An Introduction To Accounting And Finance

MSIN7012 An Introduction to Accounting and Finance

SESSION 1 (2008/9) A THEORETICAL FRAMEWORK Lecturer: Andrew Scott 1

Reading List Add: “Financial Accounting - understanding and practice” By Robert Perks, 2nd edition 2007, published by McGraw Hill Includes an introduction to management accounting plus investment appraisal. 2

International Financial Reporting Standards (IFRS) • All consolidated statements of Listed Companies in the EU should comply with IFRS for accounting periods beginning on or after 1 January 2005. • For UK AIM, IFRS for financial periods starting after 1 January 2007. • US companies plan to switch from US GAAP to IFRS in 2014 providing certain conditions are met by 2011 - the last significant standard to switch. • More than 100 countries use or are adopting IFRS. 3

Development of Accounting • Stewardship accounting - to prevent fraud • Financial accounting - provision of financial information to shareholders in annual statements • Management accounting - detailed information for decision -making by management

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Drivers for change • Need for comparability of financial information from country to country • “Creative” accounting might be misleading • Development of new performance indicators • New users require different types of information e.g. “green” accounting

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Result • Continuous evolution of accounting procedures

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Users of financial information • • • • • • • •

Shareholders Management Government/their agencies Lenders - banks Suppliers Local communities - public Customers Employees 7

Accounting Theory Framework • Elements - Assets, Liabilities, Capital, Revenue, Expenses • Concepts - Entity, Money measurement, Going Concern, Cost, Realization, Accrual, Matching, Periodicity, Consistency, Prudence • Procedures - Recording, Classifying, Summarizing, Reporting Transactions, Interpreting Reports

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Three fundamental financial statements • Income Statement(formerly known as Profit and Loss account) • Balance Sheet • Cash Flow Statement

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FKI plc • FKI plc is a major international diversified engineering group quoted on the London Stock Exchange. Acquired by Melrose PLC on 1 July 2008. – – – –

FKI Logistex –automated material handling systems Lifting products and services Window hardware and storm and screen door hardware. Energy technology - turbogenerators

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FKI plc Annual Report 2008 • Can be found at http://www.fki.co.uk/newsdetail.cfm?contentid=305

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Directors’ report Operating and financial review Remuneration report Group financial statements

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Group Financial Statements • • • • •

Independent auditor’s report Consolidated income statement Consolidated balance sheet Consolidated cash flow statement Consolidated statement of recognised income and expense • Notes to the consolidated financial statements 12

The Balance Sheet • A list of resources and a list of sources (claims against the resources) • Asset (IASC) - a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise • Non-current assets - not intended for resale 13

Continued • Current assets - expected to be transformed into cash within one year • Current liabilities - amounts owed and due for payment within one year • Working capital - current assets less current liabilities

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Income statement (Profit and loss account) • Report on the flows of revenue and expenses in a period • Based on matching a period’s sales revenue earned with the expenses incurred in earning those revenues. NOT cash receipts and payments. 15

Cash flow statement • Classifies sources and uses of cash flow from different business activities: – Operating activities – Investing activities – Financing activities – Net increase/(decrease) in cash and cash equivalents 16