Discussion – Financial Accounting

Discussion – Financial Accounting

Purpose and Aims of Financial and Management Accounting and Accounting Regulations

Management Accounting

Management accounting is a part of accounting. It has developed out of the need to make more use of accounting for making managerial decisions (Managerial Accounting – Definition and Techniques Used, 2021). Management accounting helps in the performance of each of these functions in the following ways;

Provides data

Management accounting serves as a vital source of data for management planning. The accounts and documents are a repository of a vast quantity of data about the past progress of the enterprise, which is a must for making forecasts for the future (Löfsten, H., Lindelöf, P., 2005, 6)

Communication

Management accounting is an essential medium of communication. Different levels of management (top, middle, and lower) need different types of information. The top management needs concise information at relatively long intervals, middle management needs information regularly, and lower management is interested in detailed information at short intervals. Management accounting establishes communication within the organization and with the outside world (Löfsten, H., Lindelöf, P., 2005, 6)

Analyses and interprets data.

The accounting data is analyzed meaningfully for effective planning and decision-making. For this purpose, the information is presented in a comparative form, Ratios are calculated, and likely trends are projected (Löfsten, H., Lindelöf, P., 2005, 7)

Accounting regulation

The purpose of accounting regulation is to follow the International Financial Reporting Standards when preparing financial statements. It is a way the government can keep a check on financial statements and simultaneously protect the interests of investors. Accounting policies essentially provide companies with a framework to report their financial statements, following a standardized format throughout (Löfsten, H., Lindelöf, P., 2005, 7).

  Main Types of Business and Accounting Information

Cost Accounting

The primary function of cost accounting is for a business to determine its production costs by considering how much it spends on purchasing the supplies and labour needed to create its products (Ali, 2021)

Managerial Accounting

This area of a company’s accounting department concerns itself with obtaining and preparing financial documents for management and other higher-level staff. The documents prepared by managerial accountants remain within the organization only. Managers use the financial records they receive from this department to help them make the most appropriate business decisions and manage costs (Ali, 2021).

Finance Accounting

This area of a company focuses on external companies that have expressed interest in the business. Employees create several financial statements to provide to investors. The most common ones include the balance sheet, income statement, and statement of cash flows. These documents help investors understand the financial strength of the company to decide whether they want to follow through with investing or not (Ali, 2021).

Benefits and Limitations of The Different Sources of Finance.

Source of finance	Benefits	Limitations
Equity Capital	–          No obligation to make interest payments or to repay equity investors’ initial investment. –          Lower risk of bankruptcy. –          The partners that you’ll work with also have a vested interest in seeing your business succeed.	–          The loss of control over the company. –          greater overall cost
Selling assets	–          No legal liability for the corporation before the purchase. –          No liabilities for employees	–          No established credit . –          Negotiate transfer of leases and contracts.
Bank loan	–          Common Tool for Expansion –          Loan capital is not structured as a form of equity –          lower interest rates than an overdraft	–          Limited flexibility –          Risk of assets being seized

Appropriate Sources of Funding for a Business Project

Small business loans

Traditional business loans, provided you can get them at a reasonable rate, are still an excellent way to raise finance for your venture, particularly if you are already generating revenue.

Small business grants

Government, local authorities, and private organizations provide funding and grant opportunities to small businesses across the country. These grants are typically available for new companies or existing businesses supporting economic growth in a particular area or nationwide by developing technology in a specific field or helping the disadvantaged (Cox, J. and Nguyen, T., 2017,  3-13).

Costs of Different Sources of Finance.

Grant

Covenant compliance costs + Professional advice + use of a designated supplier.

Loan

Rate of interest  + arrangement fees

Importance of Financial Planning.

Financial planning helps ensure a reasonable balance between outflow and inflow of funds to maintain stability and ensure that the suppliers of funds easily invest in companies that exercise financial planning. It also helps in making growth and expansion programs, which helps in the long-run survival of the company and reduces uncertainties regarding changing market trends that can be faced quickly with enough funds. It also helps in reducing delays, which can be a hindrance to the growth of the company. This helps in ensuring stability and profitability in concern (Irving, K., 2012,

Information Needs of Different Decision Makers In A Business.

Objectives

Because of the complex nature of the decision-making process, the decision-maker must have extensive knowledge of the details of the objective. The decision-maker must analyze this information and factor it into the process when concluding how to act (Işık, Ö., Jones, M, Sidorova, A., 2013, 4)

Resources

The decision-maker must have a firm grasp of all of the resources at his disposal before making his decision. These resources are generally financial in nature, but they can also include such resources as human capital. In many cases, managers and business owners will decide based on financial considerations, including how much capital is available, how it will be allocated, and what types of reserves the company can fall back on if things don’t go well (Işık, Ö., Jones, M, Sidorova, A., 2013, 4)

Alternatives

The decision-maker requires a firm grasp of the alternatives and their consequences. While executives may have one primary objective in mind and may push for their vision, the decision-maker must be aware of alternative solutions. This may involve complex financial analysis or merely weighing the pros and cons of each possible decision (Işık, Ö., Jones, M, Sidorova, A., 2013, 5)

Leadership

An executive must be confident that the company can carry out the mission once it is established. Knowing the leadership qualities of others in the organization can give him confidence in his decision (Işık, Ö., Jones, M, Sidorova, A., 2013, 4)

Impact of Sources of Finance on the Financial Statement

If borrowed funds are invested in projects that provide a return over the cost of debt capital, the shareholders will enjoy an increased return on their equity. In issuing shares to the public, the company has to incur considerable expenses that are not tax-deductible. As far as companies are concerned, debt capital is a potentially attractive source of finance because interest charges reduce the profits chargeable only to corporate tax (Iatridis, G., 2010,6)

Budget Analysis and Recommendations

The company in question should expand its production and come up with new products. As there is no concrete information on the budget, accurate comments cannot be made.

 Making Pricing Decisions Using Relevant Information

Relevant information includes the predicted future costs and revenues that differ among the alternatives. Any cost or benefit that does not differ between alternatives is irrelevant and can be ignored in a decision. All future revenues and costs that do not differ between the alternatives are irrelevant. Information used for pricing should be bearing on the future and different under competing alternatives Miller, K, et al 2011, 7)

Viability of A Project Using Investment Appraisal Techniques.

The performance of a project will determine its viability by a positive indicator on its payback period to generate sufficient cash flow to cover the initial cost of the project; accounting rate of return, i.e., profit expected from the investment; the investment’s net present value; internal rate of return; profitability index, i.e., how much will be earned per dollar of investment.; and the discounted payback period (Götze, U, et al. 2008, 33)

Comparison of Formats of Financial Statements For Different Types of Business.

There are three basic forms of business organizations: sole proprietorship, partnership, and limited liability companies. A sole proprietorship is a business form for which there is one owner. Two or more individuals act as owners in a partnership, and a limited liability company is a separate legal entity from its owners. When shares of a public limited company are listed, the company is known as a quoted company, whose publication of financial statements is compulsory. Therefore, the annual reports of quoted companies are a major source of financial information. However, most of the time, the financial information of sole proprietorships, partnerships and private limited liability companies is not readily available as there are no volunteers in financial statements publication (Iatridis, G., 2010,8).

Interpreting Financial Statements Using Appropriate Ratios and Comparisons, Both Internal and External.

Internal financial reporting is a business practice that involves compiling financial information frequently for use within the organization. The documents may contain confidential information, such as business indicators, financial performance, and performance indicators, among others. They are designed to help those individuals working within the company make informed decisions. External reporting involves preparing financial information to be distributed to parties outside the organization. Unlike internal reports, external reports do not contain confidential information about the company (Ali, R., 2010, 118).

Financial ratios are created using numerical values taken from financial statements to gain meaningful information about a company. The numbers found on a company’s financial statements – balance sheet, income statement, and cash flow statement – are used to perform quantitative analysis and assess a company’s liquidity, leverage, growth, margins, profitability, rates of return, valuation, and more (Ali, R, 2010, 118).

References

Ali, U.Y.A.R., 2010. Cost and management accounting practices: a survey of manufacturing companies. Eurasian Journal of Business and Economics, 3(6), pp.118.

Corporate Finance Institute. 2021. Managerial Accounting – Definition and Techniques Used. [online] Available at: <https://corporatefinanceinstitute.com/resources/knowledge/accounting/managerial-accounting/> [Accessed 6 June 2021].

Löfsten, H. and Lindelöf, P., 2005. Environmental hostility, strategic orientation and the importance of management accounting—an empirical analysis of new technology-based firms. Technovation, 25(7), pp.7-8.

Ali, A., 2021. Types Of Accounting | Financial, Management, Public, Tax, Forensic, Project, Social. [online] Accounting Simplified. Available at: <https://accounting-simplified.com/financial/introduction/types-of-accounting/> [Accessed 6 June 2021].

Cox, J. and Nguyen, T., 2017. Does the crowd mean business? An analysis of rewards-based crowdfunding as a source of finance for start-ups and small businesses. Journal of Small Business and Enterprise Development, 25(1), pp. 3-13.

Irving, K., 2012. The financial life well-lived: Psychological benefits of financial planning. Australasian Accounting, Business and Finance Journal, 6(4), pp.8.

Işık, Ö., Jones, M.C. and Sidorova, A., 2013. Business intelligence success: The roles of BI capabilities and decision environments. Information & Management, 50(1), pp.4-5

Iatridis, G., 2010. International Financial Reporting Standards and the quality of financial statement information. International review of financial analysis, 19(3), pp.6-8

Miller, K.M., Hofstetter, R., Krohmer, H. and Zhang, Z.J., 2011. How should consumers’ willingness to pay be measured? An empirical comparison of state-of-the-art approaches. Journal of Marketing Research, 48(1), pp.7.

Götze, U., Northcott, D. and Schuster, P., 2008. Investment appraisal. Methods and models, 2. pp. 33

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1. Identify the purpose and aims of financial and management accounting and accounting regulations.
2. Identify the main types of business and accounting information.
3. Assess the benefits and limitations of the different sources of finance.
4. Evaluate appropriate sources of finance for a business project.
5. Determine the costs of different sources of finance.
6. Explain the importance of financial planning.
7. Assess the information needs of different decision-makers in a business.
8. Explain the impact of sources of finance on the financial statement.
9. Analyse budgets and recommend appropriate decisions.
10. Explain how to make pricing decisions using relevant information.
11. Assess the viability of a project using investment appraisal techniques.
12. Compare formats of financial statements for different types of business.
13. Explain how to interpret financial statements using appropriate ratios and comparisons, both internal and external.