Understanding & Managing Finance Seminar 1

Some Questions  What are accounts for?  Who are the key stakeholders in an organisation and what financial information do they require?  If accounts are to be useful, what criteria must be satisfied?  What are the two main branches of accounting and what is the difference between them?

Business organisation Competitors Lenders Managers Owners Customers Suppliers Investment analysis Community representatives Government Employees and their representatives Main users of financial information relating to a business

Reliability Relevance Comparability Timeliness Cost/benefit Useful accounting information Understandability can produce the lack of which will be limited by The characteristics that influence the usefulness of accounting information

Value or costs (£) Quantity of information Relationship between costs and the value of providing additional financial information Costs Value Optimal quantity

Data analysis Information identification Information reporting Data recording The accounting information system

Management accounting Nature of reports produced Level of detail Restrictions Reporting interval Time horizon Range of information Financial accounting Specific purpose General purpose Detailed information Overview Not regulated Highly regulated Monthly/Weekly/Daily Annual/Semi-annual Forward looking Backward looking Monetary and non-monetary information with greater reliance on subjective information Primarily monetary items measured on an objective basis Financial and management accounting

Some More Questions  Describe the following types of organisations and provide an example of each one :  Sole Trader  Partnership  Limited Company  PLC  Voluntary Organisation  Charity  What are the financial benefits and limitations of the ones in italics?

Some Possible Solutions  Advantages and disadvantages of being a sole trader Advantages:  Full control and full retention of profits Disadvantages:  Unlimited liability, difficult to raise capital

Some Possible Solutions Advantages and disadvantages of becoming a limited liability company Advantages: Protection of limited liability, easier to raise finance Disadvantages: Legal formalities & costs, accountability to shareholders

Some Possible Solutions Advantages and disadvantages of applying for charitable status: Advantages: Financial - exemption from most forms of direct taxation, Status/credibility of charity registration number  Disadvantages: Trading activities are limited, must submit annual accounts

Case Study 1 Clare Wong spends a lot of her time working for a large charity. The charity has grown enormously in recent years, and the trustees have been advised to overhaul their accounting procedures. This would involve its workers (most of whom are voluntary) in more book-keeping, and there is a great deal of resistance to this move. The staff have said that they are there to help the needy, and not to get involved in book-keeping Prepare some notes that you could use in speaking to the voluntary workers in order to try to persuade them to accept the new proposals. Dyson (1997) - Accounting for non-Accounting Students.

Case Study 1 - Solution Clare might say something like: Our charity is required to register in order to gain charitable status, if the income exceeds £1000. This carries certain advantages:  We will be exempt from most forms of direct taxation  We will have a Charity Registration Number to put on our stationery This means that more money from our donations will actually go to us, and people will be more likely to donate to us. Obviously both of these mean that our charity gets more money. However in order to gain these benefits, we need to:  Comply with Charity law and submit annual accounts.  Be monitored by the Charities Commission Both of these require us to produce professional accounts, and that means the day-to-day book-keeping needs to be accurate and effective. If we want to see our charity thrive and grow, we must address our accounting practices. By doing this we will be helping the needy.

Case Study 2 You are a personnel officer in a manufacturing company, and one of your employees, a young engineering manager has been chosen to attend the local Business School to study for a diploma in management. He is reluctant to sign up for the course because it includes a subject called “Financial Management”. As an engineer, he thinks it will be a waste of time to study such a subject. Prepare some notes that you could use in speaking to the engineering manager in order to show him the benefits to him of studying financial management. Dyson (1997) - Accounting for non-Accounting Students.

Case Study 2 - solution The personnel officer might say something like:  In terms of future prospects, if you intend to progress upwards through the career structure, then you will inevitably need to take responsibility for some aspect of financial management.  You might be required to work within a budget, complete an end-of- year financial report or produce evidence for auditors or accountants who will be attempting to measure the performance of your department.  Having some understanding of basic accounting procedures will allow you to be proactive, and make the accounting work for you, and to your advantage, rather than reactive, in simply acceding to the demands of the accountants and auditors. This means that the department that you run is more likely to be effective, and you are more likely to gain promotion.