Transcript Managerial Economics - e

Alfredo de la Casa
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Alfredo de la Casa
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Email: [email protected]
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Punctuality
◦ Class starts on time
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No mobile phones
Participation
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You are here to learn, I already know!
Very serious subjects, but
We can try make learning fun, but
You need to participate too!
ACADEMIC
2008 - International
Diploma in Risk
Management (CIRM)
2003 - Chartered
Institute of
Management
Accountants (ACMA)
1993 - Degree
Business, Economics
and Marketing (BSc)
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WORK
12-13 CIMA, ACCA, Uni.
Of Sunderland, Kent,
Leeds University…
11-12 Raffles, Melior
Bus. Sch.
07-11 Department for
Transport
06-07 Metropolitan
Housing Trust
04-06 Carbon Trust
04 National Health
Service
99-04 Health & Safety
Executive
98-98 Medop Group
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07-11 Department for Transport
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06-07 Metropolitan Housing Trust
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04-06 Carbon Trust
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04 National Health Service
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99-04 Health & Safety Executive
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98-98 Medical Optica Group
◦ Business Planning and Risk Management Manager ($9
billion)
◦ Senior Finance Manager ($3 billion)
◦ Senior Financial Analyst ($2.2 billion)
◦ Management Accountant ($160 million)
◦ Team Leader ($160 million)
◦ Budget Analyst ($270 million)
◦ Finance manager ($4 million)
◦ Purchasing and Quality Control Director
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TESOL qualified
Managed teams from one to forty
Spanish, French, Italian (working knowledge)
A few words in Vietnamese
Cross cultural awareness
Wine educator
Hospitality sector advisor
Anything that is fun or looks like it: travelling,
painting, hiking, cooking,…
F&B Editor and reporter
The Accounting Scene
Chapter 1: The Accounting Scene
Learning Objectives
 Explain the need for accounting records
 Identify user groups and the characteristics of financial statements
 Distinguish between financial and management accounts
Chapter 1: The Accounting Scene
What is accounting?
Accounting
Recording transactions
Summarising transactions in order to provide information about the
business to interest parties
Accounting may be defined as:
 The classification and recording of monetary transactions (reporting)
 The presentation and interpretation of the results of those transactions
in order to assess performance over a period and the financial position
courses of action (reporting)
 The monetary projection of the future activities arising from the
alternative planned courses of action. (forecasting)
Chapter 1: The Accounting Scene
The objectives of accounting
 Provide financial information to
• the managers;
• the owners;
• other parties interested in an organisation.
What are financial statements?
Income Statement: reflects the performance of the business
over a period of time
Financial
Statement
Statement of Financial Position: reflects the position of the
business at a point of time
Statement of cash flows: summerises the inflows and outflows
of cash over a period of time
Chapter 1: The Accounting Scene
Who uses financial statements?
 The investor group
 The lender group
 The employee group
 The analyst/adviser group
 The business contact group
 The government
 The public
 Internal users
Chapter 1: The Accounting Scene
The qualitative characteristics of financial statements
The information in the financial statements should:
a. Enable its recipient to make effective, decisions;
b. Be adequate for taking effective action to control the organisation
or provide valuable details relating to its environment;
c.
Be compatible with the responsibilities and needs of its recipient;
d. Be produced at optimum cost;
e. Be easily understood by its recipient;
f.
Be timely;
g. Be sufficiently accurate and precise for the purpose of its
provision.
Chapter 1: The Accounting Scene
Terminology
1. Bookkeeping
The recording of monetary transactions, appropriately classified, in the
financial records of an entity, by either manual means or otherwise.
2. Financial Accounting
the classification and recording of monetary transactions of an entity in
accordance with established concepts, principles, accounting
standards and legal requirements, and their presentation, by means of
various financial statements, during and at the end of an accounting
period.
3. Management Accounting
the process of identification measurement, accumulation, analysis,
preparation, interpretation and communication of information used by
management to plan, evaluate and control within an entity and to
assure appropriate use of and accountability for its resources.
Chapter 1: The Accounting Scene
Terminology
Financial Statements
Chapter 2: Financial Statements
Learning Objectives
 Explain capital and revenue, cash and profit, income and
expenditure, and assets and liabilities.
Chapter 2: Financial Statements
The accounting equation
ASSETS = LIABILITIES + CAPITAL
Terms:
 Asset: A resource that may be used by a business or other organisation
to derive revenue in the future.
 Receivables: A person owning money to an entity.
 Liability: An entity’s obligations to transfer economic benefits as a result
of past transactions or events.
 Payables: A person or an entity to whom money is owned as a
consequence of the receipt of goods or services in advance of payment.
 Capital: In this context, capital is difficult to define, but it can be
regarded as a special kind of liability that exists between a business and
its owner(s).
Chapter 2: Financial Statements
The accounting equation and the statement of financial position
The statement
of financial
position
ASSETS
LIABILITI
ES
A statement of the assets, liabilities
and capital of a business at a
particular time
A detailed representation of
accounting equation.
Non-current assets
Any asset acquired for retention by an entity
for the purpose of providing a service to the
business, and not held for resale in the
normal course of trading.
Current assets
Cash or assets – held for conversion into cash
in the normal course of trading.
Non-current
liabilities
Liabilities that are due for prepayment more
than 1 year after the statement of financial
position date.
Current assets
Liabilities that fall due for prepayment within
1 year. They include that part of non-current
loans due for repayment within 1 year
Chapter 2: Financial Statements
Capital and Revenue
Capital transactions
 Affect the organisation in long term, as well as in the current period
 Capital Expenditure is expenditure on non-current assets, and
capital receipts would result from the disposal of those assets.
 Other transactions that are regarded as capital transactions are the
obtaining of, and repayment of, non-current finance.
Revenue transactions
 Affect the organisation in the current period
 Revenue receipts come from sales, and sometimes in the form of
income from investments.
 Revenue expenditure is expenditure on items that are consumed in
the period.
The Basics of Accounting
Chapter 3: The Basics of Accounting
Learning Objectives
 Explain the principles of double-entry book keeping
 Prepare accounts for sales and purchases, including personal
accounts and control accounts
 Prepare nominal ledger accounts
Chapter 3: The Basics of Accounting
The ledger account
An account – a record of the transactions involving a particular item
A ledger account may be thought of as a record kept as a page in a book.
The book contains many pages – many accounts and is referred to as a
ledger.
Nominal ledger – the ledger contains all of the accounts necessary to
summarise an organisation’s transactions and prepare a statement of
financial position and income statement.
Each account comprises two sides: the left-hand side is referred to as the
debit side, and the right-hand side is referred to as the credit side
Debit
Date
Credit
Details
$ Date
Details
$
Chapter 3: The Basics of Accounting
Double-entry bookkeeping
Double-entry bookkeeping: the most commonly used system of
bookkeeping based on the principle that every financial
transaction involves the simultaneous receiving and giving of
value, and is therefore recorded twice.
Note: Every transaction has two effects – equal and opposite – means that each
transaction must recorded in two ledger accounts. This is double-entry bookkeeping.
Chapter 3: The Basics of Accounting
Bookkeeping entries for the statement of financial position
Transactions are recorded on either the debit or the credit side of a ledger
account according to the following table:
Debit
Credit
Increase in assets
Decrease in assets
Decrease in liabilities
Increase in liabilities
Decrease in capital
Increase in capital
Entering transactions in ledger accounts is also called posting the
transactions
Chapter 3: The Basics of Accounting
Bookkeeping entries for expenses and revenue
 An expenses is a cost connected with day-to-day activities of the
organisation.
 Revenue is the term used to describe the activities that will eventually
lead to the organisation receiving money.
Transactions are recorded on either the debit or the credit side of a ledger
account according to the following table:
Debit
Credit
Increases in expenses
Decrease in expenses
Decreases in revenue
Increases in revenue
Chapter 3: The Basics of Accounting
Capital and revenue expenditure
Capital expenditure is expenditure likely to increase the future
earning capability of the organisation, whereas revenue
expenditure is that associated with maintaining the organisation’s
present earning capability.
Capital expenditure
Expenditure on the acquisition of non-current assets required for the use
in the business, not for resale.
Expenditure on existing non-current assets aimed at increasing their
earning capacity.
Capital expenditure is long-term in nature as the business intends to
receive benefits of the expenditure over a long period of time
Chapter 3: The Basics of Accounting
Capital and revenue expenditure
Revenue expenditure
expenditure on current assets
expenditure relating to running the business, e.g. electricity costs
expenditure on maintaining non-current assets, e.g. repairs
revenue expenditure relates to the current accounting period and is used
to generate revenue in the business.
Chapter 3: The Basics of Accounting
Depreciation
Depreciation is the process that the cost of assets (usually applied
to tangible assets) is spread over all of the accounting periods in
which the assets is expected to making a contribution to earnings
(the assets’ useful life).
Calculating depreciation
The straight-line method
 This method allows an equal amount to be charged as depreciation
to each accounting period over the expected useful life of the asset.
 The amount to be charged to each accounting period is given by the
formula:
Original cost - estimated residual value
Depreciation per annum =
Estimated useful life
The ledger entries to record the depreciation are:
Debit depreciation expenses account
X
Credit accumulated depreciation account
X
Chapter 3: The Basics of Accounting
Calculating depreciation
The reducing-balance method
 The reducing-balance method is the method that asset is considered
sensible to charge a higher amount of depreciation in the earlier
years
 With this method a constant percentage is applied to the cost not yet
treated as an expense at the end of the previous accounting period.
This results in the depreciation charged as an expense being greater
in the earlier years of an asset’s life than in the later years.
The constant
percentage is
31%
Original cost
50,000
Year 1
depreciation
15,500
Year 2
depreciation
Year 3
depreciation
34,500
10,695
23,805
7,380
16,425
(31% of
50,000)
(31 % of
34,500)
(31 % of
23,805)
Chapter 3: The Basics of Accounting
Accounting for the disposal of a non-current asset
 At the end of the asset’s life it will be either abandoned or sold. This
is known as a ‘disposal’ in accounting terminology
 The difference between the carrying amount or value of the asset at
the date of its disposal and the proceeds received (if any) is referred
to as the profit or loss arising on the disposal of the asset.
 If the proceeds received on disposal are less than the carrying
amount at that date the difference is a loss on disposal, which is
treated as an expense when calculating the organisation’s
profitability.
 If the proceeds received on disposal are greater than the carrying
amount or value at that date the difference is a profit on disposal,
which is treated as an income when calculating the organisation’s
profitability.
Chapter 3: The Basics of Accounting
Accounting for intangible non-current asset
 An intangible asset. An asset that does not have a physical substance,
for example trademarks and patents.
 Intangibles can be purchased or internally generated, e.g. brand names.
 Generally purchased intangibles are capitalised and internally generated
are not.
 Amortisation must be charged on intangibles capitalised which is a
reflection of the wearing out of the asset.
 Examples of intangibles are:
 development costs
 goodwill
 brands
 copyrights
 licenses
 trademarks
Controlling the Accountancy System
Chapter 4: Controlling the Accountancy System
Learning Objectives
 explain the need for financial controls;
 explain the purpose of audit checks and audit trails;
 explain the nature of errors;
Chapter 4: Controlling the Accountancy System
Preventing errors
There are a number of ways in which errors can be prevented, or at least
limited in their number and effect.
 Authorizations procedures
Transactions should be authorised at an appropriate level
 Documentation
Documentation should be used to give evidence of transactions, and
should be properly filed and referenced. This helps to provide an ‘audit
trail’ of transactions through the system.
 Organization of staff
Staff should be properly recruited, trained and supervised. No one
person should have complete control over any section of the
bookkeeping system. Duties should be shared out between different
members of staff. This is known as segregation of duties.
 Safeguarding assets
Assets should be properly maintained, insured, utilised, valued and
recorded.
Chapter 9: Controlling the Bookkeeping System
Preventing errors
 Detecting errors
Some errors may come to light purely by chance, and some are never
found at all. It would be extremely unwise to trust to chance, and
therefore there are several checks that can be incorporated to help
detect errors.
 Spot checks
These are particularly useful in detecting fraud. Spot checks are also
commonly carried out on hank balances, ledger accounts and
inventories.
 Comparison with external evidence
External evidence is among the most useful in determining the
reliability of records.
 Carry out an audit
An audit is a check on the accounting records and financial statements
of the organisation. It does not entail a complete check on every
bookkeeping entry, but rather examines the systems and procedures in
place that should contribute to the reliability of the accounting records.
Chapter 4: Controlling the Accountancy System
Preventing errors
 Reconciliations
A reconciliation is a comparison of records to identify differences and to
effect agreement. There are several types of reconciliation that can be
carried out.
 Producing a trial balance. If the debit and credit totals do not agree,
it is obvious that an error has been made.
 Reconciling the accounts of the organisation with records received
from other organisations
- bank reconciliations, where the bank account maintained by the
organisation is reconciled with the statement issued by the
bank;
- supplier reconciliations, where the ledger account maintained by
the organisation is reconciled with a statement of the ledger
account in the supplier’s books.
 Reconciling groups of ledger accounts with a control account.
Chapter 4: Controlling the Accountancy System
Bank reconciliation statement
In order to ensure that both the bank’s and the organisation’s
records are correct, a comparison is made of the two sets of
records and a reconciliation statement produced.
Differences between the bank statement and the cash book
Unrecorded items
These are items
included in the bank
statement but not in
the cash book:
 bank charges
 direct debits
 standing orders
 interest
 dishonoured
cheques
These must now be
recorded in the cash
book.
Timing Differences
Errors
Items have been recorded in the
cash book, but due to the bank
clearing process have not been
recorded in the bank statement.
These can be
found in
either the
cash book or
the bank
statement
and must be
adjusted
appropriately.
$
Balance as per bank statement
X
Less: unpresented cheques
(X)
Plus: unpresented lodgements
X
Chapter 4: Controlling the Accountancy System
Bank reconciliation statement
The steps taken to undertake a bank reconciliation are:
Step 1 – Tick off all items in both the cash book and the
bank statement
Step 2 – Update the cash book for unticked items in
the bank statement
Step 3 – Prepare the bank reconciliation with the
unticked items in the cash