1. 14.0 FINANCE AND ACCOUNTING
The interaction of key elements
Financial accounting
Management accounting
Financial reporting
Ratio analysis
The balanced scorecard
Environmental issues
Organizational issues
Strategic issues

2. 14.1 ACTIVITIES OF FINANCE AND ACCOUNTING

3. 14.2 FINANCIAL MANAGEMENT – SOURCES OF FUNDS
Share capital
Preference shares
Ordinary shares
Golden shares
Loan capital
Debentures
Bank borrowing
Overdrafts
Leasing
Factoring
Trade credit
Internal funding
State funding

4. 14.3 MANAGEMENT ACCOUNTING
Budgeting and budgetary control
Cost accounting
Fixed costs (usually indirect)
Variable costs (usually direct)
Absorption costing
Activity-based costing
Investment appraisal
Managing cash flows
The above assists management decision-making

5. 14.4 FINANCIAL REPORTING Profit and loss account Balance sheet
Cash-flow statement
Form and content of statements governed by law and accounting professions
Rules governing reporting known as generally accepted accounting practice (GAAP)

6. 14.5 THE BALANCE SHEET

7. 14.6 THE PROFIT AND LOSS ACCOUNT

8. 14.7 RATIO ANALYSIS I Profitability ratios Gross margin Net profit
Return on capital employed
Activity ratios
Inventory turnover
Debtors collection period
Sales to capital employed

9. 14.8 RATIO ANALYSIS II Liquidity ratios Gearing ratios Debt to equity
Market ratios
Dividend yield
Earnings by share

10. 14.9 BALANCED SCORECARD
After Kaplan and Norton (1992). Considers not just financial measures. Includes:
Traditional financial reports and ratio analyses
Customers’ perceptions of quality and satisfaction
Costs, productivity and relations with suppliers
Innovation and learning

11. 14.10 USERS OF FINANCIAL REPORTS
Managers
The state
Investors
Employees
Creditors
Competitors
Customers
Key issue - extent of disclosure

12. 14.11 WHAT IS CORPORATE GOVERNANCE?
“The system of checks and balances, both internal and external to companies, which ensure that companies discharge their accountability to all stakeholders and act in a socially responsible way.” (Solomon 2007)
This means that corporate governance is:
- more than management and control
- concerns the overall direction in a socially responsible way
- ensures decisions are accountable
- ensures decisions are acceptable to stakeholders.

13. 14.12 ACCOUNTING AND CORPORATE GOVERNANCE?
Provision of accurate and detailed financial reporting is an essential contribution to checks and balances.
In many countries it is a requirement that published accounts are independently audited.
Accounts are accessible to all stakeholders.

14. 14.13 INTEREST IN GOVERNANCE I
Positive reasons
Assumption that governance contributes to economic efficiency and growth, wealth and jobs.
Enhances confidence among investors and other stakeholders. Important factor in investment decisions, employer branding and employee commitment.

15. 14.14 INTEREST IN GOVERNANCE II
Negative reasons
Failure of the market to regulate business and those who make key decisions – financial crisis created international concern.
Many transactions and decisions are internal and ‘hidden’ and are difficult to control.
Many activities are complex and difficult to control.
Problems of controlling managers – e.g. over executive pay.
Problems of controlling institutional investors.
Problems with the auditing process.
Approach has widened from agency theory to stakeholder theory.

16. 14.15 MECHANISMS OF GOVERNANCE
Focus on financial reporting, auditing and the role of directors.
UK Financial Reporting Council (FRC) combined code stresses.
Leadership at board level.
Effectiveness – board should possess appropriate skills, have transparent procedures and be subject to regular elections.
Accountability – clear and understandable reports; clear relationship with auditors; sound risk management and internal controls.
Director’s pay – ‘levels of remunerations should be sufficient to attract, retain and motivate....but should avoid paying more than is necessary.’
Shareholders – satisfactory dialogue and effective AGM.

17. 14.16 ENVIRONMENTAL ASPECTS OF FINANCE AND ACCOUNTING
Sophistication of accounting practices depends upon complexity of the economy
Accounting practices affected by changes in inflation and exchange rates
Leads to differences in ownership and financing
Financial systems and financial reporting vary around the world
Particular differences in the nature and volatility of share markets
Globalization and the pressure for standardization

18. 14.17 ORGANIZATIONAL ASPECTS OF FINANCE AND ACCOUNTING
Finance and accounting in large versus small firms
Internal accounting procedures tend to follow organizational structure
Cost allocation
Transfer pricing
Transfer pricing and the global firm
Tax issues
Competition issues
Protection issues

19. 14.18 LIMITATIONS TO THE STRATEGIC USE OF ACCOUNTING INFORMATION
Accounting information is essential to strategic decision-making but there are limitations due to:
Subjectivity and problems of measurement
Information is a selective summary
Accounting information may be political
Short-termism versus the longer view