1 By Otto Khatamov Financial Accounting 2010/11 week 1

Assessment Summative; Exam 2

3 Text book Financial Accounting for Decision Makers; 5th edition by Peter Atrill & Eddie McLaney, Prentice Hall Introduction to Financial Accounting, 9 th edition by Horngren, Sundem, Elliott & Philbrick, International edition Lecture notes

4 FA; aims of lecture 1 To introduce the module To introduce ACCA F3 paper To consider what financial accounting is To introduce some accounting concepts, including the accruals concept To introduce the Income Statement & Balance Sheet, illustrated by Greggs plc 2008 annual report; For full report see click investorswww.greggs.plc.uk

5 Accounting the process of identifying, measuring & communicating financial information about an entity to permit informed judgements & decisions by users of the information American Accounting Association (AAA 1966)

CFRintrowk16 Accounting Management Accounting internal identification & use of costs to; 1. Plan/ budget 2. Make decisions about price & volume 3. Make investment decisions Financial Accounting reporting of historic results, for use by a range of external parties

ACCA F3 – Financial Accounting Detailed Syllabus: A. The context and purpose of financial reporting B. The qualitative characteristics of financial information C. The use of double entry and accounting systems D. Recording transactions and events E. Preparing a trial balance F. Preparing basic financial statements G. Interpretation of financial statements 7

ACCA F3 – Financial Accounting D. Recording transactions and events - Sales and purchases - Cash and Inventory - Tangible non-current assets - Depreciation - Intangible non-current assets and amortisation - Accruals and prepayments - Receivables and payables - Capital structure and finance costs 8

ACCA F3 – Financial Accounting F. Preparing basic financial statements - Statements of financial position - Income statements and Statements of comprehensive income - Disclosure notes - Events after the reporting period - Statements of Cash Flows (excluding partnerships) - Incomplete records 9

10 Financial Accounting reporting of historic results, for use by a range of external parties Serves a stewardship function Largely quantitative but increasingly qualitative disclosure May be subject to independent audit

11 Users of financial accounts Lenders Staff suppliersCustomers Owners Government Managers Community Business competitors Investment analysts

12 Published accounts Necessitated by segregation of ownership from management an account of stewardship for shareholders basis for investment decisions of interest to the public & government Based on International or National accounting standards?

13 Regulatory Framework Institutes; Regulation Compulsory Audit Legislation ASB & IASB ICAEW ACCA CIMA CIPFA

14 Accounting acronyms IASB; the International Accounting Standards Board, which issues IASs (International Accounting Standards) & IFRSs (International Financial Reporting Standards). GAAP; Generally Accepted Accounting Principles ICAEW; Institute of Chartered Accountants in England & Wales ACCA; Certified Accountants CIMA; Chartered Institute of Management Accountants CIPFA; public sector accountants

15 Financial statements 1. Profit/wealth generated over the period? performance 2. What is the accumulated wealth at period end? position Income Statement Balance Sheet

16 Financial statements Income Statement record of performance over 12 month period revenue income matched with revenue expenditure Balance Sheet snap shot of financial position as at the year end shows assets, liabilities & capital

17 Profit Income - expenditure = profit

CFRintrowk118 Greggs Income Statement £'000 revenue628, cost of sales-240, ,849 gross profit387,998365,454 dist. & selling costs-306, ,708 administration exp-40,845-39,030 other income8,0332,193 operating profit48,61349,909 income tax8571,234 profit before tax49,47051,143 income tax-15,375-14,792 profit atttributable to equity holders34,09536,351

19 Fundamental concepts Dual effect (double entry) Book-keeping Capital versus revenue Cash versus profit; accruals basis trading done on credit terms non cash adjustments

20 The accruals concept Recognition of income not on a cash basis (i.e. when cash is received) but on an accruals basis (i.e. when it is earned). Hence receivables & prepayments on balance sheet

21 The accruals concept Recognition of expenditure not on a cash basis (i.e. when cash is paid) but on an accruals basis (i.e. when liability is incurred) Hence payables/creditors and accruals on balance sheet

CFRintrowk122 Greggs 2008 Income Statement excludingexceptionaltotal exceptionalsitems (note 4) revenue628,198 cost of sales-240,200 gross profit387,998 dist. & selling costs-303,288-3, ,573 administration exp-40, ,845 other income08,033 operating profit44,2954,31848,613 income tax857 profit before tax45,1524,31849,470 income tax-14,033-1,342-15,375 profit atttributable to equity holders31,1192,97634,095

23 Items requiring separate disclosure (IAS 1) Identifying maintainable income – important for investors predicting future cash flows items within the ordinary activities of the enterprise which are of such size, nature or incidence that their separate disclosure (usually in a note) is required in the financial statements in order for the financial statements to show a true and fair view Such items may be separately disclosed on the face of the IS if sufficiently material

24 Items requiring separate disclosure Examples include:, disposals of items of property, plant and equipment, restructuring of activities litigation settlements

25 The Balance Sheet A statement of financial position as at a particular date, usually the companys year end A snapshot of what a company owns (assets), what it owes in the short term (current liabilities) and where it gets its finance from (usually a mix of long term debt & equity).

26 The Balance Sheet Capital = assets – liabilities The total capital being deployed is represented by these net assets

CFRintrowk127 Balance Sheet – Greggs 2008 Total equity capital147,947 Is represented by; Non current assets211,141 Current assets39,283 Total assets250,424 Less total liabilities-102,477 net assets147,947

28 The Balance Sheet Assets = capital + liabilities This suite of assets is financed by these sources of capital.

CFRintrowk129 Balance Sheet – Greggs 2008

30 Assets Inventory Non-current Receivables Intangible e.g. patent Tangible/PPE e.g. car Current assets Cash/bank

31 Characteristics of an asset A probable future benefit exists it is controlled by the business as a result of a past transaction it is capable of measurement in monetary terms

CFRintrowk132 Greggs Group; Assets Non-current assetsnote Intangible assets Property, plant & equipment11210, ,141196,783 current assets Inventories1412,1529,908 Trade & other receivables1522,69819,934 cash164,43311,581 39,28341,423 Total assets250,424238,206

33 What are the claims on a business? The owners equity or capital Liabilities; the claims of parties, other than the owner, which have arisen from past transactions or events. Divided between current liabilities (due in under 12 months) & non-current liabilities which are due for settlement in more than 12 months time

34 Dual meaning of Capital 1. Owners claim or equity versus liabilities of the business 2. Capital expenditure versus revenue expenditure

CFRintrowk135 Greggs Group; Liabilities Current liabilitiesnote trade & other payables1762,76168,183 current tax liability188,3379,008 Provisions212, ,94177,191 Non-current liabilities defined benefit pension liability205, other payables198, deferred tax liability1312,15414,315 long term provisions212, ,53615,421 total liabilities102,47792,612

CFRintrowk136 Greggs Group; Equity Capital & reservesnote issued capital2,0802,127 share premium account13,533 capital redemption reserve retained earnings131,975129,622 total equity attributable to equity holders of the parent 147,947145,594

Suggested reading & activities Introduction to Financial Accounting, Chapters 1-4 (up to page 182) Attempt review questions & exercises 37

38 FA; aims of lecture 1 To introduce the module To consider what financial accounting is To introduce some accounting concepts, including the accruals concept To introduce the Income Statement & Balance Sheet Any questions?