Perpetual life
Potentially favourable taxation
Potentially more access to owner and debt funding
Separate legal entity
Ease of ownership transfer and share price increases
Potential business network increase
Separation of ownership and control
Company
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Disadvantages
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Time consuming and costly to set up and maintain
Highly regulated
Loss/dilution of original ownership
Loss of control by owners
Taxed (30%) from the 1st dollar
Limited liability may hamper borrowing eg. banks may
want director guarantees
Greater accountability and public scrutiny
Reduced flexibility of management
Pressure for short term performance
Separation of ownership and control
Company
Income
Fees
Less Operating expenses
Admin. Expenses
Rent
Wages & salaries
$
50000
2000
3000
20000
25000
Net Profit before tax
Taxation expense (@30%)
25000
7500
Net profit after tax
17500
Reconciliation of retained profits
Retained profits at start 45000
Add net profits after tax 17500
Less Dividends paid
12000
Retained profits at end
50500
Company
Shareholder’s Equity
$
$
Share capital
50,000
Retained profits
50,500 100,500
Company
Owners' Claim
(Shareholders' Equity)
Shares
(original investment)
Different types
Reserves
(Profits and gains subsequently made)
Different types
Company
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Capital - Shares
• Shares basic unit of ownership
• Distributions of profit are termed
dividends
• 2 common classes
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Ordinary – bear the risk; voting rights
Preference – rank higher for dividends and
capital return but generally no voting rights
• Constitution lists rights of different
classes of shareholders
Company
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Capital – reserves
• Represents profits and gains not
distributed
• Retained Profits – profit put back into
company
• Other reserves – eg. asset revaluation
reserve
Company
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Directors
• Appointed by shareholders
• Legal duty
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to act in good faith in the best interest of company
to act with care and diligence
to avoid conflicts of interest between their role and
any of their personal interests
• Corporate Governance
• Specific Duties as set out in Corporations Law
including
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Furnishing financial statements and accompanying
notes;
Directors’ declaration about truth and fairness
Directors’ report
Company
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Financial Statements must comply with
accounting standards
• AASB – Australian Accounting Standards Board
• AAS – Australian Accounting Standards
• IASC – International Accounting Standards
Committee
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ASX listed companies are subject to
further rules
Shareholders appoint auditors
Controlling Interest
Consolidated Financial Statements
Trust
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A business structure which obligates a person to
hold property for the benefit of others
Types of trusts
• Family Trust
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Established to benefit one family and its members
Trustee normally given wide discretionary powers to
acquire, distribute and dispose of the trust’s income and
assets
• Unit Trust
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Business and joint venture participants
Beneficiaries can own units in the trust
Trustee must distribute income according to the unit
holdings
Beneficiaries can sell their unit
Advantages of trusts
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Tax advantages
Limited liability
Easy to form with limited
government controls
Disadvantages of trusts
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Law of trusts is complicated
Use of trusts require knowledge, skill
and care