Introduction to Finance BTEC Business Nationals Unit 5

Introduction to Finance & BTEC Business Nationals Unit 5 – An Introduction to Accounting Accounts

What is Accounting? • Accounting ▫ The collection, recording, compiling and forecasting of financial information Financial Accounting Management Accounting

Business & Economics is going interactive • Department Twitter account • Revision quizzes and Independent learning using Socrative. • Collaborative projects using Thinglink.

Twitter • Create a twitter account and follow @Acton. Bus. Econ • Look at the following list and follow ones you find interesting. • For links to articles, follow BBC, FT, Economist • For blogs and analysis of exam topics, Jim & Geoff Riley • LSE runs many free events throughout the year.

Socrative • Online quizzes and multiple choice exam practise • If you have an android, i. Phone or Blackberry mobile phone, you can download the Socrative Student App. • It can also be accessed from laptops & PCs • No account needed, just my classroom PIN: 610523

Thinglink • You can log in to this using your Twitter account. • Throughout the year, various images such as blank graphs & images will be uploaded and you will be asked to comment on them. • Your first task is to pick an EU country to be “Economics Correspondent” for. • Link to image can be found on Twitter feed.

Financial Accounting ▫ Gathering and publishing information of financial record. ▫ All limited companies publish their accounts each financial year ▫ These accounts are available at Companies’ House

Management Accounting ▫ Accounting statements produced for management purposes ▫ Planning, decision making review and control

Topics • • • Why businesses need accounts Major accounting documents Users of published accounts Raising Finance Accounting today

Why do businesses need accounts? • Management Accounting ▫ Ensures firms keep a careful check on their cash flow/working capital ▫ Gives the opportunity to plan ahead ▫ Identify costs/selling price ▫ Work out break even/profit points ▫ Measure how well staff are performing ▫ Control expenditure

Why do businesses need accounts? • Financial accounts ▫ To obtain bank loans/finance ▫ Auditing purposes (by a range of external users)

Management Accounting V Financial Accounting Management Accounting Financial Accounting Focuses on the present and the future Reports what happened in the past Is for internal users Is for external users Needs to be easy to use, relevant Needs to be reliable, accurate and up to date and consistent Is ruled by managers’ requirements Is ruled by accounting conventions and legal requirements Covers departments and divisions Covers the whole firm

Questions • What is Accounting? • What is Management Accounting? • What is Financial Accounting?

Task • Using the text book, each of you is going to read and prepare a brief summary of your section. ▫ 1. 1 Purpose of accounting ▫ 1. 2 Capital Income ▫ 1. 3 Revenue Income

Research/Homework Task • Mobile Phone industry • Research one mobile phone company ▫ Describe the different categories of Capital Income and Expenditure ▫ Describe the different categories of Revenue Income and Expenditure ▫ Explain, clearly, the differences between each category of Income and Revenue

Major Accounting Documents • Financial accounting ▫ Balance sheet ▫ Profit & loss account ▫ Cash flow statement

Balance sheet • A snapshot of a firms assets, liabilities and sources of capital ▫ What is the business worth? ▫ Can it afford to expand? ▫ Is it a safe investment?

Profit & Loss Account • The level of profit made in the most recent trading period • Profit = Revenue – Costs/expenses ▫ Is the firm trading successfully? ▫ Are the senior managers proving effective? ▫ Is it likely to be a profitable investment?

Cash flow statement • This appears in the published financial accounts of public limited accounts only • Where cash has come from & where iit has been used over the past year ▫ How easily was the firm able to find the cash to finance its recent activities? ▫ Was the finance generated from within the business, or was outside finance needed?

Major Accounting Documents • Management accounting ▫ ▫ ▫ Cash flow forecasts Budgets Contribution statements Investment appraisal Break-even charts

Cash flow forecasts • An estimate of what the firm’s bank account will look like in the each month of the coming year • If an overdraft is predicted, financial arrangements can be made

Budgets • Financial plans which can be set for costs and/or revenues • Used to coordinate, motivate and control the key activities within a business in the coming year

Contribution statements • Set out the contribution to overheads made by each division or department of a firm • Helps make decisions about allocating resources between different parts of the business ▫ More capital to finance expansion of the most profitable product area

Investment appraisal • These calculations help decide whether a prospective investment project is financially attractive ▫ Buying new machinery ▫ Building a new factory etc

Break even charts • Indicate revenues and costs, and therefore profit at all possible levels of output • They enable a break even point, where neither a profit nor a loss are made • Used in decision making: ▫ Pricing ▫ Cost cutting ▫ Expansion