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ACC2951
Introduction to
Finance and Business
Accounting 1
(Semester 1)
Adrian P. Sciberras
1
Introduction to Finance – Main Texts
2
Objectives of the lecture
•What is accounting
•The objectives of accounting
•Profit & Loss Statement
•Balance Sheet
•Definition of terms - assets/liabilities/capital
•Cash Flow Statement
•Budgets
3
What is Accounting?
4
What is Accounting?
Accounting is about recording,
preparing and interpreting business
transactions
Enables key questions to be answered,
such as how much profit have we
made?
In small businesses, managers and
owners = same people
In large businesses, managers and
owners will be different
Accounting is defined as:
• The provision of information to managers
and owners so that they can make
business decisions. 5
What is the objective of Accounting?
6
Importance of Accounting
Money makes the world go round
Businesses depend on cash and profit
Unless you understand accounting, you will never
understand business
Need to know basic terminology such as:
Income Profit
Assets Capital
Liabilities
7
Financial and Management Accounting
Financial Accounting
Provision of financial information on a business’s
recent financial performance targeted at external users
such as shareholders
Backward-looking
Double-entry bookkeeping
Profit and loss account (income statement), balance
sheet and cash flow statement
8
Financial and Management Accounting
Management Accounting
9
Overview: Financial and Management Accounts
Accounting
Financial Management
10
Users of Accounts
11
User Information Requirements
Information for costing, decision-
User Group making, planning and control.
Internal Users Information about job security and
for collective bargaining.
Management
-----------------------------------------------
Employees
Information for buying and selling
External Users shares.
Shareholders and analyst advisers Information about assets and about
Lenders Suppliers and other trade the company’s cash position.
creditors. Customers Government Information abut the long-term
and agencies such as tax prospects and survival of the
authorities. Public (individual business.
citizens or organisations) Information to enable planning.
Information primarily on profits to
use as a basis for calculating tax.
Information about the social and
environmental impact of corporate 12
activities.
Limitations of Accounts
Accounts are based on the past historical cost and thus are
out-of-date.
14
Profit & Loss Statement
15
Revenues
Business revenue can be divided into two
categories
• Revenue from current operations – Cash proceeds
from the sale of inventory, proceeds from sales,
patronage dividends, insurance proceeds, inventory
adjustments
• Expenses incurred in the production process should
be deducted from revenues to yield a gross profit
16
Expenses
Cash operating expenses – Includes expenses
paid in cash, expenses that have been incurred
but not yet paid (accounts payable), interest
expenses
Noncash expenses includes depreciation and any
expenses paid from the last reporting period if
the business is reporting on a cash basis
17
Purpose of the Income Statement
Provides a summary of the revenues and
expenses associated with the period’s
operating activities
Provide information to complete the
business income tax returns
Shows the profitability of the business for
lenders and other interested parties
18
Purpose of the Balance Sheet
Capital
21
Definitions - CAPITAL
22
Definitions - ASSET
23
Definition - ASSET
ASSETS
Fixed Current
Assets Assets
24
Definitions - ASSET
Current Assets – assets which are normally kept for less than
one accounting year. E.g. cash, debtors and stocks.
25
Definitions – FIXED ASSET
Fixed Asset
• Long lived assets whose life
exceeds 1 year;
Stock / Inventory
27
Definitions - Current Asset
Debtors
Cash
• life-blood of the
organisation
29
Definitions - Liabilities
30
Definitions - Liabilities
Liability
Short-term Long-term
Liability Liability
31
Definitions - Liabilities
Current liability – Debts owed by the business which are
overdrafts.
due until after one year. Such as long term loans and
mortgages.
32
Definitions - Current Liabilities
Creditors
• those persons to which we owe money for
their service that has been already
provided but we have not yet paid. These
can also be referred to as short-term
liabilities.
33
Definitions - Long-Term Liabilities
Loan
• when a business
does not have
sufficient money to
finance its
investment, it may
be restrained to
borrow money from
third parties (such as
34
banks)
Cash Flow Statement
35
Components of the
Cash Flow Statement
Cash available
• Beginning cash balance
• Cash revenues from sales and accounts
receivable
• Other sources of cash
Proceeds from sale of equipment and other assets
Interest and dividend income
36
Components of the
Cash Flow Statement
Cash required
• Operating expenses
• Income tax payments
• Intermediate and long-term payments
• Capital expenditures
• Cash gifts and donations
37
Components of the
Cash Flow Statement
Borrowings
• New loans to finance production and capital
expenditures
Other
• Short term loan payments
• Savings – additions and withdrawals
• Ending cash balance for the period
38