Financial Accounting
2010/11
week 1
By Otto Khatamov
1
Assessment
Summative;
 Exam

2
Text book
Financial Accounting for Decision Makers;
5th edition by Peter Atrill & Eddie
McLaney, Prentice Hall
 Introduction to Financial Accounting, 9th
edition by Horngren, Sundem, Elliott &
Philbrick, International edition
 Lecture notes

3
FA; aims of lecture 1






To introduce the module
To introduce ACCA F3 paper
To consider what financial accounting is
To introduce some accounting concepts,
including the accruals concept
To introduce the Income Statement & Balance
Sheet, illustrated by Greggs plc 2008 annual
report;
For full report see www.greggs.plc.uk; click
investors
4
Accounting

“the process of identifying, measuring &
communicating financial information about
an entity to permit informed judgements &
decisions by users of the information”
American Accounting Association (AAA 1966)
5
Accounting





Management Accounting
internal identification &
use of costs to;
1. Plan/ budget
2. Make decisions about
price & volume
3. Make investment
decisions

Financial Accounting

reporting of historic
results, for use by a
range of external parties
CFRintrowk1
6
ACCA F3 – Financial Accounting
Detailed Syllabus:
A. The context and purpose of financial reporting
B. The qualitative characteristics of financial
information
C. The use of double entry and accounting
systems
D. Recording transactions and events
E. Preparing a trial balance
F. Preparing basic financial statements
G. Interpretation of financial statements

7
ACCA F3 – Financial Accounting
D. Recording transactions and events
- Sales and purchases
- Cash and Inventory
- Tangible non-current assets
- Depreciation
- Intangible non-current assets and amortisation
- Accruals and prepayments
- Receivables and payables
- Capital structure and finance costs
8
ACCA F3 – Financial Accounting
F. Preparing basic financial statements
- Statements of financial position
- Income statements and Statements of
comprehensive income
- Disclosure notes
- Events after the reporting period
- Statements of Cash Flows (excluding
partnerships)
- Incomplete records
9
Financial Accounting
reporting of historic results, for use by a
range of external parties
 Serves a stewardship function
 Largely quantitative but increasingly
qualitative disclosure
 May be subject to independent audit

10
Users of financial accounts
Investment
analysts
Owners
Government
Community
Lenders
Business
competitors
Managers
Staff
suppliers
Customers
11
Published accounts
Necessitated by segregation of ownership
from management
 an account of stewardship for
shareholders
 basis for investment decisions
 of interest to the public & government
 Based on International or National
accounting standards?

12
Legislation
ASB &
IASB
Regulation
Regulatory
Framework
Compulsory
Audit
Institutes; ICAEW
ACCA
CIMA
CIPFA
13
Accounting acronyms

IASB; the International Accounting Standards Board, which issues
IASs (International Accounting Standards) & IFRSs (International Financial
Reporting Standards).





GAAP; Generally Accepted Accounting Principles
ICAEW; Institute of Chartered Accountants in England &
Wales
ACCA; Certified Accountants
CIMA; Chartered Institute of Management Accountants
CIPFA; public sector accountants
14
Financial statements


1. Profit/wealth
generated over the
period?
performance
2. What is the
accumulated wealth
at period end?
position

Income Statement

Balance Sheet
15
Financial statements



Income Statement
record of performance
over 12 month period
revenue income
matched with revenue
expenditure

Balance Sheet

snap shot of financial
position as at the year
end

shows assets,
liabilities & capital
16
Profit
Income - expenditure = profit
17
Greggs Income Statement
revenue
cost of sales
gross profit
dist. & selling costs
administration exp
other income
operating profit
income tax
profit before tax
income tax
profit atttributable to equity holders
CFRintrowk1
2008
2007
£'000
£'000
628,198 586303
-240,200 -220,849
387,998 365,454
-306,573 -278,708
-40,845 -39,030
8,033
2,193
48,613
49,909
857
1,234
49,470
51,143
-15,375 -14,792
34,095
36,351
18
Fundamental concepts
Dual effect (double entry) Book-keeping
 Capital versus revenue
 Cash versus profit;
accruals basis
trading done on credit terms
non cash adjustments

19
The accruals concept

Recognition of income not on a cash
basis (i.e. when cash is received) but on
an accruals basis (i.e. when it is earned).

Hence receivables & prepayments on
balance sheet
20
The accruals concept

Recognition of expenditure not on a cash
basis (i.e. when cash is paid) but on an
accruals basis (i.e. when liability is
incurred)

Hence payables/creditors and accruals on
balance sheet
21
Greggs 2008 Income Statement
revenue
cost of sales
gross profit
dist. & selling costs
administration exp
other income
operating profit
income tax
profit before tax
income tax
profit atttributable to equity
holders
excluding
exceptional
exceptionals items
(note 4)
628,198
-240,200
387,998
-303,288
-3,285
-40,415
-430
0
8,033
44,295
4,318
857
45,152
4,318
-14,033
-1,342
31,119
CFRintrowk1
2,976
total
628,198
-240,200
387,998
-306,573
-40,845
8,033
48,613
857
49,470
-15,375
34,095
22
Items requiring separate
disclosure (IAS 1)


Identifying maintainable income – important for
investors predicting future cash flows
items within the ordinary activities of the enterprise
which are of such size, nature or incidence that their
separate disclosure (usually in a note) is required in the
financial statements in order for the financial statements
to show a true and fair view
Such items may be separately disclosed on the face of
the IS if sufficiently material
23
Items requiring separate
disclosure
Examples include:,
 disposals
of items of property, plant and
equipment,
 restructuring of activities
 litigation settlements
24
The Balance Sheet
A statement of financial position as at a
particular date, usually the company’s year
end
 A snapshot of what a company owns
(assets), what it owes in the short term
(current liabilities) and where it gets its
finance from (usually a mix of long term
debt & equity).

25
The Balance Sheet
= assets – liabilities
 “The total capital being
deployed is represented by
these net assets”
 Capital
26
Balance Sheet – Greggs 2008







Total equity capital
Is represented by;
Non current assets
Current assets
Total assets
Less total liabilities
net assets
147,947
211,141
39,283
250,424
-102,477
147,947
CFRintrowk1
27
The Balance Sheet
 Assets
= capital + liabilities
“This suite of assets is
financed by these sources
of capital”.
28
Balance Sheet – Greggs 2008
Assets
Non
211,141
current
Current 39,283
Total
Financed by
Current
liabilities
Non-Current
liabilities
Equity
250,424
73,941
28,536
147,947
250,424
CFRintrowk1
29
Assets
Current assets
Non-current
Inventory
Cash/bank
Receivables
Tangible/PPE
e.g. car
Intangible
e.g. patent
30
Characteristics of an asset
A probable future benefit exists
 it is controlled by the business
 as a result of a past transaction
 it is capable of measurement in monetary
terms

31
Greggs Group; Assets
Non-current assets
note
2008
2007
Intangible assets
10
686
0
Property, plant & equipment
11
210,455
211,141
196,783
current assets
Inventories
14
12,152
9,908
Trade & other receivables
15
22,698
19,934
cash
16
4,433
11,581
39,283
41,423
250,424
238,206
Total assets
CFRintrowk1
32
What are the claims on a
business?

The owners’ equity or capital

Liabilities; the claims of parties, other than the
owner, which have arisen from past transactions
or events.
Divided between current liabilities (due in
under 12 months) & non-current liabilities which
are due for settlement in more than 12 months’
time
33
Dual meaning of “Capital”

1. Owner’s claim or “equity” versus
liabilities of the business

2. Capital expenditure versus “revenue”
expenditure
34
Greggs Group; Liabilities
Current liabilities
trade & other payables
current tax liability
Provisions
note
17
18
21
2008
62,761
8,337
2,843
73,941
2007
68,183
9,008
0
77,191
Non-current liabilities
defined benefit pension
liability
other payables
deferred tax liability
long term provisions
20
19
13
21
5,733
8,221
12,154
2,428
28,536
102,477
680
426
14,315
0
15,421
92,612
total liabilities
CFRintrowk1
35
Greggs Group; Equity
Capital & reserves
note
2008
2007
2,080
2,127
13,533
13,533
359
312
22
issued capital
share premium account
capital redemption reserve
retained earnings
131,975 129,622
total equity attributable to equity holders of the parent
147,947 145,594
CFRintrowk1
36
Suggested reading & activities
Introduction to Financial Accounting,
Chapters 1-4 (up to page 182)
 Attempt review questions & exercises

37
FA; aims of lecture 1
To introduce the module
 To consider what financial accounting is
 To introduce some accounting concepts,
including the accruals concept
 To introduce the Income Statement &
Balance Sheet
 Any questions?

38