Appunti financial accounting

Financial management accounting

BB Sara

Crash course

15.09.2016

Psw for the e – learning platform: FMA-2016.

Accounting in our GIOCA programme. Cultural organisations might be profit or not for profit.

Profit is the difference between revenues and expenses that result from activity and entity during the

period. NPOs mean that revenues must be reinvested due to differences in the aim of organisation.

Profit organisations have an investment for the capital. The profit organisation must remunerate the

capital. This is very simplified the ultimate scope of profit organisations.

The production of tables is not the mean of the organisation but it is the mean for the organisation.

The capital put in the investment is used to reinvest the productive factor and those good and

services are sold in a free market. The sum of the prices contribute to create revenues.

The difference between revenue and expenses will be used to cover initial expenditures.

In a NPO organisation is not established to make money and invest capital but indeed you collect

interest and social aims. From a juridical point of view there is not an “owner” but the mission is to

serve public interest as a whole. You must produce good and services. Also, economic process Is

different. Revenues from different sources: associate membership, public grants, donations

voulounteers contributions. You might look for public funds etc.

This revenues are used to cover goods and services thus public aim is the interest. The final scope is

not having profit and remunerate the capital. In both cases is important to have enough resources.

What di Pos and NPOs have in common?

- Operate with limited resources

- Must use resources in an effective and efficient way to pursue its aims and survive in the

long run.

- Effectiveness: results equal aims

- Efficiency: max results – minimum resources

- Need to adequately plan, manage and control the use of resources

- Need to be accountable: transparency and responsibility on the revenues collected.

Develop accounting tools. In recent years the need to be accountable is highly increased. Every

organisation shall use accounting principles.

This is why Is important to know how tools are developed and how to use advantages to have

economic and financial organisations might tell.

What is accounting?

Accounting is the process of identifying, measuring, communicating economic and financial

information about an entity for decisions and informed judgements.

It’s an useful tool to elaborate this in documents to help people to make decisions. Who is the

people interested in accounting information? Stakeholders, investors, government, the advisory

board, consumers… table.

There are different typologies of accounting, we mentioned two different accounting typologies:

financial and management accounting with different professional roles. Some will perform financial

accounting others managerial accounting.

Financial accounting Is mainly addressed to external users. Indeed it is used by managers but the

manager has much more information about the company rather then those wrote in the report.

Financial statements are a group of documents with specifical information. The past activity of the

entity is not future oriented. Budgets are based also on previous years but budget is not included in

financial accounting. The aim is to communicate financial position, cash flows for a specific time

period. To prepare the financial statement we use a bookkeeping and accounting procedures, used

to register economic transactions and to register the effect of each transaction into each transaction.

It’s done by financial accountant. It has specific format and standards.

Financial accounting has a macro focus and it can be done frequently but usually is done yearly for

the fiscal year. Financial accounting reports are reviewed by a third party the auditors: they issue an

opinion if they’re correctly done or not.

Internal auditing is used for many retail companies. We need to have an internal audit to the single

companies. It’s done by internal auditors that can be also external.

Managerial accounting requires internal users: it address managers to take decisions. We use

economic and financial information to evaluate cost and benefits to direct the activity and

controlling it while the activity is done. It’s future – oriented because it helps in decision making.

In the case of control you control to inform judgement and decisions for the future. The main tool is

the budget and preparation of the budget. Managerial accounting has specific professions

(managerial accountants with specific certification to perform this work).

Since it has an internal orientation it is not compulsory and has not a standard format.

Also there is a governmental and not for profit accounting. For government we have the same

accounting functions with similar but not the same procedures. Over – governmental organisations.

The basic concepts and functions are the same. To understand also accounting.

We will focus on financial accounting. Financial accounting is the process that starting from

transactions to register and identifying transactions culminate into financial statements.

Accounting is not an exact science, not a mechanical procedure! It’s not mechanical. There might

be different ways to account. Thus, the picture can be very confuse due to different criteria used.

Each country developed different accounting principles (i.e. Accounting Bodies in US).

At international level the need to compare financial statements has emerged. The body is é charged

of promoting harmonisation between countries around the world.

Financial accounting is the process that starts with connections coordinating preparation of financial

statements. Transactions are economic interchanges. What does it means? Something of value has

given in exchange to something with the same value.

Transactions occurr every day and they’re summarised in accounts. Accounts are folders used to

organise similar transactions. Not every transaction affect cash and they’re reported in the cash

folder. Every account affects inventory and it’s recorded in a folder which has an account name. At

the end of the period you will have balance of the account every income will give the total balance

for the cash account. This balance will be used to prepare financial statements.

Financial statements: balance sheets (financial positions of the company), cash flow (inflows and

outflows of cash),, income statement (earnings or profits during the period – profit and losses

statement), statement of changes in owners’ equity (investment and distribution to owners).

These are the four financial statement included in the financial report that includes also several

explanatory notes where management and accountants describe numbers included in financial

reports.

Looking to a real financial statements you will see that the four financial statements are brief

whereas the explanatory notes can be very very long.

The overall document is the annual financial report which includes four financial statements and

explanatory notes.

The balance sheet summarises the financial position of an organisation at one point in time (end of

st

fiscal period, usually December 31 ). It includes:

- Assets: resources of the company. Resources controlled by the company as a result of past

events from which future economic benefits are expected to flow to the entity.

- Liabilities: obligations to other entities. Resources not owned by entity but owned by

others. For instance loans, debts (both short term and long term).

- Owners’ equity. Owners’ rights on the resources. The residual interest in the assets of the

entity after deducing all its liabilities (A – L -> OE).

ASSETS are made of:

- Cash

- Account receivable (amount due to customers)

- Merchandise inventory (the cost of merchandise acquired to be sold)

- Plant and equipment (the cost of equipment and plant used in business like the cost of the

building the shops)

- Accumulated depreciation: the portion of cost of equipment that is estimated to been used

up. Depreciation means spread the cost of the asset during its whole life. Decreases the

value of the assets in the years.

- Current assets are those assets that are likely to be converted into cash or used to benefit

within one year (cash, account receivable, merchandise)

LIABILITIES are made of:

- short – term debt (amounts borrowed that will be repaid within one year of the balance sheet

date: all the debts that the company has to re – pay)

- Accounts payable (amounts due to suppliers to purchase. Debts due to suppliers to material

on credit)

- Other accrued liabilities (amounts owned to other creditors i.e. Wages not paid the current

month but the next)

- Long term debts (amounts borrowed from banks not paid within one year from the balance

sheet date). Why underlining dates? We want to understand current assets – current

liabilities.

- Current liabilities are those liabilities that are likely to be paid within one year (short term

debt, accounts payable, accrued liabilities).

The balance sheet is always in balance. Tot assets equal total liabilities and owners’ equity.

Whatever transaction will affect the balance sheet but keep the balance sheet in balance.

ASSETS LIABILITIES + OES

ASSETS – LIABILITIES + OES

NET ASSETS + EQUITY

The time – line model is used to see how financial statements equal at the end of the year. The

balance sheet at the end of one period is the valance sheet at the beginning of the period.

22.09.2016

The income statement.

The income statement shows the incomes (profit or losses) for the period under consideration. Here

the difference with Balance sheet which refers to a point in time. Income is referred to a period like

earnings produced during one year. Define the time period to which income statement refers to. It

would be very different considering the different period.

This is like a movie on the operation of activity while the balance sheet takes a picture. How is

profit and loss composed? Define it as all revenues produced in a period minus all the expenses

(gain and losses).

Revenues result from the entity operating activity. I.e. What company earns from the sale of

merchandise that constitute the positive part of income statement. Expenses are costs incurred in

generating revenues. The difference between these two is called income.

Before understanding the real statement we must understand that activities are three:

1. Operating activities: the core activity of the entity. For instance we are a publishing house

thus our core activity will be publishing books. Revenues come from the revenues of the

book. Company might need a building or equipment to print the books.

2. Financing activities: invest money to generate a positive inflow: they generate interest

expenses and interest income

3. Investing activities: can generate gain and losses.

Depending on these activities we distinguish different kind of costs:

- Operating costs: are related to the core activity of the entity. Are necessary to operate and

they differentiate into:

a. Manufacturing costs: are those cost who actually manufacture the product. Usually they

are raw materials, direct labour, manufacturing overhead (indirect costs necessary to

manufac. the product like the salary of the supervisor)

b. Non – manufacturing costs: cost of acquiring the product (like in the retail companies)

these costs are product costs directly assigned to a single unit of product. And product

costs in the financial statement is called “cost of good sold” in the income statement and

“Inventory” in the balance sheet. Other are selling, general and administrative expenses.

For the retail store the cost of electricity for the shop, administration and so on, are not

manufacturing costs but still operating costs. Thes