Finance and Accounts

What is the difference between financial accounting and management accounting? Financial accounts describes the process of gathering and publishing information of financial record. All limited companies must publish a set of accounts for each financial year. Management accounting is the term used to describe accounting statements produced and used for management purposes. The main uses of management accounts are planning, decision making, review and control.

Financial Accounting Reports what happened in the past. Is for external users Needs to be reliable, accurate and consistent Is ruled by accounting conventions and legal requirements Covers the whole firm

Management Accounting Focuses on the present. Is for internal users Needs to be easy to use, relevant and up to date Is ruled by managers’ requirements Covers departments and divisions

Different groups who use accounts: Business managers Banks Creditors (suppliers) Customers Government & tax authorities Investors Workforce Local community FOR EACH GIVE REASONS WHY THEY ARE INTERESTED IN ACCOUNTS

Business Managers Measure performance of a business Help them take decisions, such as new investments, closing branches and launching new products Control the operation of each division To set targets or budgets for the future and compare them with actual performance

Banks To decide whether to lend money to the business To decide whether to allow an increase in overdraft To decide whether to continue an overdraft or allow a loan

Creditors To see if the business is secure and liquid enough to pay off its debts. To decide whether the business is a good credit risk. To decide whether to press for payment

Customers To decide whether the business is secure To determine whether they will be assured of future supplies of the goods they are purchasing. To decide whether there will be security of spare parts and service facilities

Govt. and tax authorities To calculate how much tax is due To determine whether the business is likely to expand and create more jobs To decide whether the business is in danger of closing down, creating economic problems. To confirm that the business is staying within the law in terms of accounting regulations

Investors e.g. shareholders To asses the value of the business and their investment in it. To decide whether the business is becoming more or less profitable To determine what share of the profits investors are receiving To decide whether the business has potential for growth To compare with other businesses to see if determine who to invest in To determine whether to sell some or all of their holding.

Workforce To decide whether the business is secure enough to pay wages and salaries To determine whether the business is likely to expand or be reduced in size. To determine whether jobs are secure To find out if profits are increasing and if an increase in wages is affordable To find the average wage in the business and possibly compare it with directors

Local community To see if the business is profitable and likely to expand To determine whether the business is making losses and whether this could lead to closure To decide if there is a need to get involved, e.g. related businesses

Evaluation of accounts Management accounts Figures used in some management accounts are forecasts which means they should be used as a guideline. The creator of these accounts may want to influence a decision one way or another. Financial accounts Creative techniques exist which are within the law which can be used to give a false impression of the business situation Accounts are good at dealing with quantitative information but poor with qualitative information.

Essay Examine the usefulness of published company accounts to external users. 17marks (25mins) Knowledge - 3 marks Application (relevant examples) – 2 Analysis – 6 marks Evaluation – 6 marks

Knowledge – Definitions of key terms. basic 1 mark in depth 3 marks Application – Correct identification of groups using accounts. (1-3) Analysis – Relevance of accounts to identified groups. Max of 3 marks per identified group. (1 mark basic – 3 marks in depth) Evaluation – Limitations of usefulness of accounts.(1-3) Relevant suggestions as to what may be used in conjunction with accounts to help make decisions. (1-3)