WHAT ARE ACCOUNTING AND FINANCE?

Accounting is concerned with Collecting ,analyzing and communicating financial information.

The ultimate aim is to help those using this information to make more informed decisions.
Finance (or financial management), like accounting, exists to help decision makers.
It is concerned with the ways in which funds for a business are raised and invested.
An understanding of finance should help in identifying:
■The main forms of finance available;
■The costs and benefits of each form of finance;
■The risks associated with each form of finance; and
■The role of financial markets in supplying finance.
Once funds have been raised, they must be invested in a suitable way. When deciding
Between the investment opportunities available, an understanding of finance can help in
Evaluating the risks and returns associated with each opportunity.

WHO ARE THE USERS OF ACCOUNTING INFORMATION?

- There are likely to be various groups of people (usually known as ‘user groups’) with an interest
in a particular organization, in the sense of needing to make decisions about it.
- Activity 1.1: User Group Decisions for Ptarmigan Insurance (PI)
This activity examines how different stakeholders might use accounting information to make
decisions about PI, a major motor insurance provider.
Each user group has distinct decision-making needs based on PI's financial position and
performance.
This exercise demonstrates how accounting information serves diverse stakeholder needs,
With each group extracting different insights from the same financial data to inform their specific
decisions about the company.
1. Customers: Decision to renew policies based on:
o PI's financial stability
o Claims handling efficiency
2. Competitors: Strategic choices about competition/market exit by:
o Benchmarking against PI's performance
o Analyzing PI's financial health and expansion signals
3. Government: Regulatory decisions considering:
o Tax compliance and profitability
o Need for financial support
4. Community: Expansion approvals evaluating:
o Job creation potential
o Environmental and social responsibility
5. Investors/Analysts: Investment recommendations through:
o Risk-return analysis
o Financial performance evaluation
6. Suppliers: Continuation of supply based on:
o PI's payment reliability
o Creditworthiness assessment
7. Lenders: Financing decisions depending on:
o Debt repayment capacity
o Interest payment history
8. Management: Operational improvements by:
o Performance benchmarking
o Resource allocation analysis
9. Owners: Capital allocation choices involving:
o Investment risk assessment
o Executive compensation decisions
PROVIDING A
 SERVICE
PROVIDING A SERVICE
Accounting can be viewed as a service, where:
 User groups are the "clients"
 Financial information is the "service" provided
 Value is determined by how well it meets client needs.
For information to be useful, it must have key qualities:
1. Relevance: Capable of influencing user decisions. To do this, it must help to predict future
events (such as predicting next year’s profit), or help to confirm past events (such as
establishing last year’s profit), or do both. By confirming past events, users can check on
the accuracy of their earlier predictions.
2. Materiality: An item of information should be considered material, or significant,
if its omission or misstatement could alter the decisions that users make.
Materiality is Relative to Each Business. Three main factors determine materiality:
o Business size/scale
o Type of information
o Financial amounts involved )‫(المبالغ‬
Example: A $10,000 discrepancy would matter more to a small business than a
multinational corporation.
3. Faithful Representation: it should reflect all of the information needed to
understand what is being portrayed. It should also be neutral, which means that
the information should be presented and selected without bias )‫(تحيز‬. Finally, it
should be free from error.
4. Comparability: Users may want to compare performance of the business over
time (such as profit this year compared with last year). They may also want to
compare certain aspects of business performance with those of similar businesses
(such as the level of sales achieved during the year).
5. Verifiability: Provides assurance of faithful representation, Achieved when independent
experts confirm accuracy and Supported by objective evidence/documentation.
6. Timeliness: Must be available when needed for decisions.
7. Understandability: Accounting information should be set out as clearly and concisely as
possible. It should also be understood by those for whom the information is provided.

Note: Information should

only be produced when
benefits exceed costs,
though both are hard to
measure precisely.
Car Repair Example Known:
Immediate repair option costs £350
Costs of Seeking Alternatives:
Fuel & time required to visit multiple
garages.
Effort to collect and compare quotes
Potential Benefits:
Possible cost savings if cheaper
options exist.
Unknown Factors: Probability of
finding a better price.
Actual savings (how much less than
£350?)
Decision Rule: Only worth searching
if expected savings > total costs (time
+ fuel + effort).
 ACCOUNTING AS AN INFORMATION SYSTEM

The accounting information system should have certain features that are common to all
information systems within a business. These are:
■ identifying and capturing relevant information (in this case financial information);
■ recording, in a systematic way, the information collected;
■ analyzing and interpreting the information collected; and
■ reporting the information in a manner that suits users’ needs.
MANAGEMENT ACCOUNTING AND FINANCIAL ACCOUNTING
Differences Between Financial and Management Accounting
1. Purpose & Users
Financial Accounting: Serves external users (investors, regulators, creditors) with
standardized reports.
Management Accounting: Supports internal managers with customized insights for
decision-making.
2. Report Nature
Financial: General-purpose (e.g., annual reports, balance sheets).
Management: Specific-purpose (e.g., cost analysis, budget forecasts).
3. Level of Detail
Financial: Aggregated data (big-picture performance).
Management: Granular details (e.g., product-line profitability).
4. Regulatory Constraints
Financial: Must follow strict standards (GAAP/IFRS).
Management: Flexible, no formal rules.
5. Reporting interval
Financial: Annual (sometimes half-yearly/quarterly).
Management: Flexible frequency based on managerial needs (e.g., daily sales reports).
6. Time Orientation:
Financial: Primarily backward-looking, reporting past performance and position.
However, it may occasionally include forward-looking information (e.g., for
raising finance or resisting takeovers).
Management: Focuses on both past and future performance, aiding decision-making
with forecasts and projections.
7. Range & Quality of Information:
Financial: financial accounting reports concentrate on information that can be
quantified in monetary terms.
Management: Includes both financial and non-financial data (e.g., inventory volume,
sales orders, employee productivity).
 THE CHANGING FACE OF ACCOUNTING
The business environment has become more turbulent and competitive due to:

 More sophisticated(‫ )تطور‬customers

 Globalization (reduced importance of national borders)
 Rapid technological advancements
 Deregulation of key industries (e.g., utilities, electricity, water and gas)
 Shareholder pressure for higher returns
 Increased financial market volatility

Activity 1.9: Benefits of Accounting Rule Harmonization

(a) For an International Investor:
 Easier Comparisons: Consistent accounting terms and policies allow for better
comparison of financial performance across businesses in different countries.
 Increased Transparency: Reduces confusion from varying national standards,
leading to more informed investment decisions.
(b) For an International Business:
 Cost Savings: Eliminates the need to prepare multiple financial reports to comply
with different national rules, reducing compliance costs.
 Broader Investor Appeal: Common accounting standards boost investor
confidence, making the business more attractive to a global pool of investors.

WHY DO I NEED TO KNOW ANYTHING ABOUT ACCOUNTING AND FINANCE?

Accounting and finance form the core of a business’s management information system, guiding
critical decisions on:
 Continuing or halting (‫)توقف‬operations
 Investing in new projects
 Pricing or discontinuing products
These choices impact everyone connected to the business—employees, managers, and investors.

The Essential Role of Financial Literacy in Business

Financial decisions in a business—whether about operations, investments, or products—
have far-reaching consequences for employees, managers, investors, and other
stakeholders.
Why Every Business Professional Needs Financial Knowledge:
1. Reading & Interpreting Financial Reports
o Understand profitability, risks, and business health.
2. Financial Planning & Budgeting
o Contribute to strategic resource allocation.
3. Investment Decision-Making
o Evaluate projects, ROI, and long-term growth opportunities.
4. Business Financing
o Grasp funding options (debt, equity, etc.) and their implications.
5. Cost Management
o Optimize expenses to improve efficiency and profitability.
 BALANCING RISK AND RETURN
Risk-Return Positioning of Investments
1. UK Government Savings Account
o Risk: Very low (government can print money to ensure repayment)
o Return: Typically low
o Placement on Risk-Return Line: Far left (low risk, low return)
2. Lottery Ticket
o Risk: Extremely high (high chance of total loss)
o Return: enormous (huge) returns. (but very unlikely)
o Placement on Risk-Return Line: Far right (high risk, high potential return)

NOT-FOR-PROFIT ORGANISATIONS
May use accounting information to check that the wealth of the organization is
being properly controlled and used in a way that is consistent with its objectives.

Can you think of at least four types of organization that are not primarily concerned
with making profits?

■charities;
■ Clubs and associations;
■ Universities;
■ Local government authorities;
■ National government departments;
■ Churches; and
■ Trade unions.