PGBM01

Financial Management & Control

Lecture 1 Introduction & Financial Position

Mr S.Maniam

H/P : 016-432 1390

Email: maniamsubra64@gmail.com

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 ….before the lecture…

• Be prompt
– five minutes before the lecture/workshop
starting
– do not come in more than five minutes
after the start of the lecture/workshop
without prior permission

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 ….before the lecture…
• No mobile phones – switched off!!
• Check mail frequently for the latest info.
and materials
• Print and bring lecture/workshop notes
with you before your lecture/workshop
• Review relevant readings and do the work
asked of you prior to attending the lecture/
workshop
• A calculator is required
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 Learning Objectives
• Distinguish accounting and finance
• Identify users of financial information
• Distinguish between financial and
management accounting
• Explain the nature of accounting
information
• Roles of accounting information
• Why study accounting and finance?

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 Accounting vs. Finance
• What is accounting?
– Financial information: collecting, analysing,
and communicating
– Business decision-making:
• Internal management: new products, pricing,
financing, merger & acquisition, and diversification,
etc.
• External users: investing, lending, selling and
buying, and regulating, etc.
– Product: financial reports

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 Accounting vs. Finance
• What is finance?
– How are funds for a business raised and
invested?
• Funds came from: owners and lenders
– Forms, costs & benefits, and risks, etc.
• Funds used for: equipments, premises,
inventories, etc.
– Risks and returns
• Purpose: profit maximization
• Interrelated & overlapped

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 Users
• Stakeholders of accounting & financial
information
– Shareholders: dividends and capital gains
– Lenders: interest and capital repayment
– Management: business success, benefits
– Employees: salary, job security
– Suppliers & customers: financial strength,
creditworthiness
– Taxation: taxable profit
– Society: environment, community
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 Management vs. Financial Accounting
• Management accounting (MA): needs for
internal managers
• Financial accounting (FA): needs for all other
external stakeholders
• Differences
– Nature: purposes of the reports
– Details: more details from MA report
– Regulations: GAAP for FA reports
– Interval: annual basis for FA; more frequent for MA
– Time horizon: MA forward looking; FA backward
looking
– Range & quality: MA – non-financial nature, less
objective & verifiable; FA – monetary; objective &
verifiable.
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Management vs. Financial Accounting
The external world The business

Information Information
and data of transactions

The accounting
recording system

Analysis
of Information

Financial
reports Management
accounting reports

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 Nature of Accounting Information
• Usefulness: quality of accounting info.
– Materiality: important information to users
– Relevance: relevant to user’s needs
– Reliability: free from material errors
– Comparability: vertical and horizontal
comparisons
– Understandability: understandable for those
who have a reasonable knowledge of the
business

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Roles of Accounting Information
• Within the business
– The accounting information system

Information Information Information Information

identification recording analysis reporting

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Roles of Accounting Information
• Outside the business
– Agency theory (stewardship)

The company

Shareholders invest in Directors manage company

company

Shareholders Directors

Shareholders appoint directors

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Roles of Accounting Information
• Separation of ownership and control
– Conflicts between directors and shareholders
– Information asymmetry
– Financial reporting: assessment of
accountability of directors
– Auditors: quality assurance of financial
reporting

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 Why study?
• An accountant: a career goal
– Decision making: business operations,
investments, merger & acquisitions, etc.
• A manager in other subjects: extra skills
– How to interpret financial reports
– How financial plans are made
– How investment decisions are made
– How business are financed

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Statement of Financial Position

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 Learning Objectives
• Nature and purpose of a balance sheet*
• Presentation of a balance sheet
• Accounting conventions of financial
statements
• Interpretation of a balance sheet
• Limitations of a balance sheet

* Balance sheet is re-named as ‘statement of financial position’

according to IAS 1 (revised in Sep. 2007)

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 Financial Statements
• Statement of cash flows (Cash flow statement)
– Cash movements over a particular period
– A period statement
• Statement of comprehensive income (Income
statement)
– Profit (or loss) generated over the period
– A period statement
• Statement of financial position (Balance sheet)
– The accumulated wealth at the end of the period
– A time-point (position) statement
• All 3 statements
– An overall picture of the financial health
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 Relationship

Balance sheet Balance sheet Balance sheet

Income Income
statement statement

Cash flow Cash flow

statement statement

1 2 3
Accounting period

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 A Balance Sheet
• Purpose
– To set out the financial position of a business
at a particular moment in time
• A position statement
– A picture of financial strength
– One hand: Assets of the business
– Another hand: Claims (liabilities) against the
business

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 Components
• The current/non-current distinction
– A current asset is:
• Expected to be realised in, or is held for sale or
consumption in, the normal course of the business’
operating cycle; or
• Held primary for trading purposes or for the short-
term and expected to be realised within 12 months
of the balance sheet date; or
• Is cash or a cash equivalent which is not restricted
in its use
– All other assets are classified as non-current
assets
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 Components
• The current/non-current distinction
– A current liability is:
• Expected to be settled in the normal course of the
business operating cycle; or
• Held primary for trading purposes; or
• Due to be settled within 12 months of the balance
sheet date
– All other liabilities should be classified as non-
current liabilities

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 Major Items
• Property, plant and equipment
• Investment property
• Intangible assets
• Financial assets
• Inventories
• Trade and other receivables
• Cash and cash equivalents
• Trade and other payables
• Tax liabilities and assets
• Provisions
• Financial liabilities
• Minority interest
• Issued capital and reserves
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 Information in a Balance Sheet
• Key items: sub classified & further
analysed
– Tangible assets: IAS 16 Property, Plant and
Equipment
– Sub-classifications of inventories: IAS 2
Inventories
– Operating lease or finance lease: IAS 17
– Expensed or capitalised of borrowing costs:
IAS 23
– Etc., etc…..
• Notes to the financial statements
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 Balance Sheet Equation

Assets = Capital + Liabilities

OR

Assets - Liabilities = Capital

Non-current Current Non-current Current

assets
+ assets = Capital + liabilities + liabilities
OR
Non-current Current Non-current Current
assets + assets
- Capital - liabilities
= liabilities

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 Accounting Concepts
• The entity concept
– A legal separation of the business and its owners
• The time interval concept
– Financial statements are prepared at regular intervals
(e.g. annually)
• The duality concept
– Every transaction has a two-fold effect: debit and
credit
• Money measurement concept
– Financial accounting can only deal with items capable
of being expressed in money terms
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 Accounting Concepts (IAS1)
• Accruals concept
– Transactions and events are recognised when
they occur, not when cash is received or paid
for them
• Going concern concept
– Assumes that the business will in fact
continue
• Consistency of presentation
– Should be retained from one period to the
next
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 Accounting Concepts (IAS1)
• Materiality and aggregation
– Show material items separately, but
immaterial items are aggregated with
amounts of a similar nature
• Offsetting
– Assets and liabilities, and income and
expenses, should not be offset
• Comparative information
– Comparative information for the previous
period should be disclosed
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 Limitations
• A snapshot of the business strength
• No details of ‘what happened’ during the
period
• Focuses on business resources ‘in & out’
• Little information: performance and cash
flows during the period
• Subjective: depreciation, inventory
evaluation, etc
• Historical data – little use for future
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 Workshop 2
• Prepare a balance sheet

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END

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