B.A.

(Hons) Tourism Studies

ACC2951

Introduction to
Finance and Business
Accounting 1
(Semester 1)

Adrian P. Sciberras

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Introduction to Finance – Main Texts

Financial Accounting – An International

Introduction (David Alexander, Christopher Nobles)

Financial Accounting – Michael Jones

Accounting for non-accounting students (Dyson)

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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
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 What is Accounting?

•Accounting is the key to understanding

business

•Businesses track money using accounting

•Accounting is the language of business

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 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?

“to communicate economic measurements of and

information about the resources and
performance of the reporting entity useful to
those having reasonable rights to such
information”.

Accounting Standards Steering Committee (1975).

The Corporate Report (ICAEW).

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 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


Expenses Cash flow



Liabilities
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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

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Financial and Management Accounting

Management Accounting

•Internal needs of business

•Unlike financial accounting, not required by law

•Management accounting can be split into cost

accounting and decision-making

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Overview: Financial and Management Accounts

Accounting

Financial Management

Profit and Loss

Account Balance Cash flow Decision Accounting
Sheet making
(Income Statement) Statement

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 Users of Accounts

 Internal and external users

 Users need accounting information to help them make
business decisions
 Sometimes user needs may conflict

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 User Information Requirements
User Group
Internal Users
 Management
 Employees
External Users
 Shareholders and analyst advisers
Lenders Suppliers and other trade
creditors. Customers Government
and agencies such as tax
authorities. Public (individual
citizens or organisations)
 Information for costing, decision-
making, planning and control.
 Information about job security and
for collective bargaining.
-----------------------------------------------
 Information for buying and selling
shares.
 Information about assets and about
the company’s cash position.
 Information abut the long-term
prospects and survival of the
business.
 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 may be manipulated to give a more “nice”

picture of the business - “window-dressing”

 Accounts are based on the past historical cost and thus are
out-of-date.

 Accounts represent solely the monetary aspect of the

business’ affairs.
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 Financial Accounting

The end products of financial accounting are the

final annual accounts. These contain:-
 Trading & Profit and Loss account
 Balance Sheet
 Cashflow statement

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 Profit & Loss Statement

 The income or profit and loss statement

summarizes the level of revenue and
expenses for the business
 Major components include:
• Revenues
• Expenses
• Taxes
• Extraordinary Items

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 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

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 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

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 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
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 Purpose of the Balance Sheet

 The balance sheet indicates the degree to which

the business is liquid and solvent
 Liquidity – Can the business’ current liabilities
be retired if the current assets are converted to
cash?
 Solvency – Can the total liabilities of the
business be retired if all assets are converted to
cash?
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 Components of the Balance Sheet

 Net worth (also called net equity)

• Net worth represents the difference between
the total level of assets and the total level of
liabilities
• Net worth should be reported on an after-tax
basis
• If net worth is positive, the business is solvent
(assets can be sold to retire liabilities). If net
worth is negative, the business is insolvent 20
 Structure of the Balance Sheet
 Assets  Liabilities
• Current Assets • Current Liabilities
• Intermediate Assets • Intermediate
• Long-term Assets Liabilities
• Long-term
Liabilities

 Capital
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 Definitions - CAPITAL

 Capital is the amount of funds injected into the business by

the owner/owners.

 It is therefore the amount of the claim that the

owner/owners have on the business.

 The business is a ‘Separate legal entity’, so it is necessary to

exclude the owners’ personal assets from the balance sheet.

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 Definitions - ASSET

 Asset – a tangible or intangible resource that is owned or

controlled by an accounting entity, and which is expected

to generate future economic benefits.

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 Definition - ASSET

ASSETS

Fixed Current
Assets Assets

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 Definitions - ASSET

 Fixed assets – assets not specifically purchased for resale,

instead they are used in the production or distribution of
goods normally sold in the business. Fixed assets usually stay
in the business for more than one year. Examples include
land, buildings, machinery and vehicles.

 Current Assets – assets which are normally kept for less than
one accounting year. E.g. cash, debtors and stocks.

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 Definitions – FIXED ASSET

Fixed Asset
• Long lived assets whose life
exceeds 1 year;

• acquired for operational use

in the organisation; and

• not intended for re-sale

Typical examples: premises, motor
vehicles, computers, etc. 26
Definitions - Current Asset

Stock / Inventory

• asset with the

intention for re-sale
• Typical examples: food
products in a
supermarket

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 Definitions - Current Asset

Debtors

• We have already provided

our customers/citiziens with
a service/good but the latter
did not settle their amount as
yet.

• This is another type of

current asset 28
 Definitions - Current Asset

Cash

• life-blood of the
organisation

• cash relates to:

 cash at bank
 cash in hand

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 Definitions - Liabilities

 Liability – a legal obligation to transfer assets or

provide services to another entity which arises from

some past transaction or event.

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 Definitions - Liabilities

Liability

Short-term Long-term
Liability Liability

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 Definitions - Liabilities
 Current liability – Debts owed by the business which are

payable within one year. For instance creditors and bank

overdrafts.

 Long term liability – Debts owed by a business that are not

due until after one year. Such as long term loans and

mortgages.
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 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.

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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
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banks)
 Cash Flow Statement

 Summarizes the levels of cash that the

business has available to meet current
obligations
 Generally divided into monthly or quarterly
periods to show when excess cash is
available or when borrowing needs to occur

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 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

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 Components of the
Cash Flow Statement
 Cash required
• Operating expenses
• Income tax payments
• Intermediate and long-term payments
• Capital expenditures
• Cash gifts and donations

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 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
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