Arab Open University

Faculty of Business Studies

B203-B

Business functions in context II

Prepared By Dima Hachem
Chapter 1: Introduction to
accounting and finance
Accounting and finance
Atrill & McLaney
What are accounting and finance?
Accounting is concerned with collecting, analyzing , and
communicating financial information.
The ultimate aim of accounting is to provide useful financial
information to different users to help users make better decisions.
Accounting information is useful for those who need to make
decisions and plans about the business, and for those who need
to control the business.
Managers need such information in order to decide:
 New product or new services development
 Increase or decrease the price or quantity of existing products
 Borrow money to help finance the business
 Increase or decrease the operating capacity of the business
 Change the methods of purchasing, production, distribution.

Prepared By Dima Hachem

Finance (also used for decision-making) is concerned
with the ways in which funds for a business are raised
(from investors ,owners and lenders) and invested
(equipments,stocks..etc) in order to make the business
(owners) wealthier.
An understanding of finance should help (benefit) in
identifying:
The main forms of finance available
The costs and benefits of each form of finance
The risks associated with each form of finance
The role of financial markets in supplying finance.

Prepared By Dima Hachem

Once the funds are raised, they must be invested in
ways that will provide the business with a worthwhile
return. Finance managers should be able to evaluate:
The returns from an investment; and
The risks associated with that investment.

How does accounting differ from

finance? Identify the benefits of
each for the organization or the
decision maker.

Prepared By Dima Hachem

Who are the users of accounting information?

Owners Customers Competitors

Employees
Managers and their
representatives
Business
Lenders Government

Investment Community
Suppliers
analysts representatives

Prepared By Dima Hachem

Who are users of accounting information?
User Group Decision

Customers To assess the ability of the business to continue operations and to supply
their needs.

Competitors To assess the threat posed by the business to their market share and
profitability.

Employees To assess the ability of the business to continue to provide employment

and to reward employees for their efforts.

Managers To help make decisions and plans for the business, and to exercise control
so that plans be completed.

Lenders To assess the ability of the business to meet its obligations and to pay
interest and to repay the amount borrowed

Owners To decide whether to invest more in the business or sell all ,or part of, the
investment. This would involve an assessment of the likely risks and
returns associated with the business. To assess how effectively the
managers are running the business.
Government To assess whether the business should pay tax and how much. Whether it
complies with agreed pricing policies.
 Financial information should possess
certain key qualities. List and briefly
discuss four of them.

Fundamental qualities of accounting information

Relevance: Accounting information should be relevant to
the decision to be made. It must have the ability to
influence user’s decisions. To do this, it must help to predict
future events (such as predicting next year’s profit) or help
to confirm past events (such as last year’s profit) or do both.
By confirming the past events, users of information can
check on the accuracy of their earlier predictions. Ex:
Profitability/granting loans – Expanding sales
Materiality: To be relevant, accounting information should also be
material. An information is considered material or significant, if its
omission or misrepresentation would change the decisions that users
make. If the information is not material, it should not be included in
accounting reports.
Faithful representation: It should represent
what is supposed to represent. To do this,
Accounting information should be complete
(contain the required information), neutral ( free
from bias) and free from errors (however, it does
not say that it must always be perfectly accurate
but it should try to do so)
Information should be capable of being relied
upon to represent what it is supposed to represent.

Prepared By Dima Hachem

Enhancing qualities of accounting information
Comparability: Users should be able to compare performance of
the business over time (such as profit this year compared to last
year) or should be able to compare performance of the business to
its competitors .
Understandability: Accounting information should be
understood by users and set out as clearly as possible.
Timeliness: Accounting information should be produced and
presented to the users in time, to fulfill their decision making
needs. Failing to produce the information at the right time will
make it unuseful.
Verifiability: Accounting information is verifiable where different,
independent experts (e.g. auditors) can reasonably conclude ,on the
basis of their verification, that it is a fair reflection of the underlying
transactions and circumstances.
Prepared By Dima Hachem
The differences between management accounting &financial accounting
 Management accounting: seeks to meet the needs of managers
 Financial accounting: seeks to meet the need of all other users mentioned earlier .

Financial Accounting Management Accounting

Nature of the The reports tend to be general-purpose. Reports are specific purpose reports.
reports It contains information that will be useful They are designed for a specific user
produced for a broad range of users and decisions and/or decision.

Level of detail Provides a broad overview of the Provides managers with

performance and position of the business. considerable details about a certain
often aggregated information area.

Regulations Subject to accounting regulations imposed No regulations from external sources,

imposed by law and accounting rule makers. because they are for internal use only.

Reporting Normally on Annual basis As frequently as required by managers

interval
Time Reflects the performance and position of Often provide information
orientation the business for the past period. Backward concerning future performance as
looking. well as past performance
Range and Concentrate on information that can be Produce such reports + reports that
quality of quantified in $$ terms. More objective and are of non-financial nature (# of sales
information verifiable. orders received ,..etc.). Less objective
& less verifiable

Prepared By Dima Hachem