Global Environment Question Answers

1 What do you see as the main differences between financial accounting, management accounting and finance?

Despite the fact that both accounting and finance share the same purpose, that of the provision of financial information which will help users make better informed business decisions, there is a basic distinction between them.

Accounting is concerned with the collection, preparation and interpretation of financial information whereas finance is related to the ways in which businesses raise and invest funds to sustain their existence and create wealth. Thus, accounting provides useful information that enables users to monitor, plan and control business activities while finance allows users to identify the main sources of finance available and assess the risks, costs and benefits associated with each source. The central activities of the finance function include the strategic investment and financing decisions, risk management and forecasting and control to maintain to good cash flow which is vital to a healthy business.

Accounting is divided into financial accounting and management accounting. The main distinction between them is that financial accounting provides knowledge about business’s performance and aims to address the needs of external users (primarily shareholders) whereas management accounting has an internal scope and aims to meet only the needs of managers.

2 Discuss how financial accounting differs from management accounting.

The main distinction between them is that financial accounting provides knowledge about business’s performance and aims to address the needs of external users (primarily shareholders) whereas management accounting has an internal scope and aims to meet only the needs of managers

Financial accounting is backward-looking, reflecting events related to the performance and position of the business that occurred in a specific period in the past. By contrast, management accounting is concerned with future performance.

3 Management accounting has been described as ‘the eyes and ears of management’. What do you think this expression means? Discuss in detail.

Most businesses are far too large and complex for managers to be able to see and assess everything that is going on in their own areas of responsibility merely by personal observation. Managers need information on all aspects within their control. Management accounting reports can provide them with this information, to a greater or lesser extent. These reports can be seen, therefore, as acting as the eyes and ears of the managers, providing insights not necessarily obvious without them.

4 Explain what is meant by comparability, verifiability, timeliness, understandability and how they make financial information useful.

Comparability is the quality of information that enables users to identify similarities in and differences between two sets of economic phenomena. Making decisions about one entity may be enhanced if comparable information is available about similar entities; for example, if profit per share is calculated using the same accounting policies.

Verifiability: Accounting information is supported by evidence and independent observers are able to verify the information.

Timeliness: Accounting information should be produced in time for decision-makers to be capable of influencing their decisions.

Understandability: Information shall be classified, presented clearly and concisely.

5 What is the difference between a non-current asset and a current asset?

Current assets are otherwise known as short-term assets. They represent assets that are capable of generating benefits (sales, profit) for the company in the short run – i.e. within a year. Some examples include, a) inventories (stock) which are final product/merchandise ready to be sold, b) trade receivables (debtors) which are money owed by customers (credit sales), c) short term financial investments i.e. equities, short-term bonds etc., d) prepayments which are expenses paid in advance, for services the benefits of which have not been enjoyed yet by the firm, and e) cash or bank deposits. Current assets are very important determinants of firm liquidity!

Non-Current assets are otherwise known as long-term assets or fixed assets. They represent assets that are capable of generating benefits (sales, profit) for the company in the long run – i.e. for more than a year. Non-current assets can be categorised into tangible (property, plant, equipment) and intangible (goodwill, patents, trademarks) assets. Finally, long-term financial investments, such as ownership in other firms or long term bonds, fall under non-current assets.

6 Which one of the following is the correct definition of the profit, or loss, for a period?