1. Introduction to accounting and finance
Lecture
Introduction to Accounting [readings not essential! But look at slides beforehand]
Assignment: 3-4 people → two companies from same industry, analyse and compare
Conceptual framework and financial statements
→ accounting is the language of business (so need to practise it to improve the skill), means of
communication in business
● Definition of accounting:
○ Process: of identifying, measuring and communicating financial information about an
entity to permit informed judgments and decisions by users of the information
⚠️ everything about definition important
■ Information: about financial position (balance sheet), performance (income
statement), financial adaptability (statement of cash flows)
■ Limitations: need to understand what the numbers are, and what they are not,
what standards are used, processes used, etc.
- Reports on what happened (past events)
- No non-financial information (not included, extra in the notes,
statements themselves don’t have it) → can only put things that you
can put monetary value on it
○ Captures business activities: operating, investing, financing [book-keeping]
○ Information economics: financial statements → enabling decision-making
● Types of accounting: different purposes
○ Financial accounting: provides info for external users (investors, creditors,
government, the public → everybody except management)
○ Managerial: provides info for internal users, managers (budgets, forecasts)
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1
(2) national or international law imposing it; (3) money terms; (4) backwards looking information
, 💭 employees are external users because managers are the decision-makers, employees will
be provided with information to do their job but will not be provided the whole of it
● Forms of business organisation: Three main general forms
○ Sole proprietorship: ⚠️business entity concept → owner and business always
separate in accounting regardless of the legal form ⇒ accounting only reporting on
the business
○ Partnership: LLP (limited liability partnerships) for big companies, otherwise full
liability for smaller companies
○ Corporation: from joint stock company idea → owners different from managers
Board of Directors (limited liability). Firm and owners separated, separate legal
entity. ⇒ not caring in accounting!
⚠️double taxation: because firm as separate entity, taxed as corporate tax but dividends will
be taxed as well as part of personal income tax
● Need for financial statements:
○ User groups specific information needs: management (with more info because more
decisions to be taken), owners as investors, creditors, bond holders, suppliers,
governments, etc.
⇒ all potential users are interested in the financial performance and financial position
General users with general purpose financial statement
● Agency theory: relationship between agent and principal
⇒ there needs to be harmonisation of the interests because agent acting on behalf on principal
1. Agent: managers
2. Principal: owners, investors
○ How to solve this:
■ Contracts: equity states (value goes up for managers same way as for owners)
■ Provide info: on a regular basis, as little info asymmetry as possible,
transparency (this is regulated)
■ Auditors: internal (employed by the firm, by management) and external
(independent of the firm and they look at financial statements and say if it is
true and fair, so that owners can trust these statements) [auditors report -
unqualified opinion]
, ● International financial reporting standards (IFRS): international set of accounting standards
(before countries with their own standards but it was difficult to compare financial info)
[US GAAP = American standards, applicable to smaller companies] → but more and more
harmonisation
○ Financial reporting: about principles or rules?
■ IFRS: Main sets of international standards → principles based (conceptual
framework + standards)
⇒ definition of what assets, claims are but doesn’t prescribe set of rules.
Giving framework, can fall back on conceptual framework
[168 countries using it]
■ GAAP: rules based (because about regulating situations)
○ Reasons for international standards: globalisation + efficiency
○ Development of a conceptual framework: [extra]
1. Look at objective of the financial statement
2. Financial information: who the users are? General purpose
3. Qualitative characteristics: what to have so that users find it useful?
- Relevance: must be capable of making a difference to the decision
maker, having predictive or feedback value
- Faithful representation: representing economic phenomena in words
and numbers → complete, neutral and free from error [auditors]
+ Understandability, timeliness, verifiability, comparability
[costs and benefits between these]
4. Constraint and assumptions: cost constraint, accrual accounting, going
concern (company continuing in foreseeable future)
- Going concern: relevant when company into liquidation
- Accrual: when recognise economic events → when they happen even
if not having the cash yet (everything incurred needs to be
recognised)
5. Elements: assets, liabilities, equity, income, expenses (definition,
recognition, measurement, presentation and disclosure for this)
● Basic accounting equation: assets = liabilities + equity → two sides need to be equal
○ Second accounting equation: total revenue and gain – total expenses and losses = net
income (or loss)
⇒ revenue > expenses: profitable company
● Financial statements: tracing how financial elements of company changes
1. Income statement: first! To see profits, how successful it was
○ Telling us how good business during period [date(s)]
Lecture
Introduction to Accounting [readings not essential! But look at slides beforehand]
Assignment: 3-4 people → two companies from same industry, analyse and compare
Conceptual framework and financial statements
→ accounting is the language of business (so need to practise it to improve the skill), means of
communication in business
● Definition of accounting:
○ Process: of identifying, measuring and communicating financial information about an
entity to permit informed judgments and decisions by users of the information
⚠️ everything about definition important
■ Information: about financial position (balance sheet), performance (income
statement), financial adaptability (statement of cash flows)
■ Limitations: need to understand what the numbers are, and what they are not,
what standards are used, processes used, etc.
- Reports on what happened (past events)
- No non-financial information (not included, extra in the notes,
statements themselves don’t have it) → can only put things that you
can put monetary value on it
○ Captures business activities: operating, investing, financing [book-keeping]
○ Information economics: financial statements → enabling decision-making
● Types of accounting: different purposes
○ Financial accounting: provides info for external users (investors, creditors,
government, the public → everybody except management)
○ Managerial: provides info for internal users, managers (budgets, forecasts)
1
1
(2) national or international law imposing it; (3) money terms; (4) backwards looking information
, 💭 employees are external users because managers are the decision-makers, employees will
be provided with information to do their job but will not be provided the whole of it
● Forms of business organisation: Three main general forms
○ Sole proprietorship: ⚠️business entity concept → owner and business always
separate in accounting regardless of the legal form ⇒ accounting only reporting on
the business
○ Partnership: LLP (limited liability partnerships) for big companies, otherwise full
liability for smaller companies
○ Corporation: from joint stock company idea → owners different from managers
Board of Directors (limited liability). Firm and owners separated, separate legal
entity. ⇒ not caring in accounting!
⚠️double taxation: because firm as separate entity, taxed as corporate tax but dividends will
be taxed as well as part of personal income tax
● Need for financial statements:
○ User groups specific information needs: management (with more info because more
decisions to be taken), owners as investors, creditors, bond holders, suppliers,
governments, etc.
⇒ all potential users are interested in the financial performance and financial position
General users with general purpose financial statement
● Agency theory: relationship between agent and principal
⇒ there needs to be harmonisation of the interests because agent acting on behalf on principal
1. Agent: managers
2. Principal: owners, investors
○ How to solve this:
■ Contracts: equity states (value goes up for managers same way as for owners)
■ Provide info: on a regular basis, as little info asymmetry as possible,
transparency (this is regulated)
■ Auditors: internal (employed by the firm, by management) and external
(independent of the firm and they look at financial statements and say if it is
true and fair, so that owners can trust these statements) [auditors report -
unqualified opinion]
, ● International financial reporting standards (IFRS): international set of accounting standards
(before countries with their own standards but it was difficult to compare financial info)
[US GAAP = American standards, applicable to smaller companies] → but more and more
harmonisation
○ Financial reporting: about principles or rules?
■ IFRS: Main sets of international standards → principles based (conceptual
framework + standards)
⇒ definition of what assets, claims are but doesn’t prescribe set of rules.
Giving framework, can fall back on conceptual framework
[168 countries using it]
■ GAAP: rules based (because about regulating situations)
○ Reasons for international standards: globalisation + efficiency
○ Development of a conceptual framework: [extra]
1. Look at objective of the financial statement
2. Financial information: who the users are? General purpose
3. Qualitative characteristics: what to have so that users find it useful?
- Relevance: must be capable of making a difference to the decision
maker, having predictive or feedback value
- Faithful representation: representing economic phenomena in words
and numbers → complete, neutral and free from error [auditors]
+ Understandability, timeliness, verifiability, comparability
[costs and benefits between these]
4. Constraint and assumptions: cost constraint, accrual accounting, going
concern (company continuing in foreseeable future)
- Going concern: relevant when company into liquidation
- Accrual: when recognise economic events → when they happen even
if not having the cash yet (everything incurred needs to be
recognised)
5. Elements: assets, liabilities, equity, income, expenses (definition,
recognition, measurement, presentation and disclosure for this)
● Basic accounting equation: assets = liabilities + equity → two sides need to be equal
○ Second accounting equation: total revenue and gain – total expenses and losses = net
income (or loss)
⇒ revenue > expenses: profitable company
● Financial statements: tracing how financial elements of company changes
1. Income statement: first! To see profits, how successful it was
○ Telling us how good business during period [date(s)]
