Chapter 19 Accounting and Finance Functions

Chapter 19 Accounting and Finance Functions

Part 1 The Formulation, Implementation and Control of Policy and Performance

The accounting function has an important role to play in helping management to:

-Formulate policy

-Implement policy

-Control performance

Planning is the establishment of objectives, and the formulation, evaluation and selection of the policies,

strategies, tactics and action required to achieve them.

A Budget is a plan expressed in quantitative (normally financial) terms for either the whole of a business or

for the various parts of a business for a specified period of time in the future.

Budgetary Control is the establishment of budgets relating the responsibilities of managers to the requirements of a policy, and the continuous comparison of actual with budgeted results.

Part 2 The accounting and reporting functions in business

The sequence of steps taken :
Transaction--->Day Books--->Ledger accounts--->Financial statements

main books of prime entry:
-Purchases Day Book
-Sales Day Book
-Cash Book
-Petty cash book
-Journal

The main financial statements produced each year are:
-Balance sheet : Showing assets owned and liabilities owed and how net seetes are financed
-Income statement : Showing revenues earned and costs incurred,leading to the net profit or loss for the year
-Cash flow statement : Summarising the cash receipts for the year and cash payments paid out to help readers of the accounts to understand the liquidity of the business

Part 3 The Management Accounting and Performance Management Functions

Management Accounting
- for internal use
- to aid planning, comtrolling and decision making
- no legal requirements
- management decide on the information that they require and the most useful way of presenting it
- financial and non-financial information
- time period is historical and forward-looking

Financial Accounting
- for external use
- to record the financial performance in a period and the financial position at the end of the period
- limited companies must produce financial accounts
- format and content of financial accounts must follow accounting standards and company law
- mostly financial information
- mainly a historical record

Examples of decision making that management accountants can help management with are:
- breakeven analysis
- key factor analysis
- pricing decisions
- investment appraisal

Budgetary control involves two elements:
~ Planning - setting of various budgets for the appropriate future period
~ Conrol - comparison of the plan in the form of the budget with the actual results achieved for the budget period

Part 6 Investment appraisal and financing viable investments

Investment appraisal : long-term investment decisions

Advantages of issuing new ordinary shares:

• dividens can be suspended if profits are low, whereas interest payments have to be paid each year.
• bank will typically require security on the company's assets before it will advance a loan

Advantages of raising loan finance:

• Interest payments are allowable against tax, whereas dividend payment are not an allowable deduction against tax.
• No charge is required in the ownership of the company, which is governed by who owns the shares of the company.

Part 7 Management of working capital

Company must also decide on the appropriate level of investment in short term net assests, i.e.

Inventory

• advantage of large balance - customers are happy since they can be immediately provided with good
• advantage of small balance - low holding costs. Less risk of obsolescence costs

Trade receivables

• advantage of large balance - customers are happy since they like credit.
• advantage of small balance - less risk of bad debts. good for cash flow.

Cash

• advantage of large balance - creditors are happy since bills can be paid promptly.
• advantage of small balance - more can be invested elsewhere to earn profits.

Trade payables

• advantage of large balance - perserves your own cash
• advantage of small balance - suppliers are happy and may offer discounts