Task 1:

Purpose and requirement of Accounting Information

Accounts involve keeping a record of the daily financial activities and preparation of financial
statements on a monthly basis. Different financial statements are being prepared like income
statement which shows the profitability of the organization, balance sheet which shows the
companys financial position at a certain point in time, a cash flow statement which elaborates
the cash inflow and outflow and owners capital shows the capital investment and end capital of
the owner or investor.
Accounting information is necessary for multiple reasons which are as follows

Business progress can be easily monitored with accounting information when the concern

is to earn a profit.
Accounting information is required in multiple decisions making regarding investment

opportunities as well as borrowing.

Accounting information is used to provide a fair and true picture of the business to the

shareholders.
This accounting information is used by auditors, CFO, tax agencies and banks as well

Techniques for recording financial information

There are different techniques for recording accounting information.
Techniques for recording accounting information is a process of recording, analyzing, verifying
and reporting of financial data in an organized manner. This information can be recorded in
different ways which are as under:
Manual records: accounting information can be kept manually. This information can be stored on
the register and another notebook. But maintaining data in this way can be costly and difficult as
it is required more registers etc. as well as extra efforts and safe keeping. This type of financial
data can be exposed to risk (Matejski, 2015).

Daily book: accounting information can also be stored in the daily book. This is a book in which
accounting information like debits and credits are entered on a daily basis to manage activities
(Matejski, 2015).
Cash base record: some businesses such as sole proprietor used to manage their accounts on a
cash basis. This means the record every transaction whenever there involve cash. They record
payment when to give cash and record receipt when to receive cash from others.
Accrual basis: another method of recording transaction is accrual basis which is mostly used by
the large organization because their number of transaction are huge and so cash basis is not fit for
the large organization.
Single entry system is also a method of recording accounting information. In this method, all
transactions of receipt and payment recorded in one account by a short description of every
payment. This method of entry support cash basis accounts and small business (Schmidt, 2016).
Double entry covers to a single entry. In this system, there are always minimum two accounts in
which one account is debited and other credited. This type of account recording support accrual
basis and hence support for large business. This is the now the standard recording method of all
companies whether private or public (Schmidt, 2016).

Legal and organizational requirement

Different business has different requirement for information management. Accounting
information is prepared as per the relevant rules and regulations. Every country has its own
system alongside international standard. Accounting information in the UK is recorded and
presented as advised by UK Generally accepted accounting principles. The legal requirement of
the accounting information for a company requires to disclose information about the cash in and
outflow, profitability and expenditures, Tax paid and others things. Moreover, this is legally
required to check whether compliance has been made with rules and regulations or not (Student,
2015).

Usefulness of financial statements to stakeholders

Finance is an important aspect of business. Its a blood to the organization. So finance is essential
for managers. Financial statements are important as it gives information to stakeholders about
profitability and financial position of the company. It always provides a view of all financial
controls being adopted by the company. It also used to attract more capital. Stakeholders usually
dont participate in companys day to day business especially in public limited company. In a
private company, it depends on the stakeholders either they want to be the part of the activities or
not. In a small business like this, financial statements are more important as all stakeholders are
fully involved in this business. So this information will help in making a decision whether where
to put more efforts or not. Moreover, this information is beneficial because whenever we have to
launch a new product or start a new business then we must have information and knowledge of
how to maintain finance, control budget, making breakeven points, costing and pricing of the
organization products and services (Student, 2015). The UK accounting standard is UK GAAP
and Financial reporting standards (FRSs) issued by Accounting Standard Board (ICAEW, 2016).

Difference between management and financial accounting

Whether financial or managerial accounting, both use same data for analysis but still there is the
difference on the basis that how information produced is being used. Financial accounts produce
information for external users like creditors, government and bankers etc. while managerial
accounting information is used for the internal purpose to take some decision for different
ventures or activities like pricing and others.
Financial accounting information showcases the past of the business as it shows position and
performance at a certain point in time while managerial accounting is used for the purely future
purpose to make budget estimates and targets.
Financial accounting data is purely objective and verifiable as compared to that of managerial
accounting. Managerial accounting information is used for estimation is objectivity doesnt
matter here rather relevancy is required for proper estimation and decisions.
Financial accounting information shows the position of the overall company as it used a
complete whole year data while managerial accounting can be specific to some or different

department like it can be used to focus on changing the price or increasing and decreasing
production.
Financial accounting is mandatory and follows generally accepted accounting principles as
external stakeholders are interested and users of this information but as far as managerially is
concerned that is not mandatory and dont need to follow GAAP (Ashraf, 2011).

Budgetary control process

A budget is a financial document carrying the estimation of proposed actual targets. Budget is
prepared to make planning for the future activities achieve target set.
The budgetary control process is a system of controlling cost by establishing standards, budgets,
comparing actual results with budgets, assigning responsibilities, making the correction and
setting standards again for maximizing sustainable profits. Budgetary control process as
following steps:

Setting objectives
Preparing budgets and establishing responsibility centers
Comparing actual results with budgets
If results are favorable it becomes standard otherwise, a remedial action is advised
(Venkatesh, 2015)

The budgetary control system is used to set an objective for the future planning and expected
performance. It is used to operate different department and cost Centre as well as to make the
system more centralized. There are four types of center in budgetary control which is revenue
Centre that is used to measure the inputs in monetary terms, expense center is used to maintain
the expense, profit center is used to measure the output in monetary term while investment center
is used to measure the return on investment by comparing assets employed and results achieved.
For effective budget control system, there should be budget committee and budget officer to
control related matters (Samia, 2014).

Costing methods
There are four methods of costing to make the price of the product. Costing methods are
classified on some bases. One the base of elements we categorize cost as direct labor, material

and factory overhead. On functional bases, it becomes production cost, administrative, selling
cost. When we consider variability then it is a variable cost, fixed cost or semi-variable cost
while normality leads to normal and abnormal cost (Periasamy, 2010). But when we use the cost
methods for pricing of the product then they are Cost base pricing, demand-based pricing, and
competition based pricing and customize pricing. But these methods are solely based on costing
techniques discussed above. In cost base pricing, we measure the cost of a different element like
how much hours of labor used, how much material and factory overhead used. What was the
level of administrative and promotional activities? These all calculated in the monetary term to
set the price of the product. This can be cost plus pricing where simply a percentage of cost is
added to the cost for profit margin in price. While in markup pricing a certain percentage of
margins is added at each level like wholesaler and retailer to get profit (Nitisha, 2015). Demand
base pricing suggests setting the price of the product as per demand. While competition based
pricing suggest setting the price to beat the competitor by either setting lower prices or giving
combos in the same price.

Task 2:
Sales
Direct Labor
Material
FOH
Profit

Sales:

Actual (1100)
63.5455
22.7163
19.7958
5.8182
15.2152

69900/1100 = 63.5454

Direct labor:

24420/1075 = 22.7163

Material:

23260/1175 = 19.7985

FOH:

6400/1100 = 5.8182

Profit Variance:

Actual Profit Budgeted profit

15.2152 14

Budgeted (1000)
62
22
20
6
14

1.2152 (fav)

All companies prepare a budget for future planning to set targets. If budget is not prepared then it
becomes difficult for the organization to take the business on a streamline. As in this business,
there are some budgeted figures which set the target to get sales revenue of 62000 by selling
1000 units. Budgets cost for different elements are also set as direct labor 22 per hour, the
material at 20 per unit and FOH at 6 per unit. But this is not necessary that all the things go as
per plan or budget. There can be a positive or negative difference called variance. Sometimes
company outperforms or sometimes it underperforms. In above calculation there is a positive
variance in profit which means per unit profit is more than as budget although the difference is
not with a big margin but still it is positive and is favorable. When we see the cost especially at
direct labor, the budgeted cost was 22 per hour but it slightly increased to 22.7163 whereas
material and FOH cost were lower than budgeted. Moreover budgeted sales for units were set at
1000 units but actually sold are 1100. So these things covered the extra direct labor costs and
company got higher profit as compared to budgeted one.
Additionally, we should have to look down deep into the matter like what are the reasons that
more than budgeted hours are used. Either labor was trained or was lower in number as per
required. This can also lead to the Human Resource issues. Other departments can also be
monitored to make performance better and proactively taking action to any future risk. To boost
sales a quality assurance can also be done with the material that is being used in production.

Task 3:

Actual price of Machine

10,000

Residual Value

3000

Estimated life

5 years

2000

3000

3000

5000

5000

Cash flows

Accounting Rate of Return and Payback Period

Accounting rate of return also known as average rate of return and payback period are those
analysis techniques that are used to have a snapshot of certain capital budgeting. Sometimes
companies need to make a quick calculation to get birds eye view of investment for further
analysis so these techniques are being used. Further analyzes are present, future or net present
value analysis, ratio analysis to make big decisions.
Accounting Rate of return:
Accounting rate of return is a calculation for capital budgeting in which inflows and initial
investments are analyzed to check the impact of specific capital investment in company
profitability. A project is acceptable if Accounting rate of return (ARR) is greater than what we
budget or estimate. In the case of two or more project, greater ARR is selected. It is considered to
be a straight line method for analysis as it used a straight line method of depreciation in the
calculation (Investopedia, 2015).
Accounting rate of return can be beneficial on following grounds which are as under;

It is easy and simple to calculate

It is not required special information
It is based on accounting profit so measure the profitability

While it faces some problems like;

It doesnt consider the time value of money

It doesnt take the cash flow from investment as well the terminal value of the project.

Annual Depreciation

(Initial Investment Residual Value)/ Estimated life

(10000 - 3000)/5

7000/5

1400

Accounting rate of Return =

(average cash inflows annual depreciation)/initial

investment
=

(3600 - 1400)/ 10000

2200/10000

0.22

22%

Payback period:
Payback period is a calculation which tells that in how much time a capital investment can be
recovered. A project is acceptable where payback period is less than expected and in the case of
two or more projects, the lower payback period is selected. Payback period can be beneficial on
the following grounds;

It is useful for companies where investment obsolescence rate is high.

It gives a quick picture of what an investment can do.
It is a quick risk analysis technique.
It shows how long an investment can be kept bound.

But there is some problem with this technique like this technique doesnt use asset depreciable
life. An asset sometimes required some cash outflow to perform well as per requirement so
further cash outflows are not considered in this method of risk analysis. Moreover, it doesnt take
into account profitability matters and also, it ignores the time value of money so that we can
check that what will be the present value of the future cash flows. Hence, this technique is not
useful for making a decision of huge and complex capital investment rather its better for getting
a quick idea (not decision) either to the investment made or not.
Payback period
Year
1
2
3
4
5

=
Cash flow
2000
3000
3000
5000
5000

Cash inflow for the 1st three years:

initial investment /cash inflow per period

Cumulative cash flow
2000
5000
8000
13000
18000

2000 + 3000 + 3000 = 8000

So the payback period is somewhere between 4 th year and only 2000 are more required to get
back initial investment. So
Payback period

=
=

3 +0.4

3.4

3 + 2000/5000

So the payback period for this capital investment is 3.4 years. If the forecasted payback period is
less than above then this investment shouldnt be made or vice versa.

Financing business
Every business at the start required some initial capital. This initial investment can be made by
different ways. After start business required time to time more investment for smooth running or
starting a new venture in the shape of expansion. There are different ways which can be used;
Reinvestment of profit

An easy and cost effective way to finance a business project is to reinvest the income which is
generated by business activities. As this is a reinvestment of the income so it cannot be charged
with the interest rates like in others (Iqbal, 2012).
Bank loan
If reinvestment is sufficient then the business project can be financed by borrowing from
financial institutions like banks. But this needs to disclose your financial information to the
banks for being eligible for this. Moreover, there will be the certain cost of borrowing in the
shape of interest, mortgage or pledge (Iqbal, 2012).
Collateral
A business project can also be financed by selling account receivables with other institutions.
This process required to sell your account receivable and also a fee other than interest on
financing through this collateral (Iqbal, 2012).
Private financing
A private financing can be done by asking family and friend to lend required amount for
investment. This private financing can be done with family and friends easily. It can also be done
by selling the bond in the stock market which has certain interest rate and time to maturity. On
maturity bonds will be back and the amount should be delivered to borrowers (Iqbal, 2012).

Working capital management

Working capital is a measurement of company short-term financial position. This should be
maintaining healthy as investor initially looks at the working capital ratio of the company.
Working capital management refers to the practice of the company that it has the ability to run its
operational activities smoothly and can pay short-term debt easily. Following are the components
of working capital (Ahmad, 2011).
Account receivables: these are the amounts which are due to our customer. These are the
amount of the service or products provided to the customer. Account receivable should be
managed efficiently. Ir should be collected in a timely manner. Late in the collection can affect
business operations and hence can lead to the end point of sales and customer satisfaction. Or

either it can also affect other activities like it can lead to use the amount of some other activities
in maintaining operations (Ahmad, 2011).
Accounts Payables: these are the amounts owed by the company to its suppliers. Accounts
payable shows company strength to meet its short-term debt payment ability. Moreover, it also
builds credit worthiness of the organization as well as goodwill in the market. So accounts
payable should also be managed effectively (Ahmad, 2011).
Inventory: the main important part of the working capital is inventory. This is also called stock
which is used in the production of goods and services. This is the main thing that leads to meet
demands and generation of sales revenues. Inventories day out ratio is also used by the different
stakeholders to check the company working capital management and its ability to run its
operation smoothly (Ahmad, 2011).

References

Ahmad, U. (2011). Ratio analysis Report. Sahiwal.

Ashraf, A. (2011). Financial and Managerial accounting.
ICAEW. (2016). Knowledge and guide to UK standard. Retrieved 2016, from ICAEW:
www.icaew.com

Investopedia. (2015). Accounting rate of return. Retrieved from Investopedia:

www.investopedia.com
Iqbal, A. (2012). business financing. Multan.
Matejski, I. (2015). Methods of recording accounting information. Oxford School.
Nitisha. (2015). 4 Methods of Pricing. Economic Discussion.
Periasamy, P. (2010). A textbook of financial and cost accounting.
Samia. (2014). Budgetary control system.
Schmidt, M. (2016). Single Entry System (Single Entry Accounting Bookkeeping) Explained.
Student. (2015). The Usefulness Of Financial Statements To Stakeholders Accounting Essay. The
Usefulness Of Financial Statements To Stakeholders Accounting Essay. UK.
Venkatesh. (2015). Budgetary Control : Meaning, Objectives and Essentials.