Introduction to Financial Accounting

1. Introduction

2. Introduction to Financial Accounting The hows and whys? Introduction

3. Learning Outcomes • Learning Outcomes • An introduction to some of the concepts of financial accounting • To familiarise you with some of the concepts and conventions which accountants work within • To help you to understand that accounting is not just about numbers! There is more to it than that • To explain who uses accounts and why Introduction

4. Other Outcomes? • Workplace skills • The nature of jobs will continue to change and its not just technical skills which are , needed • You also need to develop meta-cognitive skills such as communication, critical thinking, logical argument, presentation and • Professionalism Introduction

5. Why am I studying this? • To learn some technical detail • To understand the terminology • Because you will come across terminology on a daily basis in a working environment • It’s a good way of learning how to learn • It’s a core subject for accountants, economists, analysts, bankers, and all financially based professions Introduction

6. What is accounting? • In groups of two • Give me some words to describe what you think accounting is. • What frightens you about accounting? • Stop at the Pinger Introduction

7. Who are accountants? • Give me some words to describe accountants and what they do Introduction

8. Some tips • Read and practice, copy the answer if you must • Try to understand why you are doing something • For example when we start to do book keeping not • “I’ll debit the bank because that’s what teach did”but “I’ll debit the bank because its an asset account and it is increasing” followed by “and I’ll credit Sales as the revenue increases • This is called deep learning Introduction

9. An Iceberg Introduction

10. Surface v Deep learners • Surface is what you can see • Just to pass the exam • Forget it afterwards • Not knowledge • Deep • You want to know why, you have an enquiring mind • You understand what you are doing and why you are doing it • Professional! Introduction

11. Introduction

12. The surface learner! Introduction

13. The Lecture • Summary • Intended learning outcomes • By why are we learning this? • Questions • Technical stuff • Short break • A work through • Plenary – what have we learnt Introduction

14. Who uses accounts and why? • Accounts are used by all sorts of stakeholder groups for all sorts of reasons. Examples include • banks, • financial institutions, • customers, • debtors and creditors, • members of the public, • private investors, • the tax authorities, • analysts. Introduction

15. What do accounts tell us? • Accounts tell us the financial position of an entity. • The basic accounting question tells us that all the assets equal the equity invested in the company and the liabilities. • We are able to see this from the statement of financial position. They give us the numbers. • The limited accounts of limited companies can be downloaded from several websites, including their own. A good source is the Financial Times website at FT.com. Introduction

16. What don’t accounts tell us? • Financial accounts are snapshot of what has happened in the period they refer to, • they do not tell us everything, a little like looking at a picture and wondering who is on the left or the right or what was happening the night before! • Other issues need to be considered such as • what has happened in previous years or • how competitors are doing. • There are techniques for doing this such as ratio analysis, which is considered in week 9. • More and more we also need to considered issues concerning the environment such as climate change and ethical waste disposal which is considered in week 10 about qualitative issues. • Plastic Bags Introduction

17. What is accounting? • Financial accounting • Management accounting • Auditing • Taxation • Financial Management Introduction

18. Financial Accounting • Financial accounting is a way of reporting what has happened in a given financial period, which could be a day, a week, a month, but is usually a year. Accounts are summarised on financial reports, called • the income statement (used to be called the profit and loss account); • the Statement of Financial Affairs, (used to be called the Balance sheets; and • the Statement of Cash flows (used to be called the Cash Flow Statement) Introduction

19. What is financial accounting? Financial accounting involves: • Recording transactions • Preparing financial statements

20. How transactions are recorded • Books of account • Bookkeeping • Manually in books • Computer accounting package • Summarising

21. Why you need to keep records • Prevent theft • Pay your way • Check if worthwhile working • Keep tax inspector happy

22. What information do stakeholders need? • Those who supplied the business with goods or services • Those who provided cash such as the bank • Employees • The government • The public

23. How accurate is the information? • What information would you expect to be 100% accurate? • How accurate would you want the stock of a chain of confectioners shops to be? • What would you need to consider when deciding on the level of accuracy that you require?

24. Accounting terminology • Transaction – a business activity involving money • Assets – resources available to a business • Liabilities – amounts owed by a business • Capital – amount invested in a business by its owner • Statement of financial position – a list of • resources (assets) and • sources of these assets (Capital and liabilities) • Inventory – goods available for sale

25. Accounting terminology (Continued) • Statement of income – report of income and expenses • Income or revenue – what the business earns from the sale of goods or provision of services • Expenses – what it cost the business to earn the income • Gross profit – the difference between sales revenue and cost of what was sold • Net profit – gross profit less all expenses

26. Management accounting • Management accounting stated at the time of the industrial revolution, as people moved from rural communities into towns and cities, and businesses and their owners wanted to predict what might happen if they costed ahead, or budgeted for cash flow. • Examples include, break even analysis, costing, pricing, variance analysis, cost-volume profit analysis, activity based costing, budgeting. Introduction

27. Management accounting is an essential part of day to day business management, and best explained using spreadsheets, knowledge of which is also essential for business management. • CIMA define management accounting as “the application of the principles of accounting and financial accounting to create, protect , preserve and increase value for the stakeholders of profit and not-for profit enterprises in the public and private sectors.” (CIMA, 2005) Introduction

28. Auditing • This is checking that the account present a true and fair view of the financial position of a limited company. It is defined by CIMA (2005) as “Systematic examination of the activities and status of an entity based primarily upon investigations of its systems controls and records.” Introduction

29. Two types of auditing • External auditing: external auditors are appointed by the owners of an entity, who are independent and not part of it. They report to the owners and not the management. They may do detailed checking of the records (or books). They might also ensure that there is what is known as an “audit trail” so that transactions can be traced through the books. • Internal auditing: They can work closely with the external auditors, but have a different role. They are employed by the company so are influenced by this, they are not independent, they may have a consultancy role, and perform, for example value-for money audits, and possible fraud investigations. Introduction

30. Taxation • This is a highly complex branch of accounting, and specialists help individuals and limited companies to work out their tax affairs. They often advise entities how to pay less tax this is known as tax avoidance, which is perfectly legal. However tax evasion, or the non-payment of tax is a serious offence which can lead to imprisonment. More details about the UK tax system can be found at the tax Office or Her Majesty’s Revenue and Customs website at: http://www.hmrc.gov.uk/ Introduction

31. Financial Management • This is a relatively new form of accounting, and financial managers are responsible for setting objectives and planning ahead. They will be involved in the management of the organisation and gaining their knowledge from more than just accounting rules and regulations, using disciplines such as economics maths and management too. Introduction

32. What have we learnt today? • Learn how to learn • Engaging in learning is more fun that not engaging • Accounting is not just about numbers • There are several types of accounting • Accounting is a profession • There are several professional bodies • Look at the web sites and find out what the objectives of the accounting bodies Introduction