Bringing information to life Interaction arising from accounting practice ( chapters 2,3,5,7,8 and 9)

Accounting for information Accounting is sometimes misinterpreted for being backward looking, probably because many people associate accounting with reporting and analysis and the audit of the external reports, which are published after a financial period has ended. As far as accounts are concerned time is usually divided up into discrete financial periods say years.

First, the current years, and transaction and events affecting the financial performance for the year compared to the budget for the year. Second, next year and forecasts of transactions and events to incorporate into the financial plans or budget for the year to come. Third, last year and issuing reports and explanations to interested parties, usually external to the organization, about what happened compared with what was supposed to happen measured in financial terms.

Accounting information, written or verbal, is part of many forms of human interactions: for example, Formal settings Informal settings within organizations Between people from different organizations Between people and organizations.

Budgeting Budget is a quantitative statement, for a defined period of time, which may include planned revenues, expenses, assets, liabilities and cash flows. The main documentary and information outcomes of the processes of budget planning and budget control are budgets and budget control reports. Theses are important for organization, departments and managers.

Budgets reflect plans for the future and expectations for the present Budget control reports comprise budget information about expected events compared with information reflecting actual events. Budgeting helps organizations to plan ahead in order to identify and reach objectives and targets, specified in financial and similar terms. Now read chapter 9 of accounting book.

Budgets, long term plans and corporate objectives Identify business objectives Consider options Prepare a long term plan based on the most appropriate option Prepare budget ( short tem plan)

Budgets and forecasts are distinctly different Budget is a plan not a forecast. To talk of a plan suggest an intention or determination to achieve the planned targets. Forecasts tend to be predictions of the future state of the environment. Forecasts are helpful for the planners. If a reputable forecaster has forecast the particular number of new cars to be purchased in the United kingdom during next year, it will be valuable for a manager in a car manufacturing business to obtain this forecast figure when settings sales budgets.

Advantages of budgeting include 1.Budgeting system provide a planning framework within departments, across organizations interrelated departments and hierarchically up the chain of accountability. 2.A planning framework encourages managers to think ahead, identify targets and establish the levels and types of activities and resources needed to achieve those targets. 3.Budgeting systems enable a financial framework to be established: drawing up projections or forecasts of cash in flow, cash out flow and cash shortfalls and surpluses.

4. Since planning involves setting targets and establishing the level and types of required inputs, a budget can provide a yardstick for measuring performance once operations are in progress. 5. The performance measurement dimension also helps to monitor progress towards realistic targets on a time basis. 6. Budgets can encourage managers to take responsibility for their own performance. 7. A well organized budget process can encourage teamwork geared towards accomplishing objectives of the organization. Ac 4.4

Familiar forms of summarized financial information There are two forms of statements: 1.Statements that inform about financial performance 2.Statement that inform about financial position Three major financial statements are Cash flow statement Profit and loss account Balance sheet

Financial performance statements It is to express what is happening in the macro and micro operations areas in an economic way: that is, by putting values on the inputs and on the outputs. Performance of the organization as a whole, or of its particular parts, can be measured by the differences between the value of the outputs and the value of the inputs. For a business it is better to evaluate present and past performance, not only for profit purposes, but for comparing how much it could or should be making.

Financial position statement It is also called balance sheet Financial position statement is an economic picture of the transformation process, a still rather than a movie. On a balance sheet you will expect to find a summary listing of items owned or controlled by the organization, amounts owed by the organization and the difference between the two.

Items owned, usually called assets, might include land and manufacturing, distribution and administrative premises, machinery, equipment, vehicles and furnishings; stocks of inputs that haven’t yet been transformed, of items that are part way through transformation and of outputs that have not yet been distributed or sold; a list of people who owe money to the organization (theses are called accounts receivable or debtors); and cash and bank balances.

Amounts owed, usually called liabilities, might include a list of people who are owed money by the organization for goods and services bough on credit ( these are called accounts payable or creditors); and overdrawn bank balances and other short and long term loans. The difference between the two is usually referred to in a business as net worth or capital or more precisely as owners or shareholders capital/ shareholders equity. Read chapter 2 and 3 for further clarification of accounts

Cash budget pg.237 The budget period would be broken down into sub- periods, typically months. The budget would be in columnar form, with a column for each month. Receipts of cash would be identified under various headings and total for each months receipts shown. Payments of cash would be identified under various headings and a total for each months payment shown. The surplus of total cash receipts over payments or of payments over receipts for each month would be identified. The running cash balance, which would be obtained by taking the balance at the end of the previous month and adjusting it for surplus or deficit of receipt over payments for the current month, would be identified.

The flow of cash around organizations Figure 4.3 cash flow is modeled for an organization whose finances depend on selling its outputs. Figure 4.4 shows the flow of cash for an organization whose principle revenue is taxes and grants.

Cash flow statements Information about the inputs, outputs, revenues and expenses, assets, liabilities and capital that arise in both self sustaining and budget financed organizations can be captured, processed and summarized. It is useful to present information specifically about cash flows, past, present and future. Cash flows forecasts on a day to day week to week or month by month basis are essential to many household and all organizations, more than financial performance and financial position statement. Cash flow are also useful for evaluation of an organizations financial performance and financial position. Read ch.5 of accounts important.

Cost based tactical information Use of information and application of economic ideas in analyzing decisions, setting prices, and similar matters in which present and future cost information is useful. Costs and revenues are analyzed for a variety of purposes, including: to make long and short term pricing and production decisions; to calculate profits, contributions, savings and so on and to choose between alternative courses of action.

There is a principal of different costs for different purposes. Lets examine differential costing or costs and revenues for operational tactical decisions. The simple notion of this is break even analysis. Do activity 4.8 Read chapter 7 and 8 of accounting to understand the cost.

costs Costs represents the resources that have been sacrificed to achieve a business objective. Costs are classified as fixed costs and variable costs. Break even point is where Total revenues=Total costs