UNIVERSITY EXTENDED LEARNING

1. UNIVERSITY EXTENDED LEARNING Financial Accounting and Financial Management 2016

2. The Role of Accounting in Business • ‘By inspection of a merchant’s books, by a man that hath skill, one may soon find out his wisdom and success, as well as his real worth.’ (North, 1714)

3. Decision making and information Accounting is concerned with the preparation and presentation of : FINANCIAL INFORMATION Needed to make ECONOMIC DECISIONS

4. DECISIONS!!!

5. A CHOICE BETWEEN TWO OR MORE ALTERNATIVES • Can be RATIONAL only when sufficient information is available • Every individual or group in society makes decisions about the future

6. MANAGEMENT • DECIDES HOW TO FINANCE OPERATIONS OF AN ENTERPRISE • To borrow funds from a lender? • Obtain funds from the owners, investors, shareholders?

7. CASH FLOWS!!!!!!! • A BUSINESS ENTERPRISE WITH CASH AVAILABLE WILL DECIDE ON THE TYPE OF INVESTMENT THEY WISH TO MAKE!!!

8. FINANCIAL ACCOUNTING • CONTRIBUTES TO THESE DECISIONS BY IDENTIFYING: • What information will assist the various decision-makers; • How it should be measured; and • How it should be communicated to them

9. Users of Financial Information • Accounting provides information about various types of entities to a wide range of users, for the purpose of decision-making • It is often described as the language of business • Users of financial information maybe broadly categorised as primary and as other users

10. PRIMARY and Other Users • Are users who lack the ability to prescribe all the financial information they need from an entity • They therefore rely on the information provided in financial reports • Interested in assessing the entity’s ability to generate cash inflows, and • Managements ability to protect and enhance their investments

11. Accounting thought and practice • Can be classified according to the user group to whom it is directed!!!

12. DIFFERENCE • Financial Accounting is concerned with providing useful information about the business entity to the primary and other users (management) Management Accounting is concerned with providing useful information related to the deployment of resources and exploitation of opportunities for management

13. The Accounting Information System • Selects data, processes that data, and produces information about an economic entity • The data that is selected has an economic impact upon the reporting entity • The input, processing and output of the system is governed by accounting principles, theory and concepts

14. Objective of financial statements • Provide information about the : • Financial position • Financial performance, and • Changes in the financial position of an entity that is useful to a wide range of users in making economic decisions

15. ECONOMIC DECISIONS • Require an evaluation of the: • ABILITY of an entity to generate a cash flow • TIMING of that cash flow • CERTAINTY of that cash flow

16. USERS and their information needs • Capital providers • Equity investors • Lenders • Other creditors • Suppliers • Customers • Employees • Government and their agencies • Members of the public (stakeholders) Primary Users Other Users

17. Qualitative Characteristics of financial statements • Are attributes that make the information provided in financial statements useful • CONSIDER: • Threshold quality of materiality • The constraints of timeliness and cost/benefit

18. Qualitative characteristics Fundamental characteristics Relevance Faithful representation (complete, neutral, free from error) Verifiability Timeliness Understand-ability Comparability Enhancing characteristics

19. Qualitative characteristics of useful financial information Capable of making a difference in decisions made Relevance Materiality: Omitting influence decisions Entity specific Nature/magnitude Predictive /confirmatory value

20. Qualitative characteristics of useful financial information Compare with other entities/ trends Comparability Identify similarities and differences

21. Qualitative characteristics of useful financial information Knowledgeable/ independent observers reach consensus Verifiability Direct or indirect verification

22. Qualitative characteristics of useful financial information Having information in time to influence decisions Timeliness

23. Qualitative characteristics of useful financial information Classifying, characterising and presenting information clearly Understand-ability Users have reasonable knowledge Cannot leave out complex material information

24. GAAP • What is GAAP? • - Generally Accepted Accounting Practice • - set of principles • - IAS and IFRS statements • Helps all financial statements to be drawn in a similar manner • Includes a “Conceptual Framework”

25. CONCEPTUAL FRAMEWORK • General explanation of financial statement preparation • Basis from which all statements / standards are prepared

26. OBJECTIVES of financial reporting • To assess future net cash inflows • - Resources of the entity • - Claims against the entity • - How efficiently resources are used • Decisions depend on returns • - Equity (dividend and market price) • - Debt (interest, principal repayment)

27. Underlying AssumptionGOING CONCERN • Financial statements are prepared under assumption that the entity is a going concern • Will continue to operate in forseeable future • No intention/need to liquidate • Why would they not be able to continue? • What other assumptions/basis can be used when preparing financial statements • How does this differ from Going concern assumption??

28. ACCRUAL BASIS • When are effect of events recognised by the business? • - in the period in which an event occurs • - Income is recognised when it is EARNED • - Expenses are recognised when they are • INCURRED • Has NO link to when cash is received or paid • All financial statements are prepared on the accrual basis except for the cash flow statement

29. Internal Control • Ensures that a business organisation is effectively and efficiently run; • That the assets are safeguarded; and • That the financial statements faithfully present the information which they purport to present

30. A system of Internal Control ensures that: • The information that directors need to make decisions is available • The delegated authorities are properly exercised • The data needed for the control of costs is accurate and complete • The data needed for the preparation of financial statements is accurate and complete

31. Forecasting cash flows • External users need to predict the entity’s future performance and more specifically future cash flows • If a business does not generate enough cash, it may be unable to distribute cash to its owners, pay interest on borrowings, pay suppliers, repay loans • Cash flow is paramount in valuing a business

32. Cash Basis of Accounting • Measures performance by subtracting cash inflows from cash outflows to arrive at a net cash flow for the period • Operating activities • Investing activities Cash Flow Statement • Financing activities

33. The Entity Concept • Entails identification of the business enterprise • Separation of the recording of transactions relating to : • - the business entity as an accounting entity • - the owners as the proprietor of the entity

34. Elements • Assets - Resources • Liabilities - Outside claim • Equity - Owners claim • Income • Expenses Performance

35. Elements • Elements directly related to measurement of financial position • Assets, Liabilities, Equity • Elements directly related to measurement of performance • Income, expenses

36. Timeline of elements Element Definition Initial recognition Recognition Criteria Initial measurement Subsequent measurement De-recognition

37. Assets: Definition • Resource • Owned/controlled by the business • Due to a past event • From with future economic benefits are expected

38. Assets: Recognition criteria • The inflow of benefits must be PROBABLE • The cost of the asset must be reliably measurable

39. Liabilities: Definition • Present obligation • Created as a result of a past event • From which future outflow of economic benefits is expected

40. Liabilities: Recognition criteria • The outflow of benefits must be PROBABLE • The amount of the liability must be reliably measurable

41. Equity • Equity is the difference between assets and liabilities • Residual claim Equity = Assets – Liabilities

42. Equity • Equity is also known as Net Asset Value (NAV) • This is what owners will be entitled to if the business closes (all liabilities will have been paid) – owners’ worth • How is equity (NAV, owners’ worth) affected by: • Income? • Expenses?

43. Cost • Fair value of consideration or payment given for the asset • Cash: • Paid on purchase date – cash given • Paid after purchase date? Is R1.00 received today worth the same as R1.00 received in one year’s time?

44. Time value of money • Assume an interest rate of 10% per annum • Over a year, you will earn interest PV + interest 100 x 110/100 PV FV R110 R100 One year FV - interest 110 x 100/110

45. Cost • So.... • The fair value of consideration or payment given for the asset when you pay cash after the purchase date is... • The Present Value of the amount paid in the future

46. Other measurement bases • Fair Value • The amount for which the asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction. • Present Value • Discount future cash payments for asset to today using applicable interest rate • Net Realisable value • What amount would we receive if we sold asset today less associated selling costs? • Current cost • What would the asset cost if we purchased it today?

47. Financing decision • Where have the funds come from DEBT EQUITY • Funding from third parties: • Banks • Other lenders Owner contributes funding to the business - Capital Business now has funding in the form of CASH or other ASSETS

48. Investing decision Funding in the form of cash SWAP Assets purchased

49. Operating decision ASSETS PROFIT/LOSS USE Business uses assets to make profit (or loss)

50. Distribution decision PROFIT What the owner chooses to do with profit Take profit out of business Leave profit in the business Retained profit Dividend/drawings