Introduction to Managerial Finance HIMASHI DE MEL
Unit Outline Lesson 1: Introduction to Financial Accounting ● Lesson 2 : Financial Statements Analysis and Interpretation ● Lesson 3 Introduction to Management Accounting ● Lesson 4: Forecasting and Budgeting ●
Introduction to Accounting System for recording and reporting business transactions, in financial terms, to interested parties whom will use this information as the basis for performance assessment, decision making and control. Accounting is concerned with: 1. Recording accounting data 2. Classifying and summarizing 3. Communicating information
Users of Accounting Information 1. Owner(s)/shareholders 2. Banks/financial institutions 3. Government agencies 4. Management and employees 5. Trade contacts
Qualitative Characteristics of Accounting Information These are the features those will make the financial information useful to its users. 1. Understandability 2. Relevance 3. Reliability 4. Comparability
Qualitative Characteristics of Accounting Information 1. Understandability : Financial information should be presented in a manner that a reader can easily comprehend it. Concept assumes a reasonable knowledge of business by the reader, yet, does ● not require advance business knowledge. To enhance understandability the information must be; ● Complete ○ Concise ○ Clear ○ Organized ○
Qualitative Characteristics of Accounting Information 2. Relevance: The information must be relevant to the needs of the users where it will influence the economic decision making of the users. Predictive value: Financial information could be used for predictions ● Feedback value: Quality information has a feedback value when it confirm or ● correct previous expectations Timeliness: Information should be available before it is out of date. ●
Qualitative Characteristics of Accounting Information 3. Reliability : Accounting information reliability refers to whether financial information can be verified and used consistently by investors and creditors with the same results. Refers to the trustworthiness of the financial statements ● Information should be; ● Verifiable ○ Faithful representation ○ Neutral ○
Qualitative Characteristics of Accounting Information 4. Comparability: The information that is prepared using the same measurement techniques and reported in a similar fashion is considered comparable information. SLFRS ● IFRS ●
Elements of Financial Information 1. Assets : A resource that may be used by a business to derive revenue in future. 2. Liabilities: An entity’s obligation to transfer economic benefits as a result of past transaction or event 3. Capital: This is the residual interest in the assets of the entity after deduction of its liabilities 4. Revenues: Company’s actual or promised cash inflows resulting from a completed sale of the company’s products or the satisfactory delivery of service 5. Expenses: These are the benefits that are consumed or used up in the process of earning revenues.
Elements of Financial Information Assets Liabilities Current assets: These are the assets Current liabilities: These are liabilities 1. 1. which are acquired with the intention which are payable within a year from of converting them into cash during the the date of the balance sheet. normal business operations. 2. Non-current liabilities; These are 2. Non-current assets: These are assets liabilities which do not become due for which are acquired for relatively long payment in one year and which do not periods for carrying on the business require current assets for their payment.
Accounting Concepts Accounting concepts are the basic rules , assumptions , or conventions adopted in preparation of accounts. 1. Business entity concept 2. Dual aspect concept 3. Money measurement concept 4. Going concern concept 5. Accounting period concept 6. Accruals concept
Book-keeping process All events that are taken place in an organisation are not recorded in books of accounts. Transactions will be recorded in final accounts. An event is classified as a transaction only if: 1. The event occurred as a result of a management decision 2. The event can be measured in monetary terms 3. The financial position of the business changes as a result of the event
Book-keeping process Book-keeping process is the recording of monetary transactions, appropriately classified, in the financial records of an entity.
General Purpose Financial Reports 1. Statement of financial position : This is a statement of the assets and liabilities of a business at a given moment in time. 2. Statement of comprehensive income: This is a statement indicating in detail how the profit/(loss) of a period has been made. 3. Statement of changes in equity: This is a statement that summarises the opening and closing positions of shareholders funds. 4. Statement of cash flow: This will record the amount of cash and cash equivalents entering and leaving an organisation.
Financial Statement Analysis and Interpretation Lesson 02
Ratio Analysis This is a quantitative analysis of information contained in an organisation’s financial statements. 1. Measures of profitability 2. Measures of liquidity 3. Measures of efficiency 4. Measures of financial leverage
Measures of Profitability 1. Gross profit margin : measures the gross income as a percentage of sales. 2. Net profit margin : measures the net income as a percentage of sales. 3. Return on capital employed : measures the returns that a company is realizing from its capital invested.
Measures of Liquidity 1. Current ratio : Compares the current assets with current liabilities. 2. Quick ratio/ acid test ratio : Considers that inventory may not be easily converted into cash and therefore may be excluded when assessing liquidity and compares current liabilities without inventory with current liabilities.
Measures of Efficiency 1. Inventory days: measure the organisation’s performance with relative to the time taken for the organisation to turn its inventory into sales. 2. Trade debtors/ receivables collection period: measure of the average number of days that an organisation takes to collect revenue after a same has been made. 3. Trade payable/ creditors settlement period: indicates how long the organisation takes to pay its invoices from trade creditors.
Measures of Financial Leverage 1. Gearing ratio: measures the amount of long-term financing provided by debt relative to equity. 2. Times interest earned : mesures an organisation’s ability to cover its interest payments.
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