BST511

Financial Analysis
and Control
Malcolm Anderson
Mathematics & Accounting
Mathematics & Accounting
 Why accounting?

Accounting shapes our lives

(Horngren et al, 2002)

[Accountants] have been remarkably

successful in establishing their craft as the
leading management qualification
(Matthews, Anderson & Edwards, 1998)

accounting is the language of business

 Why finance?
Leaders views from across the globe
Leaders views from across the globe:
 Staff

Malcolm Anderson
Room S26 AndersonM3@cardiff.ac.uk
Natalie Forde
Room R09 Forde-LeavesN@cardiff.ac.uk

Mel Williams, Rena Zhang and Amrit

Bhardwaja
 Aims of the Module

The aims of the module are to provide an

understanding of key concepts and
techniques underpinning financial
accounting and management accounting.
 Learning Outcomes
Knowledge and Understanding
Explain the distinction between Financial Accounting and
Management Accounting.
Critically evaluate the role, importance and limitations of
accounting concepts in financial reporting.
Explain the distinction between cash and profit for financial
reporting purposes.
Apply and critically evaluate the techniques used in evaluating
and analysing financial statements.
Assess the relevant costs for short-term decision making.
Apply and critically evaluate the techniques of investment
appraisal.
Intellectual Skills: Analysis/Synthesis/Evaluation
Critically analyse, interpret and draw reasoned conclusions from
a set of data.

Discipline Specific Skills: Application of Knowledge;

Application of Theories/ Models;Problem solving
Prepare a cash flow statement, income statement and statement
of financial position from basic data.
Apply and interpret financial ratios.
Analyse relevant, sunk, committed and opportunity costs for
decision making purposes.
Apply and interpret investment appraisal techniques such as Net
Present Value, Internal Rate of Return, Payback Period and
Accounting Rate of Return.
 Transferable Skills; Information handling; Personal
Development; Teamworking; Reasoning; Decision-making

Search for and acquire relevant knowledge.

Work independently, exercise initiative and time management
skills.
Effectively communicate ideas, principles, theories and
arguments.
Develop problem solving, critical thinking and enquiry skills.
Develop numeracy, grammar and IT skills.
Teamworking through discussion and argument.
Methods of Teaching & Learning

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)

This book is available as an e-book via

the university library and is therefore
available free to CARBS students.

See module outline for further reading.

 Lecture 1
Fundamentals of Accounting
Financial & Management Accounting
Financial Reporting

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

American Accounting Association (1966):

The process of identifying, measuring and
communicating economic information to
permit informed judgements and decisions
by users of the information
 Users of accounting
information
User Use
Management Control business/plan future
Investors Potential profits/investment security
Employees Pay increase/security of employment
Customers Continue to supply
Suppliers Will they be paid?
Lenders Is company solvent?
Government Assess amount of tax due. Measure of how economy
performing.

Public Is company run responsibly? Environmental impact.

Business Organisations

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

Performance Cost planning

measurement and cost
and evaluation control
(Horngren et al, 2005)
 Branches of 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

IASB FRAMEWORK FOR THE PREPARATION AND

PRESENTATION OF FINANCIAL STATEMENTS

Conceptual framework a statement of generally accepted

theoretical principles which form the frame of reference for
financial reporting

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

To view Tescos latest annual report:

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

Verifiability Timeliness Comparability Understandability

 Chapter 4 Elements of
Financial Statements
Asset An asset is a resource controlled by the entity as a result of
past events and from which future economic benefits are
expected to flow to the entity.
Liability A liability is a present obligation of the entity arising from
past events, the settlement of which is expected to result in
an outflow from the entity of resources embodying economic
benefits.
Equity Equity is the residual interest in the assets of the entity after
deducting all its liabilities.
Income Income is increases in economic benefits
Expenses Expenses are decreases in economic benefits
 Components of the
Annual Report
Directors report

Corporate governance report

Auditors report

Financial Statements:

Statement of comprehensive income

Statement of financial position
Statement of changes in equity
Statement of cashflows
Notes
The other side of accounting
Management Accounting
No prescribed format: management decides
Intended for internal users and often commercially
confidential; more detailed
Contains estimates and approximations because
information is needed quickly
Often covers segmental details as well as whole
organisation
Produced much more regularly - weekly, daily,
even real-time
 Management information for..
1. Inventory valuation for internal and external profit
measurement
costs incurred in manufacturing must be split between Cost of Sales
(matched with revenue) and Closing Inventory (carried into future periods
as an asset and used to make future sales).
2. Provide relevant information to help managers make
better decisions
Management needs to know how much cost (and so profit) is related to
each product in order to:
allocate resources and selling effort
decide which products to retain and which to drop
decide what new products to manufacture
benchmark costs against competitors
3. Provide information for planning, control and
performance measurement
Budgeting and control: focuses on responsibility accounting and
the control of costs by managers responsible for them, evaluated
on them.
The monthly management pack
The ideal monthly management pack for reporting to the board should between 10 and
20 pages and contain the following elements:

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.

Source: 'Performance Reporting to Boards: A Guide to Good Practice

by Danka Starovic.
 Changing organisational
environments & role of MA
Competitive environment
Emphasis on cost-efficiency and customer satisfaction,
e.g.
Customer focus
Continuous improvement
Total Value Chain analysis
Key success factors
Increasing focus on non-financial measures for
measuring performance
From bean counter to business partner (Byrne &
Pierce, 2007)
Non-Financial KPIs
 Management Accounting
vs. Financial Accounting
Management Accounting Financial Accounting

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)