introduction to financial information

INTRODUCTION TO FINANCIALO UC O O CINFORMATION

LECTURE 1

LEARNING OBJECTIVESLEARNING OBJECTIVES` Understand the key differences between economics,

accounting and finance` Understand why financial information is important` List the main users of accounting information and

understand their information needs` Distinguish between management accounting and financial

accounting` List the main types of business ownership and outline

their characteristics` Summarize the advantages and disadvantages of each type

of business ownership

WBS, 2013-14Panagiotis Dontis Charitos2

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IN TODAYS LECTUREIN TODAY S LECTURE...` Topics` Differences between economics, accounting and finance` Importance of financial information` Users of accounting information and their information needs` Differences between management accounting and financial

iaccounting` Main types of business ownership` Characteristics` Characteristics` Advantages vs. disadvantages


ECONOMICS FINANCE ACCOUNTINGECONOMICS - FINANCE ACCOUNTING` Economics is a social science` Study the production, consumption and distribution of services

or goods` Explain how economies work and how do different economies ` Explain how economies work and how do different economies

interact` Finance is a subset/tool of economics that studies the

financial markets` Personal finance, corporate finance, state finance

` Accounting is an essential part of finance and economics` Precise recording, reporting and assessment of financial deals

and transactions of a businessand transactions of a business` Preparation of statements or declarations concerning assets,

liabilities, and outcomes of operations of a business


ECONOMICS FINANCE ACCOUNTINGECONOMICS - FINANCE ACCOUNTING

Accounting

Finance

Economics


WHY IS FINANCIAL INFORMATION ESSENTIAL ANDTO WHOM?TO WHOM?` Informed decision making` Investing` Managing` Regulating

` Range of users called user groups` Owners` Managers` Regulators` Other stakeholders


USERS OF FINANCIAL INFORMATIONUSERS OF FINANCIAL INFORMATION

Suppliers

Lenders

Suppliers

Customers

EmployeesPeers /

Competitors

Managers Analysts

O / G tBusinessOwners / InvestorsGovernment

agencies


USERS OF FINANCIAL INFORMATIONUSERS OF FINANCIAL INFORMATION` Different user groups require different information` Managers (Internal)` Costing services and products` Planning and budgeting` Planning and budgeting` Decision making ` Budgetary controlg y

` Other users (External)` Company value` Performance` Credit / financial position` Prospects` Prospects` Taxation


MANAGEMENT ACCOUNTING VS. FINANCIAL ACCOUNTINGFINANCIAL ACCOUNTING` Two distinct types of accounting` Distinction can be made as per` Target user group` Framework` Framework` Content

` Management/Managerial accountingg g g` Information to managers` Provisional

C i bl f d ` Customisable form and content` Financial accounting` Information to all other stakeholders` Information to all other stakeholders` Developed within company law framework` Content must comply with accounting rules and standards


MANAGEMENT ACCOUNTING VS. FINANCIAL ACCOUNTINGFINANCIAL ACCOUNTING` Management/Managerial accounting` Process of collecting, recording and reporting information

that is of use to the managers of a business

` Financial accounting` Process of collecting and recording financial data to prepare

f l d f h f ' financial statements and reports for the firm's management, investors, lenders, suppliers, tax authorities, and other stakeholdersstakeholders

` Remember...The key difference between financial and managerial accounting is that financial The key difference between financial and managerial accounting is that financial

accounting is aimed at providing information to parties outside the organization, whereas managerial accounting information is aimed at helping managers within the

organization make decisions


organization make decisions

MANAGEMENT ACCOUNTING VS. FINANCIAL ACCOUNTINGFINANCIAL ACCOUNTING


TYPES OF BUSINESS OWNERSHIPTYPES OF BUSINESS OWNERSHIP` Sole proprietorship` Simplest form of business organisation` Small size (employees, sales volume etc.)` Individual sole owner` Responsibility for management and operationsN l l d b d b` No legal distinction between owner and business

` No legal requirement for accounting` I di id l t t` Individual tax return

` Unlimited liability


TYPES OF BUSINESS OWNERSHIPTYPES OF BUSINESS OWNERSHIP` Partnership` Similar to sole proprietorship` Typically small size` Easy to set up` Easy to set up

` Shared ownership` Minimum 2 maximum 20` Responsibilities for management and operations (own arrangements)` Types of partners (general, limited, sleeping, companies / LLPs)

` No legal distinction between owner and business` No legal distinction between owner and business` Partnership tax return` Income and expenses for tax yearp y` Includes statement for division of profits and losses

` Joint unlimited liability


TYPES OF BUSINESS OWNERSHIPTYPES OF BUSINESS OWNERSHIP` Limited company

Di i il h hi ` Dissimilar to other ownership types` Size ranges considerably` Very complicated to set upy p p

` Shared ownership` Owners subscribing capital` As a rule owners not involved in running business` As a rule owners not involved in running business

` Legal distinction between owner and business` Tight regulatory frameworkg g y` Documents of incorporation` Annual financial reports - annual meetings of owners` Subject to independent audit` Subject to independent audit

` Limited owner liability` Up to the amount of subscribed capital


TYPES OF BUSINESS OWNERSHIPTYPES OF BUSINESS OWNERSHIP` Limited Liability Partnerships (LLPs)` Limited Liability Partnership Act 2000` Limited Liability Partnership Act 2000` Effective April 2001 in England, Scotland and Wales

` Similar to partnership` Vary in size` Vary in size` More complicated to set up and run

` Shared ownership` LLP has members not partners at least 2` LLP has members not partners at least 2

Companies and other LLPs can be members` Deed of partnership (partnership agreement)

Capital, profit allocation, management, changes` Organisational flexibility of partnerships with the benefit of limited liability for

their members` Legal distinction between owner and LLP

C b i i d b i fi d fl i ` Can borrow money in its own name and secure borrowings on a fixed or floating charge

` Files accounts and annual return much like a limited company


TYPES OF BUSINESS OWNERSHIPTYPES OF BUSINESS OWNERSHIP

Characteristics / Sole Proprietorship Partnership Limited LLPPros & Cons Sole Proprietorship Partnership Limited LLP

Easy to set up 999 999 8 99

Incentive for personal success 999 99 8 9successFreedom in decision making 999 99 8 9

Close contact with staff and customers 999 99 8 9

Shortage of capital / talent 999 9 8 8

Problems with death or retirement 999 999 8 8

Problems with resignations / disputes 8 999 8 8

Personal wealth at risk 999 99 8 9

Reporting requirements 9 9 999 99

Exposure levelsNo 8Low 9M di 99


Medium 99High 999

LECTURE 1 READING LISTLECTURE 1 READING LIST` Core reading` Perks and Leiwy` Part 1: Intro to Financial Accounting` Chapter 13 sections 13.1 to 13.3

` Further readingA ` Atrill and McLaney` Chapter 1

` W b ` Web resources` HMRC` htt // h k/` http://www.hmrc.gov.uk/

` CIMA` http://www cimaglobal com/


` http://www.cimaglobal.com/