Lezione 16 settembre di Economia aziendale

There might be a number of users that are not part at all of the business entity,

call it External users, that might need information about performance, results

outcome etc… this users are stakeholders, stake means interest, stakeholders,

those that

are interest

in a business

entity and

interest in

understanding whether the business entity is doing. This external users are not

involved at all in the manage of the business entity so they are very different,

they are not making decision. Why this people are interested? Who are the

external users? Tat peolple who have the money to acquire some of the shares

of the business entity (you became partially the owner).

• Financial accounting is the preparation and presentation of financial

statements to allow users to make decisions about the entity

• Financial statements are a set of annual reports directed towards the

information needs of a wide range of users (mainly external)

– Statement of Cash Flows

– Balance Sheet (a.k.a. Statement of Financial Position)

– Income Statement (a.k.a. Profit & Loss statement)

– Statement of Changes in Equity

• Financial accounting is regulated by rules

Financial accounting is the preparation of this information in order to allow

many external users (those who not participate to the decision of the business

entity) to make some decision, this implies the preparation of the financial

statements. Financial statements are basically documents, reports, that

summarize the information of business entity. The statements of cash flows

that summarize information concerning the cash that the business entity has

collected in a specific period, and the cash that is using for the payments. The

balance sheet that provide description of the assets and the liability of a

business entity is a description of the resources that a business entity can use

in order to sell products to the customers. The income statement that is a

description of the profit that the business entity was able to achieve during a

(cash flows and profits are two different things, cash

specific period of time,

flows means cash going out and cash going in, profits is related of the ability of

the business entity to sell products to the customers).

• Management accounting provides information for internal users

• Unlike financial accounting, management accounting

– Generates monthly/weekly reports for internal audiences

– Considers various parts of the entity rather than the overall entity

– Is NOT regulated by rules

• Core activities include

– Formulating plans, forecasts and budgets

– Providing information to be used in monitoring and control within the different

parts of an entity

Management accounting is related to the provision of the information to the

internal users this is typically not regulated by rules, so reporting in this case is

much more flexible. In this case the users are those who provide the

information. Decision are made by the manager in order to run the business.

• Why is regulation important in financial accounting?

• Two key issues:

– Transparency towards external stakeholders

– Globalization and increased comple

Regulation first of all assure transparency, if you are consider investors, in the

purchase of some finance securities, you might want to be sure that the

information that is communicated is right, you might want to be sure that you

can trust this information. Unfortunately you don’t know who has prepared this

information, so how can you trust? You need rules, e you need someone that

can follow this rules, so rules are important to unsure transparency and to be

sure that this numbers are true.

• The information that is communicated to external users must be reliable

– Corporate collapses, insider trading and company frauds have resulted in

changes to corporate regulation

• Main sources of company regulation:

– Corporations Act (2001) – Australia

– Sarbanes Oxley Act (2002) – US

– European Commission (https://ec.europa.eu/info/business-economy

euro/company-reporting-and-auditing/company-reporting/financial reporting)

• Independent audit: financial statements are usually audited by independent

external accounting firms

When companies are typically required to be double check, so someone else

that is external of the company, check role by role this number according that

the information is right, transparent and reliable.

• Generally accepted accounting principles (GAAP) : A set of rules and

practices, having substantial authoritative support that guide financial

reporting

• Since 2005, most countries have complied with International Financial

Reporting Standards (IFRSs)

• IFRSs are prepared and issued by the International Accounting Standards

Board (IASB), an independent non-profit organization

– IASB defines GAAP in the EU and more than 100 other countries

• Time lag in the distribution of information to users

• Historical information based on past data

• Subjectivity of information refers to the choices involved in inclusion of

items to be reported and accounting policies to adopt

• Costs of providing information

– Information costs : Costs involved in gathering, summarising and producing

info contained in financial report

– Release of competitive information : Information in the financial report

could be used by competitors

• A business entity is a voluntary association of people formed and organized

to carry on a business, with the aim of making profits

• Process of accounting concerns identifying, measuring and communicating

economic information for decision making

• Users of accounting information may be external or internal

• Management accounting concerns needs of internal users, while financial

accounting focuses on reports for external users

7• Need for transparency and globalization increased the importance of

(harmonized) regulation in financial accounting

Business goals and sustainability

• Maximising profits (shareholder value)means that business entity should

compensate owners/shareholders with a competitive financial return on

investment and the protection of the entity’s assets

–Management decision making is therefore primarily concerned with increasing

the ability to make shareholders happy

• But should managers make decisions purely for shareholders at the

expense of other stakeholders?

Maximising profits, if a business entity is able to achieve a lot of profits, this

means that the owners are happy, because the owners are those that benefits

from this profits, the higher the profits the higher is the compensation to the

owners that have provided an initial contribution to the business entity, if the

owners are happy, the owners of course will be willing to pay higher salary to

the managers. Primar objective s to make the shareholder happy, because the

owner are those who take the risk for the business, however when the owners

make decisions of course they make decision trying to maximise their income.