MSIN7012

An Introduction to Accounting and

Finance

SESSION 1 (2008/9)
A THEORETICAL
FRAMEWORK
Lecturer: Andrew Scott
1
 Reading List
Add:
“Financial Accounting - understanding and
practice”
By Robert Perks, 2nd edition 2007, published
by McGraw Hill
Includes an introduction to management
accounting plus investment appraisal.
2
 International Financial
Reporting Standards (IFRS)
• All consolidated statements of Listed Companies
in the EU should comply with IFRS for
accounting periods beginning on or after 1 January
2005.
• For UK AIM, IFRS for financial periods starting
after 1 January 2007.
• US companies plan to switch from US GAAP to
IFRS in 2014 providing certain conditions are met
by 2011 - the last significant standard to switch.
• More than 100 countries use or are adopting IFRS.
3
 Development of
Accounting
• Stewardship accounting - to prevent
fraud
• Financial accounting - provision of
financial information to shareholders in
annual statements
• Management accounting - detailed
information for decision -making by
management 4
 Drivers for change
• Need for comparability of financial
information from country to country
• “Creative” accounting might be
misleading
• Development of new performance
indicators
• New users require different types of
information e.g. “green” accounting 5
 Result
• Continuous evolution of accounting
procedures

6
 Users of financial information
• Shareholders
• Management
• Government/their agencies
• Lenders - banks
• Suppliers
• Local communities - public
• Customers
• Employees
7
Accounting Theory Framework
• Elements - Assets, Liabilities, Capital,
Revenue, Expenses
• Concepts - Entity, Money measurement,
Going Concern, Cost, Realization, Accrual,
Matching, Periodicity, Consistency,
Prudence
• Procedures - Recording, Classifying,
Summarizing, Reporting Transactions,
Interpreting Reports
8
Three fundamental financial
statements
• Income Statement(formerly known as Profit
and Loss account)
• Balance Sheet
• Cash Flow Statement

9
 FKI plc
• FKI plc is a major international diversified
engineering group quoted on the London Stock
Exchange. Acquired by Melrose PLC on 1 July
2008.
– FKI Logistex –automated material handling systems
– Lifting products and services
– Window hardware and storm and screen door hardware.
– Energy technology - turbogenerators

10
 FKI plc Annual Report
2008
• Can be found at
http://www.fki.co.uk/newsdetail.cfm?contentid=305
• Directors’ report
• Operating and financial review
• Remuneration report
• Group financial statements

11
Group Financial Statements
• Independent auditor’s report
• Consolidated income statement
• Consolidated balance sheet
• Consolidated cash flow statement
• Consolidated statement of recognised
income and expense
• Notes to the consolidated financial
statements
12
 The Balance Sheet
• A list of resources and a list of sources
(claims against the resources)
• Asset (IASC) - a resource controlled by the
enterprise as a result of past events and
from which future economic benefits are
expected to flow to the enterprise
• Non-current assets - not intended for resale

13
 Continued
• Current assets - expected to be transformed
into cash within one year
• Current liabilities - amounts owed and due
for payment within one year
• Working capital - current assets less current
liabilities

14
 Income statement
(Profit and loss account)
• Report on the flows of revenue and
expenses in a period
• Based on matching a period’s sales revenue
earned with the expenses incurred in
earning those revenues. NOT cash receipts
and payments.

15
 Cash flow statement
• Classifies sources and uses of cash flow
from different business activities:
– Operating activities
– Investing activities
– Financing activities
– Net increase/(decrease) in cash and cash
equivalents
16