FINANCIAL REPORTING, ANALYSIS
AND PLANNING
Financial reporting is concerned with;
• Recording Financial Data
• Classifying and summarizing financial data and
• Reporting what has been learnt from the
organization’s financial data to the users of
accounting information.
Users of Accounting Information
• Managers of the company.
• Company shareholders:
• Trade associates such as suppliers and customers:
• Lenders
• Tax Authorities
• Employees
• Government Agencies
• Members of the public
• Financial Advisors
TERMS TO KNOW
Profit:
• This is the excess of income over expenditure
• An asset:
This is the valuable equipment, or item which
the business owns or has use of. These include
office buildings, machinery, furniture and
fittings.
Assets
• Non current assets (Fixed assets): Assets held and used in
the business for a long time (in excess of one year).
• Current Assets :Assets held for use in the business for a
short period (less than one year).
• Liability
It is a claims against the business (debts of business) such
as Bank loan, creditors, amounts due to tax authorities but
still un paid.
• Non-current liabilities:
• Liiabilities that the organization intends to settle within a
period exceeding one year such as Bank loan.
• Current liabilities: Liabilities that the organization intends
to settle within one year.
THE BUSINESS AS A SEPARATE ENTITY
FROM ITS OWNERS
(ENTITY CONCEPT)
• In law, the company is a separate legal entity
from its owners.
• It can acquire assets, incur debts and enter
into binding contracts in its own name. The
exception is when the business is carried on a
sole trader (sole proprietorship) or as a
partnership.
THE NEED FOR ACCOUNTING
INFORMATION
• According to international accounting
standards Committee (IASC), the
objectives of financial statements is to
provide information about the financial
position, performance and changes in
financial position of an enterprise that is
useful to a wide range of users in making
economic decisions.
The Main Financial Statements
These include the:
• Statement of Comprehensive
Income,
• Statement of Financial Position,
• cash flow statement and
• the statement of changes in equity.
Statement of Financial Position
• This is the list of all assets owned by a business
and the capital and all liabilities owned by a
business at a particular date.
• Monetary terms are attributed to each of the
assets and liabilities. The sum of assets will
always equal to the sum of the capital and
liabilities, that is:
• Total assets (A) = Capital(c) + Liabilities (L)
= C + L
• This is referred to as the accounting equation
Statement of Comprehensive Income
• This is a record of income generated and
expenditure incurred over a given period.
• The income shows whether the business has had
more income than expenditure (a profit) or vice
versa (a loss).
• The published accounts for which the statement
of comprehensive income is prepared is one year
commencing from the end of the previous year’s
accounts. Shorter period accounts can be
prepared for management purposes.
Non – Financial statements
• Local legislation may require production of
non-financial information such as commentary
on the local legislation on the contents of the
financial sections of the report, relevant
disclosures, accounting policies adopted etc.
FINANCIAL MANAGEMENT, FINANCIAL
ACCOUNTING AND MANAGEMENT
ACCOUNTING
• Financial management is concerned with raising and
controlling financial resources of the organization.
• Financial accounting is concerned with recording
financial data, classifying and summarizing it and
reporting what has been learnt from the financial data
for the organization.
• Management accounting is a management information
system which analyses data to provide information as a
basis for managerial action. The concern of a
management accountant is to present accounting
information in a form most helpful to management.
AUDITING
• The annual accounts of a limited liability company must be audited
by a person independent of the company.
• A firm of certified public accountants is appointed to audit the
accounts prepared by the company and report whether the
accounts show a true and fair view and are properly prepared in
accordance with local legislation or international accounting
standards.
• Such a report is described to be unqualified (or “clean”) audit
report.
• Sometimes auditors may disagree with the management on a point
concerned with the accounts. If the matter is MATERIAL, the auditor
prepares a qualified audit report pointing out the matter(s) over
which they disagree with the management.
INTERNAL AUDIT FUNCTION
• This is different from the role played by the
external auditors referred to above.
• Internal auditors are employees of the
company whose duties are fixed by
management and therefore report to the
management on the effectiveness of internal
control systems.
Qualities of good accounting
information
• Relevancy –should be relevant to the needs of the users
• Comprehensibility: –should be comprehensive enough
• Reliability: It should be reliable having been independently verified
by a qualified external auditor.
• Completeness: The accounts should present a complete picture of
its economic activities.
• Objectivity: there should be minimum subjectivity i.e free from
bias.
• Timeliness: information should be timely and not too remote from
the period to which it relates.
• Comparability: information should be prepared on a consistent
basis to aid valid comparisons with previous periods’ accounting
information and also to aid comparisons of accounts of companies
in similar businesses.
CAPITAL AND REVENUE EXPENDITURE
• Capital expenditure is expenditure which results in
acquisition of non-current assets or an improvement in
their earning capacity.
• Capital expenditure is not charged as an expense in the
income statement although a depreciation charge will
usually be made to write off the capital expenditure
gradually over time. Depreciation charges are expenses
in the income statement.
• Capital expenditure on non-current assets results in the
appearance of a non-current asset in the balance
sheet.
Revenue expenditure
• This is expenditure incurred for either of the following
reasons
• For the purpose of the trade of the business. This
includes expenditure classified as selling and
distribution expenses, administration expenses and
financial charges.
• To maintain the existing earning capacity of non-
current assets.
• Note: revenue expenditure is charged to the income
statement of a period provided that it relates to the
trading activity and sales of that particular period.
Capital income and revenue income
• Capital income is the proceeds from the sale
of non-trading assets (i.e. proceeds from the
sale of non-current assets, including long term
investments).
• The profits (or losses) from the sale of non-
current assets are included in the income
statement of a business for the accounting
period in which the sale took place.
Revenue income
This is income derived from the following sources
• The sale of trading assets
• Interests and dividends received from investments held by
the business
• Trade accounts payable (creditors) and trade accounts
receivable (debtors).
• A creditor is person to whom the business owes money
• A trade debtor is a person whom owes the business money
for debts incurred in the course of trading operations.
• Question:Can cash raised through a loan or issue of share
be included in the income statement? Explain your answers
Trade accounts payable (creditors) and
trade accounts receivable (debtors).
Trade creditor /Trade accounts payable (creditors) and
trade accounts receivable (debtors).
• A trade creditor is a person to whom the business owes
money for debts incurred in the course of trading
operations.
• Debts still outstanding arising from the purchase of
trading materials (stock) are called trade accounts
payable or simply accounts payable.
• Trade debtors (receivables) refer to sales of goods on
credit that are not yet paid for.
• Balance Sheet Preparation
Accounting concepts
• Duality Concept
• Substance over form
• Accrual/Matching Concept
• Consistency
• Objectivity
• Materiality
• Prudence
• Substance over form
• Entity Concept
• Going concern
• Assignment: Read and make notes on accounting concepts showing
how each of them can be applied in the preparation of Financial
Accounts.