IAF.

Lesson 2:

Accounting information:

information identification,
information recording,
information analysis,
information reporting
1. Output and users of accounting information
Output:
The Balance Sheet
The Profit and Loss Statement and Cash Flow Statement
Financial Statement Analysis
Users:
Customers - to assess the ability of the firm to remain in business and meet the needs of
customers
Competitors - to assess the threat posed by the firm to their market share and
profitability. To provide a benchmark by which to measure efficiency and performance.
Employees and unions - to assess the ability of the business to continue to provide
employment and to compensate employees for their labour
Government - to assess how much tax the firm should pay, whether it complies with the
law, whether it needs financial assistance, and so on
Community representatives - to assess the ability of the business to continue to provide
employment for the community, to assess how it uses community resources and to
measure its environmental and social impact on the community
Investment analysts - to assess the likely risks and returns associated with the firm in
order to determine its investment potential, and to advise clients accordingly
Suppliers - to assess the ability of the firm to pay for goods and services supplied
Lenders - to assess the ability of the firm to meet its obligations and to pay interest and
repay the principal that has been borrowed
Owners - to assess how effectively managers are running the firm, and to make
judgements about likely future levels of risk and return from investing in the firm
Managers - To help them to make decisions and plans for the firm, and to help them to
exercise control to ensure that the objectives of the firm are met
2. Differences between financial accounting vs management accounting
financial accounting management accounting

Infor. for external users For internal users (management team to

make decision)
Follow Gov. standard (how financial Non-standard and non-format
statements are prepared)
Consists primarily of financial Inclu. Non-finacial infor.
information
For external transaction & event Include external and internal
Historic infor. (in the past) Historic & future infor.
Infor. highly aggregated Infor. for various levels of detail depend
one management requirement

3. E.g. of financial decision-making: Finance means using acc infor. to make financial
decision
Kind of questions:
What investment to make
What project to undertake
What product/ser to manufacture or provide
How to allocate scarce source in order to meet companys objectives
Whether to buy or start up a business
How much to pay for a business
How to raise capital to start up a business
4. Objective of financial decision-making
Financial manager makes decision on behalf of firms ower
Maximize the wealth of owner
 Maximize value of company
Maximize share price for shareholders wealthy and companys value
5. The importance of the critical factors in accounting

Relevant - if information is not relevant to a decision, it is not useful and there is no point
producing it.
Reliable - which means free from material error or bias. Information must be capable of
being relied on by users to be accurate.
Comparable - Items that are basically the same should be treated in the same manner for
measurement and reporting purposes.
Understandable - Information and reports must be expressed as clearly as possible and
capable of being understood by those at whom the information is aimed.
Timely - which means available in time for it to be useful for decision-making.
Cost effective - the benefit of the information must outweigh the cost of providing it

6. The importance of the critical factors in finance

Cash is important because it is the ultimate driver of value. Only cash can be used to buy
things, to pay suppliers, to pay dividends and to increase the wealth of
shareholders. Accounting profit is a measure of the effectiveness of the firm over a specified
period of time, but profit itself cannot be used for investment or consumption. That's why
decisions should ultimately be based on cash as the determinant and driver of value.

Time is important because of something we call the time value of money. Money has
time value because the value to us of a given sum of money differs depending on when the
money is received. A dollar today is worth more than a dollar tomorrow - because today's
dollar can be invested and will be worth more than a dollar tomorrow. Therefore you would
rather receive money earlier than later, and a dollar received in the future is worth less than a
dollar received today. In a later module we will look at the mathematics required to make
adjustments for the time value of money.

Risk is important because the future is uncertain. Very rarely can we say that a future
anticipated event will happen with certainty, and we have to take that into account when
making decisions about future events. The more uncertain a future anticipated cash flow, the
less valuable it is to us today when making decisions about that future cash flow - for
example, how much we would spend in order to bring about that future anticipated cash
flow?
 7. Explain the advantages and disadvantages of the different types of firms
Start a business -> a firm

Sole traders Partnership Corporation (company)

Run by one person >1 person

advantages Easy and inexpensive to set up - Reputation of owners - Separation of owner and
control by allowing outside
- Share skills and
part-owners without asking
knowledge
management
- Owners have limited
liability. The most they can
lose is only their investment
in a firms shares (not their
personal house and
properties)
- Ownership can be transferred
easily

Disadvantages - Owner must be solely - Unlimited liability. But a More costly and complex to set
responsible for the firm lender can ask any partners up
to repay the debts.
- Prevent outside investor who
wanna be ownership but dont - Difficult to transfer. If one
wanna be in management of partners are death,
partnership is end
- Owner has unlimited liability
for firms debt. Owner loses
everything including personal
property for the debt
- Difficult to transfer ownership

8. Explain the differences between the different types of companies

Corporation = company

Private company Public company Listed public company

(Pty Ltd) (Ltd)

- Maximum of 50 non-employee - Unlimited shareholders Same to public company

shareholders but it is listed on a stock
exchange.
- Not require to appoint an auditor - Required an auditor to
submit regular financial The public can buy shares
statement in listed p.com