Chapter 7

The role of accounting

1 Definition
 1 What is accounting
Accounting is a systematic process of recording, analysing and summarising transactions of a business.

The person in charge of accounting is called accountant, and this individual is typically required to follow a
set of rules and regulations.
2 Users of accounting information
2 The users of accounting information
 WHO (stakeholder) WHAT info WHY

Effective control & planning

Managers All information
decision
Employees Financial situation Careers / pay
Management's performance
Shareholders Profitability
withdraw profit
Trade contacts:
supplier/customers
The creditors
空白演示
Creditability /supply
Creditability /liquidity
Risk
Risk
Tax authority Profit Tax assessment
Financial analysts and advisors Info (depend on their clients) For client
Resource allocation
Government Financial situation
national statistics
Local economy
The public Relevant info Employment &
environment(pollution)
3 Nature, principles and scope of accounting
 3.1 The structure of accounting function
In many larger companies the finance director has one or more deputies below him/her.
 3.1 The structure of accounting function
3.1.1 Financial accountant
• Routine accounting, for example, recording of daily transactions.
• Providing accounting reports about historical performance.

3.1.2 Management accounting

• Cost analysis.
• Budgets and control.
 3.1 The structure of accounting function
3.1.3 Treasurer 融资 /投资/利益分配
Treasury management is the acquisition and deployment of financial resources, mainly
focusing on investment and financing decisions.
a) Raising funds by borrowing.
b) Investing surplus funds.
c) Cash management (preparation of cash budgets and arrangement of overdraft).
d) Working capital management (Working capital represents the net current assets
available for day-to-day operating activities. It is calculated as current assets minus
current liabilities. The components are usually inventory, trade receivables, trade
payables and cash).
e) Foreign currency risk management.
f) Tax management (such as tax mitigation, not tax evasion).
Example question 1
With which TWO of the following is cash and working capital management concerned?

A. Controlling the level of receivables

B. Monitoring the level of long-term liabilities

C. Verifying the existence and condition of non-current assets

D. Managing quantities of inventories and work-in-progress

3.2 Financial accounting and management accounting
A. Financial accounting
It is mainly focused on recording, processing financial
information and preparing financial statements mainly to the
external users.

B. Management accounting
It is mainly focused on analysing data to provide information as
a basis for managerial action to act as assistance for managers
to plan, direct and control organisation’s operations.
 3.2 Financial accounting and management accounting

Types Intended users Forms Types of data Apply or not

Financial Shareholders and Financial Mainly financial Yes

accounting other stakeholders statements focus

Management Management Budgets and Both financial No

accounting internal report and non-financial
 3.2.1 External reports ★
The statement of profit or loss (SOPL)
The statement of profit or loss, also called income statement, reports a company’s profitability
during a specified period of time.
The income statement is a company's financial statement that indicates how the revenue
is transformed into profits by deducting expenditures. The purpose of the income
statement is to show managers and investors whether the company made profit or loss
during the period being reported.
Summary- Income statement-for/over the period

Revenue /Turnover /Sales

(Cost of sales)
(Expense )-including depreciation expense/interest
Profit before tax
(Tax)
Profit for the year
The statement of financial position (SOFP) 资产负债表
The statement of financial position, also known as a balance sheet, is a financial document which
provides a financial overview by listing all the assets owned, all the liabilities owed and the residual
equity of a business at a particular date.

The statement of financial position is demonstrated according to the accounting equation:

Assets = Liabilities + Equity
The statement of financial position (SOFP)
• Asset is any resource controlled by an entity and from which future
economic benefits are expected to flow into the entity. Assets listed in
a balance sheet can be divided into current assets (e.g. cash, inventory,
receivables) and non-current assets (e.g. property, plant, equipment).
• Liability represents a present obligation an entity owes to other
entities and the settlement of which would result in future economic
benefits to flow out of the entity. Liabilities listed in a balance sheet
can also be divided into current liabilities (e.g. trade payables) and non-
current liabilities (e.g. loan note).
• Equity refers to the owners’ interests in the business, which is the
residual claim of all assets after deducting all liabilities. The most
common components of equity are retained earnings and share capital.
Summary- Statement of financial position – at certain date
Asset
Non-current asset
Property plant and equipment

Current asset
Inventory
Trade receivable
Cash
ASSET=LIABILITY +EQUITY
Equity
Retained earnings

Liability
Non-current liability
Loan note

Current liability
Trade payable
The statement of cash flows 现金流量表
Most companies prepare their financial statements based on accrual basis 权责发生制,
rather than cash basis现金收付制, which means profit or loss is merely a reflection of
financial position in accounting. Thus, a cash flow statement could help the company to
understand the real cash movements of it.
The cash flow statement shows the cash receipts and payments in operating, financing and
investing activities during the past accounting period. It could assist analysing and
identifying problems such as whether the company is solvent or has liquidity trouble
(liquidity reflects the ability to pay short term liabilities).
Summary- Statement of cash flows
Cash flow from operating activities

Cash flow from financing activities

Cash flow from investing activities

Net cash flow for the period

Cash flow at the beginning
Cash flow at the end
 Example question 2
Jack is carrying out an analysis of Thor Co., and has obtained its published statement of financial position and
statement of profit and loss.
In which financial statement will Jack find the following information?
A B
Statement of Statement of
financial position profit or loss
Non-current assets
Turnover
Gross profit
Shareholders’ funds
Firm’s liquidity
Intrinsic value of a business at a point in time
Example question 3
Which TWO of the following activities could not affect a company’s cash flow?
A. Repayment of bonds B. Accrual
C. Interest expense paid D. Depreciation of non-current assets

Extension
Prepayment - Asset - 预付账款
Accrual - Liability - 产生但还未支付的费用
Example question 4
Anna is carrying out an analysis of Avengers Co and has obtained its published statement of financial
position and statement of profit and loss.

Which TWO information can be found in statement of financial position?

A. Non-current assets

B. Gross profit

C. Shareholders’ funds

D. Turnover
 3.2.2 Internal reports
(a) Cost schedule
• Wages
• Selling expenses
• Departmental costs

• Administration costs • Cost of sales etc.

Cost schedule enables managers to keep a check on what the business is spending.
3.2.2 Internal reports
(b) Budgets

Budgets are prepared to show projected sales, costs, overheads and profits. Budgets enable managers to
identify potential cash shortage and arrange overdraft facilities with the bank in advance. At the same
time, budget could also help managers identify potential cash surplus and search for investment
opportunities.
 3.2.2 Internal reports
(c) Variance reports
The variance reports detail the differences between the actual performance and budgets and explain
the reasons behind any material variances. Variance reports could assist the management in controlling
the procedures and performance of the business.
 3.2.2 Internal reports
(d) Exception reports
Exception reporting is one special form of variance reports which focuses attention on those items
where performance differs significantly from standard or budget.
Extension - Integrated reporting (IR)

Integrated report combines the financial and any other relevant information into one single document
about value creation over time.

The core content elements of IR are as follows:

• Organisational overview
• Governance
• Opportunities and risks
• Strategy and resource allocation
• Business model
• Performance
• Future outlook
Extension - Integrated reporting (IR)
Categories of capital

Category Characteristics

Financial Funds / obtained through financing or generated through operations

Manufactured Manufactured physical objects used in production or service provision;

including buildings, equipment and infrastructure

Human Skills, experience and motivation to innovate

Intellectual Providing competitive advantage: patents / copyrights / software

Natural Inputs to goods and services and natural environment on which an

organisation’s activities have an impact: water / land / minerals /
forests

Social The institutions and relationships established, including an

organisation’s social license to operate
4 Regulatory system
4.1 Company law
Limited companies are required by law to prepare and publish accounts annually. The form and
content of accounts are regulated and must also comply with accounting standards.

A company can be fined and also face the suspense by the stock exchange if both requirements were
violated:

1) failing to keep proper accounting records

2) failing to file financial statements after the year end

4.2 Generally Accepted Accounting Practice (GAAP)
一般公认会计原则

GAAP is a set of rules governing accounting which may derive from:

Company law, accounting standards, statutory requirements in other countries

( particularly the US ), stock exchange requirements

U.S. GAAP
4.3 IFRS

国际财务报告准则
To harmonise and bring about convergence of accounting standards in different countries, the
International Financial Reporting Standards (IFRS) Foundation has set up an offshoot called
International Accounting Standards Board to develop and approve IFRS.

The Financial Statements are required to show a true and fair view. Company directors (Board
of directors) are responsible for it although the finance director is always delegated to make
preparation for the Financial Statements.
External auditing is required in listed companies each year to reasonably verify the ‘true and fair
view’ of the Financial Statements.
Example question 5
The government of Tayo carries some legal requirements which local companies

must meet. Which of the following requires local companies to keep financial

records and prepare accounts?

A. GAAP

B. IFRS

C. National legislation
Example question 6
Are each of the following statements true or false in relation to the purpose of International
Financial Reporting Standards (IFRS) ?

(1) IFRS are used as national requirements in some countries

(2) IFRS are required for a stock exchange listing in some countries

(3) International reporting standards always intended to override local

accounting regulations
Example question 7
Which of the following is responsible if the financial statement of a company do not show a true and fair
view of the financial performance of a company?

A. The finance director B. The board of directors

C. The external auditor D. The company chairman

Example question 8
5 Manual and computerised accounting system
5.1 Common software applications
Coding and module

Ø Computers require information to be expressed in the forms of codes.

Ø A module is a program which deals with one particular part of a business

accounting system.

A simple accounting package might consist of only one module (stand-alone module)
while more likely to consist of several modules (suite) such as inventory, receivables
ledger, payables ledger etc.
5.2 Integrated software

Integrated software is a software that connects the most commonly used

functions into one application. Each module is internally connected with the
others, so that any data entered in one module will be linked automatically (or by
simple operator request) to any other module where the data is of some
relevance.

Ø lower level of bespoke applications

5.3 Databases
Database aims to pool data, which can support a variety of applications among the whole organisations.

5.3.1 Objectives of database

(a) Sharing data and information between different departments and users;
(b) Preserving integrity of data;
(c) Updating timely to fulfill future requirements
5.3 Databases
5.3.2 Appraisal of database
Advantages Disadvantages
Avoiding duplication Great initial investment

Better security than traditional manual system by Time needed to integrate data
restricting authority of users to update and change data into new system
5.4 Spreadsheets

A spreadsheet is kind of electronic paper, which can be used conveniently for recording,
calculating and generating statements. It is quite useful in accounting.
6 Fintech
6.1 What is Fintech
In its broadest sense, the term “fintech” generally refers to technology-driven innovation
occurring in the financial services industry. For the purposes of this reading, fintech refers to
technological innovation in the design and delivery of financial services and products. Many of
these innovations are challenging the traditional business models of incumbent financial services
providers.
6.2 Artificial intelligence (AI)
It is a computer system which can perform tasks better than human intelligence.
The system may be better to identify complex, non-linear relationships between
data than traditional quantitative and statistical methods.
For example, when business analysts want to generate insights relating to
sentiment and behaviour of potential consumers, they could find this trends by
using AI to do data mining, by sorting through enormous amounts of data
(company filings, annual reports, and earnings calls).
 ★
6.3 Blockchain
Blockchain has been a popular topic recently. Barbara and Robert (2018)
points out that:
Blockchain is a type of digital distributed ledger in which information,
such as changes in ownership, is recorded sequentially within blocks
that are then linked or “chained” together and secured using
cryptographic methods. Each block contains a grouping of transactions
(or entries) and a secure link (known as a hash) to the previous block.
New transactions are inserted into the chain only after validation via a
consensus mechanism in which authorised members agree on the
transaction and the preceding order, or history, in which previous
transactions have occurred.
6.4 Cloud computing
Cloud computing is on-demand access, via the internet, to computing
resources—applications, servers (physical servers and virtual servers), data
storage, development tools, networking capabilities, and more—hosted at a
remote data center managed by a cloud services provider (or CSP). The
CSP makes these resources available for a monthly subscription fee or bills
them according to usage.

Cloud computing is a popular option for people and businesses for a

number of reasons including cost savings, increased productivity, speed
and efficiency, performance, and security.
6.5 Big data
Big data is the extremely large collections of data (data sets) that may be analysed to
reveal patterns, trends, and associations, especially relating to human behaviour and
interactions.

Volume
The vast volume of
Veracity
data generated is a Truthfulness of the
key feature of big captured data
data

Velocity
Variety
The speed at which
‘real time’ data is (Variability)
being streamed into Diversity of source
the organization, and data, with a lot of the
with which it is data being
processed within the unstructured
organization
6.6 Cyber security
Cyber security refers to the body of technologies, processes, and practices designed
to protect networks, devices, programs, and data from attack, damage, or
unauthorised access. Cyber security may also be referred to as information
technology security.
Cyber security is extremely important to financial sector because of sensitive
information. Organisations transmit sensitive financial data across networks and to
other devices while doing businesses. Cyber security can help protect financial
information systems that process or store financial data.