INTRODUCTION

O UC O TO
O FINANCIAL
C
INFORMATION
LECTURE 1

LEARNING 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
p

`
`
`
`
`
`

Panagiotis Dontis Charitos

WBS, 2013-14

IN TODAYS 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
accounting
i
Main types of business ownership
`
`

Characteristics
Advantages vs. disadvantages

Panagiotis Dontis Charitos

WBS, 2013-14

ECONOMICS - 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
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 business
Preparation of statements or declarations concerning assets,
liabilities, and outcomes of operations of a business
Panagiotis Dontis Charitos

WBS, 2013-14

ECONOMICS - FINANCE ACCOUNTING

Accounting

Finance

Economics

Panagiotis Dontis Charitos

WBS, 2013-14

WHY IS FINANCIAL INFORMATION ESSENTIAL AND

TO WHOM?
Informed decision making

`
`
`

Investing
Managing
Regulating

Range of users called user groups

`
`
`
`

Owners
Managers
Regulators
Other stakeholders

Panagiotis Dontis Charitos

WBS, 2013-14

USERS OF FINANCIAL INFORMATION

Suppliers
Lenders

Customers
Peers /
Competitors

Employees

Managers

Owners /
O
Investors

Analysts

Governmentt
G
agencies

Business

Panagiotis Dontis Charitos

WBS, 2013-14

USERS OF FINANCIAL INFORMATION

Different user groups require different information
Managers (Internal)

`
`

`
`
`
`

Costing services and products

Planning and budgeting
Decision making
Budgetary
g
y control

Other users (External)

`
`
`
`
`

Company value
Performance
Credit / financial position
Prospects
Taxation
Panagiotis Dontis Charitos

WBS, 2013-14

MANAGEMENT ACCOUNTING VS.

FINANCIAL ACCOUNTING
Two distinct types of accounting
Distinction can be made as per

`
`

`
`
`

Target user group

Framework
Content

Management/Managerial
g
g
accountingg

`
`
`

Information to managers
Provisional
C
Customisable
i bl fform and
d content

Financial accounting

`
`
`
9

Information to all other stakeholders

Developed within company law framework
Content must comply with accounting rules and standards
Panagiotis Dontis Charitos

WBS, 2013-14

MANAGEMENT ACCOUNTING VS.

FINANCIAL ACCOUNTING
`

Management/Managerial accounting
`

Financial accounting
`

Process of collecting, recording and reporting information

that is of use to the managers of a business
Process of collecting and recording financial data to prepare
f
financial
l statements and
d reports for
f the
h firm's
f ' management,
investors, lenders, suppliers, tax authorities, and other
stakeholders

Remember...
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
decisions
10

Panagiotis Dontis Charitos

WBS, 2013-14

MANAGEMENT ACCOUNTING VS.

FINANCIAL ACCOUNTING

11

Panagiotis Dontis Charitos

WBS, 2013-14

TYPES OF BUSINESS OWNERSHIP

`

Sole proprietorship
`
`
`

Simplest form of business organisation

Small size (employees, sales volume etc.)
Individual sole owner
`

`
`

No legal
N
l l distinction
d
between
b
owner and
d business
b
No legal requirement for accounting
`

12

Responsibility for management and operations

I di id l tax
Individual
t return
t

Unlimited liability

Panagiotis Dontis Charitos

WBS, 2013-14

TYPES OF BUSINESS OWNERSHIP

`

Partnership
`

Similar to sole proprietorship

`
`

Shared ownership
`
`
`

`
`

13

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

Partnership tax return
`

Typically small size

Easy to set up

Income and expenses

p
for tax yyear
Includes statement for division of profits and losses

Joint unlimited liability

Panagiotis Dontis Charitos

WBS, 2013-14

TYPES OF BUSINESS OWNERSHIP

`

Limited company
`

Di i il to other
Dissimilar
h ownership
hi types
`
`

Shared ownership
`
`

`
`

`
`

Documents of incorporation
Annual financial reports - annual meetings of owners
Subject to independent audit

Limited owner liability

`

14

Owners subscribing capital

As a rule owners not involved in running business

Legal distinction between owner and business

Tight
g regulatory
g
y framework
`

Size ranges considerably

Veryy complicated
p
to set upp

Up to the amount of subscribed capital

Panagiotis Dontis Charitos

WBS, 2013-14

TYPES OF BUSINESS OWNERSHIP

`

Limited Liability Partnerships (LLPs)

`

Limited Liability Partnership Act 2000

`

Similar to partnership
`
`

Effective April 2001 in England, Scotland and Wales

Vary in size
More complicated to set up and run

Shared ownership
`

LLP has members

members not partners
partners at least 2

Deed of partnership (partnership agreement)

15

Capital, profit allocation, management, changes

Organisational flexibility of partnerships with the benefit of limited liability for

their members

Legal distinction between owner and LLP

`

Companies and other LLPs can be members

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

Files accounts and annual return much like a limited company

Panagiotis Dontis Charitos

WBS, 2013-14

TYPES OF BUSINESS OWNERSHIP

Characteristics /
Pros & Cons

Sole Proprietorship

Partnership

Limited

LLP

Easy to set up

999

999

99

Incentive for personal

success

999

99

Freedom in decision
making

999

99

Close contact with staff

and customers

999

99

Shortage of capital /
talent

999

Problems with death or

retirement

999

999

Problems with
resignations / disputes

999

Personal wealth at risk

999

99

Reporting requirements

999

99

Exposure levels
No
8
Low
9
M di
Medium
99
High
999

16

Panagiotis Dontis Charitos

WBS, 2013-14

LECTURE 1 READING LIST

`

Core reading
`

Perks and Leiwy

`
`

Further reading
`

A
Atrill
and McLaney
`

Part 1: Intro to Financial Accounting

Chapter 13 sections 13.1 to 13.3

Chapter 1

W b resources
Web
`

HMRC
`

CIMA
`

17

htt //
http://www.hmrc.gov.uk/
h
k/
http://www cimaglobal com/
http://www.cimaglobal.com/
Panagiotis Dontis Charitos

WBS, 2013-14