Finance and Accounting Webinar

Kingsford Mensah

22ND February 2023

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 Key Topics to Understand today
 What is Accounting and Branches of Accounting

 Accounting Concepts, Principles and Standards

 Accounting Equation and Financial statements

 Management accounting - Budgeting

 Finance Function

 Significance of cash

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 Accounting and Branches of Accounting

 Accounting can be defined as the process of maintaining financial records and estimates and
using the information to make critical financial decisions.

 There are two main accounting branches: Financial Accounting and Management Accounting.

 Financial Accounting - recording any business transactions according to accounting principles.

 Management Accounting - provides information to management for better administration of

the business. It helps in making important decisions and controlling of various activities of
the business. Important activities such as budgeting, fixing pricing and cost and break even
analysis.

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 Difference between Financial Accounting and
Management Accounting
Nature Management Accounting Financial accounting
1) Necessity Optional Required
2) Purpose A means to the end of the assisting Produce statements for outside users
management

3) Users Relatively small group; known identity Relatively large group; mostly unknown
4) Underlying structure Varies according to use of the information One basic equation:
Asset = Liabilities + Owner's Equity

5) Source of principles Whatever is useful to management GAAP

6) Time Orientation Historical and estimates of the future Historical
7) Information content Monetary and nonmonetary Primarily monetary
9) Report Frequency Varies with purpose; monthly & weekly Quarterly & annually
common

12) Liability Potential Virtually none Few lawsuits, but threat is always present

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 Accounting Principle, Concept and Standard
• Accounting concepts are the basic assumptions of which transactions are recorded and financial
statements are prepared.

• Companies implement these principles while preparing financial statements to make them
consistent and complete.

•  The accounting principle states the common rules or regulations for recording financial transactions
and making financial statements.

• The accounting principles are generally termed as ‘Generally Accepted Accounting Principles or
simply GAAP.

• Accounting principles and concepts determine income, expenses, assets and liabilities for financial
reporting.

• Accounting Standards - Accounting Standards are the guidelines, principles and practices for financial
reporting. Accounting standards specify how transactions and other events are to be recognized, measured,
presented and disclosed in financial statements.

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 Accounting Principle, Concept and Standard

There are certain basic principles of accounting that are to be kept in mind while preparing financial
statements. Some of these are:
• Historical Cost Principle - Assets are recorded on the balance sheet at their historical cost without
adjusting them for the changes in the market value of these assets.

• Disclosure Principle - any information that would significantly affect the decision of the user of
financial statements about the company must be disclosed in the form of notes in the financial
statements.

• Consistency Principle - This principle mentions that all accounting principles and traditions should
be functional steadily from one period to the other.

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 Accounting Principle, Concept and Standard

• The Entity Concept - A business is an artificial entity distinct from its owners.

• Going Concern Concept -It means that the entity is going to continue unless it is liquidated.

• Accrual Concept - It suggests that incomes and expenses should be recognized as and when they
are earned and incurred.

• Dual aspect concept - This concept assumes that every transaction has a dual effect, i.e. it affects
two accounts in their respective opposite sides. Therefore, the transaction should be recorded at
two places

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 Accounting Equation

• The accounting equation states that a company's total assets are equal to the sum of its liabilities and its
owners' equity.

• The accounting equation is a fundamental part of the balance sheet and one of the basic principles of financial
accounting

• ASSETS = LIABILITIES + OWNER’S EQUITY

• This means:

• OWNER’S EQUITY = ASSET– LIABILITIES

• LIABILITIES = ASSETS – OWNER’S EQUITY

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 Accounting Equation Simplified

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 Transaction Analysis Equation

The accounting equation MUST remain in balance after each

transaction.

Assets = Liabilities + Equity

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 Equity

Owner’s
Claims on
Assets

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 Double Entry

• Double entry, a fundamental concept underlying present-day bookkeeping and accounting,

states that every financial transaction has equal and opposite effects in at least two different
accounts. It is used to satisfy the accounting equation.
• There is Debit and Credit for accounting transaction.
• The rule is Debit the Receiver and Credit the Giver

A T-account represents a ledger account and is used to show the effects of one or more
transactions.

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 Calculate the Missing Amounts.
ASSETS = LIABILITIES + EQUITY

410,000 = 200,000 +  

   =  5,400  +  7,700

         
24,255 = + 11,150
         
1,150,000 = 545,700 +
         
750,500 = + 350,500
         
= 880,500 + 305,250

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 1. Assets = Liabilities + Equity Correct / Incorrect

2. Liabilities + Assets = Equity Correct / Incorrect

3. Assets – Liabilities = Equity Correct / Incorrect

4. Liabilities + Equity = Assets Correct / Incorrect

5. Equity – Assets = Liabilities Correct / Incorrect

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 Financial Statements

There are 4 main types of Financial Statements:

• Balance Sheet – also Known aa s statement of
financial position. It is a snapshot of a business's
assets, liabilities, and equity/capital.
• Income Statement - also known as a statement of
revenue and expense, or a profit and loss statement.
shows a business's operating and non-operating
revenue and expenses.
• Cash Flow Statement - also known as the statement
of cash flows is an important financial statement that
gives users an understanding of how well a business
is managing its cash flow.
• Statement of owner's equity - also known as a
statement of changes in equity, or a statement of
shareholders' equity. It shows the business's capital
and retained earnings—the profit kept,

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 Balance Sheet

• Balance Sheet Items

• Total Assets = Non-Current Assets + Current Assets +

• Total Liabilities = Non-Current Liabilities + Current Liabilities

• Total Owner’s Equity = Owner’s Equity + Retained Earnings –Drawings (If any)

Assets: Current or non-current

• Current assets- cash or near cash held for sale/consumption/trading for a short term.
•Non-current assets- normally held for the long-term operations of the business.
Liabilities: Current or non-current
•Current- amounts due within the business operating cycle, settled within a year.
•Non-current- amounts due that are not current liabilities.

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 Assets

Cash
Accounts Notes
Receivable Receivable
Resources
owned or
Vehicles controlled by Land
a company

Store Buildings
Supplies
Equipment
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 A1
Liabilities

Accounts Notes
Payable Payable

Creditors’
claims on
assets
Taxes Wages
Payable Payable

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 Balance Sheet Process
Assets Liabilities Capital
1 3 5
Non-current assets Non-current liabilities Capital/Owner’s Equity
Land and Building X Bank loans X Capital Introduced
Motor Vehicle X
X
Office Furnitures Add: Profit/Less (loss) X
X 4
X Current liabilities
Trade payables X
Bank overdraft X
2 X
Accruals Less: Drawings X
Current assets X
Inventory Other payables X Capital
X
Trade receivables VAT owed to taxation authority X
X
Prepayments x X
Other receivables X
Cash at bank and in hand X
X

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 Sample of balance sheet

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 Sample of balance sheet
  £
Non- Current Assets  
Plant and machinery 4,000
Current assets  
Stocks 1,800
Debtors 960
Bank 40
Total Assets 6,800
Current liabilities  
Trade creditors 520
Proposed dividend 320
Taxation 160
Accruals 100
  1,100
Non-current Liabilities  
10% debenture 2,000
Total Liabilities 3,100
 
Owner’s Equity  
Equity 900
Retained profit 2,800
Owner’s Equity + Liabilities 6,800

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 What Goes on an Income Statement

• What Goes on an Income Statement:

• An income statement, also called a profit and loss statement, lists a business’s revenues, expenses and
overall profit or loss for a specific period of time. An income statement reports the following line items:

 Sales: Revenue generated from the sale of goods and services

 Cost of Goods Sold: Including labour and material costs

 Gross Profit: The cost of goods sold subtracted from sales

 General and Administrative Expenses: Includes rent, utilities, salary, etc.

 Earnings Before Tax: Your business’s pre-tax income

 Net Income/Profit: The total revenue minus total expenses, which gives the profit or loss

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 Income Statement measurement and layout

Sales revenue
Less
Cost of sales
Total revenue for Equals
the period Gross profit
Profit
less Less
(or loss)
for the = Total expenses Operating expenses
incurred in Equals
period
generating that Operating profit
revenue Less
Non-operating expense (e.g. interest payable)
Plus
Non-operating income (e.g. interest receivable)
Equals
Profit for the period

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 Sara Ted’s Income Statement & Cost of Sales
calculation
Sales revenue £232,000
Cost of sales £154,000
Gross profit £78,000
Salaries and wages (£24,500)
Rent and rates (£14,200) Sales revenue £232,000
Heat and light (£7,500)
Cost of sales
Telephone and postage (£1,200)
Insurance (£1,000) Opening inventories
Motor vehicle running expenses (£3,400)
£40,000
Depreciation – fixtures and fittings (£1,000)
Depreciation – motor van (£600) Goods bought £189,000
Operating profit £24,600
Interest received from investments £2,000 Closing inventories (£75,000) (£154,000)
Interest on borrowings (£1,100)
Gross profit £78,000
Profit for the year £25,500

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 Example of Income Statement

Smart Plc Income statement 2021

  £  
Turnover 8,030  
Cost of sales 4,818  
Gross profit 3,212  
Distribution costs 1,606  
Admin expenses 600  
Operating profit 1,006  
Interest 200  
Profit before tax 806  
Tax 286  
Profit attributable to shareholders/Net Profit 520  
Dividend 320  
Retained profit 200  

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 Cash Flow Statement

Cash flows from operating activities

plus or minus

Cash flows from investing activities

plus or minus

Cash flows from financing activities

equals

Net increase (or decrease) in cash and cash equivalents over

the period

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 Cash Flow Statement: Example of Tesco Plc Year
end 2017

£m

Cash generated from operations 2,558

Interest paid (522)

Corporation tax paid (47)

Net cash generated from operating activities 1,989

Net cash generated from investing activities 279

Net cash used in financing activities (1,387)

Net increase in cash and cash equivalents 881

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 The finance function
Financial management is concerned with the acquisition, financing, and management of assets with
some overall goal in mind.
Finance develops plans and executes operations to decide how much money should be raised, from
which sources, where and how that money should be invested to maximize the project’s return or profit.

The top 4 functions of finance are as follows

i) Collection of Funds

ii) Capital Budgeting Decisions

iii) Short-term asset management

iv) Distribution of fund

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 Goals of Finance Manager
 The goal of a financial manager is to keep the
company solvent and successful.
 The elements to this goal are:

 Maximise current value

 Maintain growth

 Maximise profit

 Minimise cost

 Avoid bankruptcy
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 Finance Manager Duties
Tracking money

Managing documents

Establishing compliance

Creating strategies

Maintaining relationships

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 Budget and Budgeting
1. Budgeting is an operational plan, for a definite period usually a year. Expressed in financial terms and
based on the expected income and expenditure.  
• Budgeting is a process of expressing quantified resource requirements (amount of capital, amount of
material, number of people) into time-phased goals and milestones.

• Importance of Budgeting:

• To control resources

• To communicate plans to various department managers.

• To motivate managers to strive to achieve budget goals.

• To evaluate the performance of managers

• To provide visibility into the company's performance

• For accountability

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 Types of Budget

• Sales budget – an estimate of future sales, often broken down into both units and currency. It is
used to create company sales goals.

• Production budget - an estimate of the number of units that must be manufactured to meet the
sales goals.

• Project budget – a prediction of the costs associated with a particular company project. These
costs include labour, materials, and other related expenses.

• Master Budget - A master budget is a comprehensive financial planning document that

includes all of the lower-level budgets, cash flow forecasts, budgeted financial statements,
and financial plans of an organization.
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 Steps in Budgeting

1 2 3 4 5

Set financial Estimate your Record what Budget for Review and
goals income you spend actual and evaluate
unexpected monthly
expenses

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 PROJECT BUDGET

• £
• Staffing/Project Oversight
• Staffing (30 hours x £120) 3,600
• Direct Expenses
• Material 6,500
• Other Expenses 1,500
• EXPENSES TOTAL 11,600

• INCOME
• Money Raised for the project (Sources) 20,000

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 EVENT BUDGET

• Budgeted Revenue For the Event

• REVENUE: £

• Ticket Sales (£200 per person) X 500 people 100,000

• Sponsorships 20,000

• Total Revenue 120,000

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 Budgeted Fixed Expenses For the Event

• Fixed Expenses :

• Event Registration/Ticketing Website 2,000

• Event Marketing 2,500

• Venue Rental 5,000

• Venue Design 1,000

• Speakers Fees (£1000 per Speaker) 2 speakers 2,000

12,500

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 Budgeted Variable Expenses and Total Expenses
for the Event
• Variable Expenses:

• Tablecloths - £10 per person (500 X £10 ) 5,000

• Tables and chairs - £30 per person (500 X £30) 15,000

• Meals - £100 per person (500 X £100) 50,000

70,000

• Total Expenses (£12,500 + £70,000) 82,500

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 Budgeted Profit and Loss for the Event

• Budgeted Profit or Loss:

• Total Revenue 120,000

• Less: Expenses 82,500

• PROFIT 37,500

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 Significance of Cash

Cash is the lifeblood of a business, and a business needs to generate enough cash from its activities 
so that it can meet its expenses and have enough left over to repay investors and grow the
business. While a company can fudge its earnings, its cash flow provides an idea about its real health.

Importance of Cash
• needs cash to pay its suppliers
• needs to pay essential debts immediately
• Needs to maintain a good reputation with suppliers
• Needs to reduce finance costs by avoiding overdrafts/loans
• Needs to plan ahead for the future

Questions: Is cash the same as Profit? Cash and Profit which is more Important?

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 Critical Differences Between Profit and Cash Flow

• Profit and cash flow are both important elements of a healthy, growing business, but they are not the same thing.

• Profit indicates the amount of money left over after all expenses have been paid, cash flow indicates the net flow of cash
into and out of a business.

• Profit is a major indicator of overall business success, whereas cash is needed to keep and operate the business on a daily
basis successfully. 

• lack of profit exerts a negative impact on the cash flow of the company.

• After all, we can conclude that cash is not profit and profit is not cash.

• A company can be profitable but lack adequate cash flow.

• To succeed in business, one needs both profits and cash flow.

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 Key Points To note on Cash and Profit

 Cash flow is the actual money going in and out of your business.

 Profit is your net income after expenses are subtracted from sales.

 A business can be profitable and still not have adequate cash flow.

 A business can have good cash flow and still not make a profit.

 In the short term, many businesses struggle with either cash flow or profit.

 Rapid or unexpected growth can cause a crisis of cash flow and/or profit.

 Both cash flow and profit are necessary to stay in business over the long term.

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 www.cranfield.ac.uk/MKU

T: +44 (0)1234 750111

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