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Financial Analysis
and Control
Malcolm Anderson
Mathematics & Accounting
Mathematics & Accounting
Why accounting?
Malcolm Anderson
Room S26 AndersonM3@cardiff.ac.uk
Natalie Forde
Room R09 Forde-LeavesN@cardiff.ac.uk
Lectures
Tutorials
Surgeries
Revision sessions
Assessment Week feedback
Learning Central
Practise questions/packs
Assessment & Feedback
Formal assessment
3 hour January exam (answer 3 questions, 1
from each section)
Informal Assessment/feedback
Assessment Week = 1 hour m/c test (does not
count towards overall module mark)
Tutorials
Practise questions
Syllabus
Purpose and definitions of financial accounting, types of
financial statements, role and importance of accounting
concepts; distinction between cash and profit/loss, preparation
of cash flow statement, income statement, statement of
financial position and strengths/weaknesses of each;
limitations of conventional profit measurement; rules vs.
principles in standard-setting; impact of assumptions and
judgements and choice in accounting measurement; analysis
and evaluation of financial statements; introduction to
management accounting; cost and revenue classification;
relevant costs for decision making, time value of money;
investment appraisal techniques
Reading
The main textbook is McLaney and
Atrill (2014) Accounting and Finance:
An Introduction (Pearson)
M&A
Chapter 1
Learning outcomes
define accounting
explain the different types of business entity
explain who users of the financial statements
are and their information needs
explain the nature, principles and scope of
financial accounting
compare and contrast, for a business, financial
accounting with management accounting
A frequently asked question
What do we
mean by
accounting?
Accounting
Rolls Royce
Private Tesco
Sector Barclays Bank
NHS
Public Bank of England
Sector Cardiff City
Council
Third Oxfam
Sector Salvation Army
Legal Form
Sole
Proprietorship
Partnership
Limited Liability
Company
GOING PUBLIC?
Why
Access to wider pool of finance
Easier to grow by acquisition
Original owners realise some of their investment
Better public image
Shares given marketability
But:
Dilution of control
Enhanced reporting requirements
Greater chance of take over
Increased public scrutiny
Purpose of accounting systems
Formulating
overall
strategies and
plans
Meeting
external Resource
regulatory allocation
reporting decisions
requirements Accounting
Financial Accounting:
the activity of recording and analysing the financial results of
transactions as a means of arriving at a measure of the firms success
and financial soundness
(Glautier & Underdown, 2001)
Management Accounting
Management accounting is the application of the principles of
accounting and financial management to create, protect, preserve and
increase value for the stakeholders of for-profit and not-for-profit
enterprises in the public and private sectors
(CIMA Official Terminology, 2010)
Origins of accounting
In early civilisations, writing seems to have
been first developed for accounting purposes
Growth of organised commerce drives the
need to measure financial performance and
record complex transactions
Industrial revolution spawns the joint stock
company - and capitalism
Separation of owners and managers
develops two needs: external financial
reporting to owners and internal
management information for management
scorekeeping and decision-making purposes
Financial Accounting
Regulated and in a standardised format
Historical orientation
High degree of precision expected
Not normally produced quickly
Formal, legal communication to outsiders
Externally verified by audit/review
Infrequent
FA Regulatory Framework
Generally Accepted Accounting Practice (GAAP)
Combination of:
Local company law
Local accounting standards
Local stock exchange requirements
International Regulation
IFRS Foundation & International Accounting Standards Board
(IASB)
European Commission
Listed companies must prepare consolidated Financial
Statements in accordance with IFRS from 1 January 2005
International harmonisation
http://www.ifrs.org/Use-around-the-world/Pages/Use-around-
the-world.aspx
IASB Conceptual Framework
http://www.ifrs.org/Pages/default.aspx
FA - Conceptual Framework
1. Objective of F.S.
2. The reporting entity
3. Qualitative characteristics of useful financial info
Relevance and faithful representation
4. The remaining text:
Underlying assumptions of F.S.
Going concern
Elements of F.S.
Definitions of an asset, a liability and equity (income and expenses)
Recognition of the elements of F.S.
Probability of future economic benefits and reliability of measurement
Measurement of the elements of F.S.
H.C., current cost, net realisable value and present value
Why provide financial
accounting information?
The objective of general purpose financial
reporting is to provide financial information
about the reporting entity that is useful to
existing and potential investors, lenders and
other creditors in making decisions about
providing resources to the entity.
IAS 1 Presentation of Financial
Statements
A complete set of financial statements should include:
[IAS 1.10]
a statement of financial position (balance sheet) at the end of
the period
a statement of comprehensive income for the period (or an
income statement and a statement of comprehensive income)
a statement of changes in equity for the period
a statement of cash flows for the period
a summary of accounting policies & other explanatory notes
FS should present fairly the financial position, financial
performance and cash flows of the enterprise
Illustration of Income Statement
X Company Ltd Income statement for the year ended 30 June
2014 2015
Revenue x x
Cost of sales (x) (x)
Gross profit x x
Distribution costs (x) (x)
Administrative expenses (x) (x)
Profit from operations x x
Investment income x x
Finance cost (x) (x)
Profit before Tax x x
Tax expense (x) (x)
Profit after tax x x
Statement of Financial Position
Statement of financial position for X Company as at 30 June 2015
ASSETS
Non-current assets
Property, plant and equipment x
Intangible Assets x
x
Current assets
Inventories x
Trade and other receivables x
Cash and cash equivalents x
x
Total assets x
EQUITY AND LIABILTIES
Equity
Share capital x
Retained earnings x
x
Non-current liabilities
Long-term borrowings x
Current liabilities
Trade and other payables x
Total equity and liabilities x
Statement of Cash flows
000
Cash flows from operating activities X
Cash flows from investing activities X
Cash flows from financing activities X
Net increase in cash and
cash equivalents during period X
Cash and cash equivalents
at the beginning of period X
Cash and cash equivalents at end period X
TESCO PLC
http://www.tescoplc.com/files/pdf/reports/ar
15/download_annual_report.pdf
Ch 3: Qualitative Characteristics
As per the Framework 2010:
Faithful
Relevance
representation
Enhancing
Qualitative
Characteristics
Auditors report
Financial Statements:
1. Executive summary with a synopsis of KPIs and identifying all key issues
2. Action plan specifying corrective actions and contingencies with best/worst case
scenarios.
3. P&L account showing period and cumulative positions with highlighted variances
against budget - and major variances. Trend analysis shown graphically.
4. Projected outturn recalculated on the basis of actual performance and action plans.
5. Profiled cash flow summarising actual and projected receipts, payments and
balances on a regular basis to year end.
6. Capital programme - Analysis of progress of major capital schemes showing
percentage completion, current and projected expenditure, completion cost and
timescale.
7. Balance sheet showing working capital position in tabular form or using
performance indicators, e.g. debtor and creditor days.
Information mainly Internal users, e.g. Managers External users e.g. Shareholders,
produced for creditors, lenders, banks,
government
Purpose of To aid planning, control and To record financial performance and
information decision making position in a period
Legal requirements No Yes (limited companies)
Formats No set format managers Limited companies must produce
decide on content & financial accounts
presentation
Nature of Financial & non-financial Mostly financial
information
Time period Historical & forward-looking Mainly an historical record
An artificial distinction?
Past vs future:
Much financial accounting depends on
making assumptions about the future
Much management accounting involves
interpreting the past
External vs internal users:
The non-statutory elements of financial
reporting are still selected by internal
managers
Next lecture....
Lecture 2
Fundamentals of Accounting:
Measuring & reporting financial position
Chapter 2 M&A
Cash v Profit
Accounting Concepts
Accounting Equation
SOFP (balance sheet)