Accounting And Finance for

Managers (MBA 682)

Part I: The context of Accounting

and Finance
 An Introduction
Chapter
to Accounting

1
1.1 Definition of Accounting (As a
Process)
is a
Accounting Identifying
Process of

Recording&
summarizing

information
Relevant Reporting
that is

Reliable
to help users make
Comparable better decisions.
Definition of Accounting (As A system)

Accounting is a system of processing

financial and non-financial data from
internal and external sources and
reporting the result (information) to the
interested users for wise (informed)
decision making.
1.2 Accounting Activities
 Identifying  Recording,
summarizing,
Business analyzing
Activities Business
Activities 
Communicating
Business
Activities
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1.3. A Short History of Accounting
 Accounting has evolved through different stage
of development at different parts of the world
and at different periods of time depending on
the economic development of the society.
 The gradual increase in production and
economic transactions from time to time has,
depending on technological enhancement,
created difficulty to memorize and manage all
these economical events and compel people to
record.

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…. History of accounting
 According to Alexander (2002), people started
recording economic transactions for the first time
on clay in Mesopotamia and then advanced to
record on Papyrus in Egypt.
 In the 5th century B.C., Greece used "public
accountants" to allow its citizenry to maintain real
authority and control over their government's
finances.
 Perhaps the most important Greek contribution to
accountancy was its introduction of coined money
about 600 B.C.
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… History of Accounting
 The innovative Italians of the Renaissance
(14th -16th century) are widely acknowledged
to be the fathers of modern accounting.
 Luca Pacioli was an Italian man, who is
known as the father of modern accounting,
invented the double-entry system and
published in his book in 1494.

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History of Accounting….

 The first professional accounting body was

formed in Venice in 1581.

 The early accountants were ‘scribes’ who also

practiced law.
 Stone (1969) noted that in ancient Egypt in the
pharaoh’s central finance department . . . “Scribes
prepared records of receipts and disbursements
of silver, corn and other commodities.”
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1.4 What is the relation between
accounting and bookkeeping?
 Bookkeeping is the recording of financial
transactions and events, either manually or
electronically.
 Accounting is much more. It includes
identifying, measuring, recording, and
analyzing business events and transactions,
and helps information users to make economic
decisions.
1.5 Processing Accounting Information
(the Accounting cycles)
 Identifying & recording of business trans /& events
 Classifying of data by posting to ledgers
 Summarizing of data from ledgers in to unadjusted
work sheet
 Adjusting, correcting, updating, records (completion
of work sheet)
 Closing nominal accounts to summarize operation of
the accounting period
 Preparation of post closing trial balance (F/st.)
 Reversing & adjusting of certain entries for next
accounting periods
 1.6 Users of Accounting Information

External Users Internal Users

•Lenders •Consumer Groups •Managers •Sales Staff

•Shareholders •External Auditors •Officers •Budget Officers
•Governments •Customers •Internal Auditors •Controllers
Users of Accounting Information

External Users Internal Users

Financial accounting provides Managerial accounting provides

external users with financial information needs for internal
statements. decision makers.
 Users of Accounting Information-
External
 Lenders: Whether the firm (borrower) can
repay the money or not?
 Shareholders: whether to buy, hold, or sell
stocks?
 Governments: whether the firm pay all due
tax?
 Customers: whether the firm can exist to
provide post-sale services?
 External Auditors: whether the financial
statements are prepared according to GAAP?
 Etc.
 Users of Accounting Information-
Internal
 Marketing managers: target customers, set
price, monitor sales.
 Production managers: monitor cost and ensure
quality.
 Purchasing managers: what, when and where
to purchase materials.
 Human resource managers: employees’
performance and compensation.
 1.7 An Overview of Accounting
Principles
 General principles: basic assumptions,
concepts, and guidelines for preparing
financial statements.
Usually stem from long-used accounting
practice.
 Specific principles: detailed rules used in
reporting business transactions and events.
Usually created by a pronouncement from an
authoritative body.
I. Assumptions
A. Business Entity
B. Going-Concern
C. Monetary Unit measurement

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II. Concepts
A. Accounting Period Concept
B. The Objectivity Concept
C. The Dual-Aspect Concept

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III. Principles
A. Historical Cost Principle
B. Revenue Realization Principle
C. Matching Principles
D. Full-Disclosure Principles

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IV. Constraints
A. Materiality
B. Consistency
C. Conservatism
D. Cost-Benefit

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Financial Statements:
-A Lens to View Business
- Carry information from
processed data

Financial
Statements
 1.8 Types of Financial Statements and
Reports

 The Income Statement

 The Balance Sheet
 The Statement of Retained
Earnings
 The Statement of Cash Flows
The Income Statement
 An income statement is a summary of the revenues
and expenses of a business over a period of time,
usually either one month, three months, or one
year.
 Summarizes the results of the firm’s operating and
financing decisions during that time.
 Operating decisions of the company apply to
production and marketing such as sales/revenues,
cost of goods sold, administrative and general
expenses (advertising, office salaries)
 Provides operating income/earnings before interest
and taxes (EBIT)
Results of financing decisions are
reflected in the remainder of the
income statement.
When interest expenses and taxes are
subtracted from EBIT, the result is net
income available to shareholders.
 Net income does not necessarily
equal actual cash flow from operations
and financing.
BALANCE SHEET: It depicts the basic
Accounting equation

Assets = Liabilities + Equity

Liabilities
Assets & Equity
 The Balance Sheet

 A summary of the assets, liabilities, and equity of a business at a particular point in time, usually at
the end of the firm’s fiscal year.

Assets = Liabilities + Equity

(Resources of the (Obligations of (ownership left over
business enterprise) the business) Residual)

Fixed Assets Long-term Common stock outstanding

(Plant, Machinery, Equipment (Notes, bonds, & Additional paid-in capital
Buildings) Capital Lease Retained Earnings
Current Assets Obligation)
(Cash, Marketable Securities, Current Liabilities
Account Receivable, Inventories) (Accounts Payable,
Wages and salaries,
Short-term loans
Any portion of long-term
Indebtedness due in one-year)
THE STATEMENT OF CASH FLOWS
 The statement is designed to show how the firm’s operations have
affected its cash position and to help answer questions such as these:

• Is the firm generating the cash needed to purchase additional fixed assets for
growth?
• Is the growth so rapid that external financing is required both to maintain
operations and for investment in new fixed assets?

• Does the firm have excess cash flows that can be used to repay debt or to
invest in new products?

The statement shows :

- Cash flows from operating activities
- Cash flows from Investing activities
- Cash flows from financing activities
1.9 Financial vs. Managerial Accounting

Accounting System
(accumulates financial and
managerial accounting data)

Managerial Accounting Financial Accounting

Information for decision Published financial
making, and control statements and other
of an organization’s financial reports.
operations.
Internal External
Users Users
 1.9 Financial vs. Managerial Accounting
Managerial Accounting Financial Accounting
Users of information Managers within company Interested outside parties
Regulation Required. Must comform to
Not required because for internal
GAAP which is regulated by
use only
FASB and SEC.
Basic accounting system plus Almost exclusively from the
Source of Data
various other sources basic accounting system
Reports often focus on subunits. Reports focus on the enterprise
Nature of Reports Based on a combination of in its entirety. Based on
and Procedures historical data, estimates, and historical transactions.
projections of future events.
1.10 Cost Accounting

 Cost Accounting: concerned with analysis and

ascertainment of cost, its classification, accumulation,
allocation and absorption so as to calculate the unit cost
of a product/process or a cost centre and to facilitate
cost reduction and cost control.

 Cost Accounting information is used both by

managerial and financial accounting.
 1.11 Managerial Functions and
Accounting information
An organization . . .
Directing

Acquires Resources Decision

Organized set Making
of activities

Controlling Planning
Hires People
 1.11 Managerial Functions and
Accounting information
An organization . . . Plan Human
resource
Directing development

Provide
Rewards for
Acquires Resources best
Organized set performance
of activities

Try to align
individual
interest with
Take
org. Interest
Hires People corrective
action
 1.11 Managerial Functions and
Accounting information
An organization . . .
Marketing
Production decisions
decision

Acquires Resources Decision

Organized set Making
of activities

Investing
Financing
decisions
Hires People decisions
 1.11 Managerial Functions and
Accounting information
An organization . . .
Goal setting Strategy
Budgeting formulation

Acquires Resources
Organized set
Planning
of activities

Strategic
Hires People planning
 1.11 Managerial Functions and
Accounting information
An organization . . .
Variance M&E
Analysis

Acquires Resources
Organized set
Controlling
of activities

Performance Taking
Measurement Corrective
Hires People
Action
 How Accounting Adds Value to the
Organization
 Providing information for decision making and
planning.
 Assisting managers in directing and controlling
activities.
 Motivating managers and other employees
towards organization’s goals.
 Measuring performance of subunits, activities,
managers, and other employees.
 Assessing the organization’s competitive position.
 End of Chapter 1

Thank you for your Attention!!!