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By Otto Khatamov

Financial Accounting 2010/11week 1

Assessment

Summative; Exam

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Text book

Financial Accounting for Decision Makers; 5th edition by Peter Atrill & Eddie McLaney, Prentice Hall

Introduction to Financial Accounting, 9th edition by Horngren, Sundem, Elliott & Philbrick, International edition

Lecture notes

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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 www.greggs.plc.uk; click investors

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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)

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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

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ACCA F3 – Financial AccountingD. 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

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ACCA F3 – Financial AccountingF. 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

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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

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Users of financial accounts

Lenders

Staff suppliers Customers

Owners Government

Managers

Community

Business

competitors

Investmentanalysts

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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?

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RegulatoryFramework

Institutes;

Regulation

CompulsoryAudit

Legislation ASB & IASB

ICAEWACCACIMACIPFA

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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

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Financial statements

1. Profit/wealth generated over the period?performance

2. What is the accumulated wealth at period end?

position

Income Statement

Balance Sheet

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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

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Profit

Income - expenditure = profit

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Greggs Income Statement2008 2007£'000 £'000

revenue 628,198 586303cost of sales -240,200 -220,849gross profit 387,998 365,454dist. & selling costs -306,573 -278,708administration exp -40,845 -39,030other income 8,033 2,193operating profit 48,613 49,909income tax 857 1,234profit before tax 49,470 51,143income tax -15,375 -14,792profit atttributable to equity holders 34,095 36,351

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Fundamental concepts

Dual effect (double entry) Book-keeping Capital versus revenue Cash versus profit;

accruals basis

trading done on credit termsnon cash adjustments

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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

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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

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Greggs 2008 Income Statement

excluding exceptional totalexceptionals items

(note 4)revenue 628,198 628,198cost of sales -240,200 -240,200gross profit 387,998 387,998dist. & selling costs -303,288 -3,285 -306,573administration exp -40,415 -430 -40,845other income 0 8,033 8,033operating profit 44,295 4,318 48,613income tax 857 857profit before tax 45,152 4,318 49,470income tax -14,033 -1,342 -15,375profit atttributable to equity holders 31,119 2,976 34,095

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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

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Items requiring separate disclosure

Examples include:,disposals of items of property, plant and

equipment, restructuring of activities litigation settlements

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The Balance Sheet

A statement of financial position as at a particular date, usually the company’s 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).

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The Balance Sheet

Capital = assets – liabilities“The total capital being

deployed is represented by these net assets”

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Balance Sheet – Greggs 2008

Total equity capital 147,947 Is represented by; Non current assets 211,141 Current assets 39,283 Total assets 250,424 Less total liabilities -102,477 net assets 147,947

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The Balance Sheet

Assets = capital + liabilities

“This suite of assets is financed by these sources

of capital”.

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Balance Sheet – Greggs 2008

Assets Financed by Non current

211,141 Current liabilities

73,941

Current 39,283 Non-Current liabilities

28,536

Equity 147,947 Total 250,424 250,424

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Assets

Inventory

Non-current

Receivables

Intangible e.g. patent

Tangible/PPE e.g. car

Current assets

Cash/bank

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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

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Greggs Group; Assets

Non-current assets note 2008 2007

Intangible assets 10 686 0

Property, plant & equipment 11 210,455

211,141 196,783

current assets

Inventories 14 12,152 9,908

Trade & other receivables 15 22,698 19,934

cash 16 4,433 11,581

39,283 41,423

Total assets 250,424 238,206

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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

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Dual meaning of “Capital”

1. Owner’s claim or “equity” versus liabilities of the business

2. Capital expenditure versus “revenue” expenditure

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Greggs Group; Liabilities

Current liabilities note 2008 2007trade & other payables 17 62,761 68,183current tax liability 18 8,337 9,008Provisions 21 2,843 0

73,941 77,191Non-current liabilitiesdefined benefit pension liability 20 5,733 680other payables 19 8,221 426deferred tax liability 13 12,154 14,315long term provisions 21 2,428 0

28,536 15,421total liabilities 102,477 92,612

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Greggs Group; Equity

Capital & reserves note 2008 2007

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issued capital 2,080 2,127

share premium account 13,533 13,533

capital redemption reserve 359 312

retained earnings 131,975 129,622

total equity attributable to equity holders of the parent 147,947 145,594

Suggested reading & activities

Introduction to Financial Accounting, Chapters 1-4 (up to page 182)

Attempt review questions & exercises

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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?