Chapter 1 - Accounting and Finance for Managers PDF

1 Introduction to 01 accounting Guidance and teaching tips The first thing to note about teaching accounting is that students from non-specialist backgrounds often arrive with the preconception that the subject i...

1 Introduction to 01 accounting Guidance and teaching tips The first thing to note about teaching accounting is that students from non-specialist backgrounds often arrive with the preconception that the subject is, for want of a better word, dull. Part of our job as educators is to enthuse them. When I start teaching a new group, I set out with the first objective that I will try to make them recognize that this is a dynamic field and that accounting is an essential function for businesses all over the world, regardless of size or industry. I also try to show them that it can be fun, interesting and exciting. Each of these online content sections hosts a few tricks and tips that might help you engage your classes. While none of our advice is guaranteed to work, it has helped us in the past. My belief is that if your students are enjoying it, chances are that you will enjoy it also. This is a two-way relationship. The effect is that this will improve their learning experience and the level of fulfilment you will gain from your teaching. The exercises in the main text highlight this approach. We have pointed students towards real-world examples where possible and we encourage them to do as much of their own research as possible. Note that the level of interest in our examples will vary dependent upon the cohort of students. For example, I’ve provided an extract from Tesco plc’s annual report because this is a globally recognized brand and, being a supermarket, the business is (in theory) fairly straightforward for everyone to understand. If you teach in the United States, you might prefer to use Walmart’s annual report. Alternatively, if you teach in Asia you might prefer to use Jusco (Aeon Stores HK Co Ltd). When all is said and done, the fundamental premise of financial accounting is broadly the same, and within industries and between years the accounting numbers should be broadly comparable. Some businesses have a heavy reliance on certain types of assets and/or liabilities. Some companies have high profit margins, some do not. Our job as accounting educators is to provide examples, contextualize, and engage the students with the fundamental ideas and concepts of accounting. I believe that when the students can (literally) see the importance of what they’re studying and see what the final product looks like, they are more likely to want to learn and contribute to classes positively. Too often, as lecturers, we forget that students do not share our © Matt Bamber and Simon Parry, 2014 These resources accompany the publication of Accounting and Finance for Managers (2014), Kogan Page, London. For more information, visit www.koganpage.com/accountingfm 2 Accounting and Finance for Managers Additional Resources knowledge and experiences. It is worth being clear and explicit about the objectives of the accountant’s role and its many variations. You might choose to show other examples of annual reports. Indeed, this is to be encouraged. Students react positively to things that interest them and if you can find a company that the group would be more interested in than a supermarket or an airline, then chances are you will enjoy the teaching experience more and so will they. As a word of caution, however, I wouldn’t lead off by providing the annual report of a bank or an insurance company at this early stage. This is a temptation because of their role in capital markets and their global brand recognition. The prob- lem is that the long and complex annual reports and financial statements of such companies are a reflection of the industry’s own complexity. You might try a different tack to engage students with the real world. I have, for example, provided a worked example of a start-up business – Climb On! This is because climbing is close to my heart. It is also a business which I can easily envisage. If you have special knowledge of a business, you should use this as an example. In short, what I am saying is that you might want to tailor the examples to your class and that this is to be encouraged! Another problem that you will face when dealing with teaching basic financial accounting is that students need to know the ‘background’. How much of this back- ground they need to know is up to you. In the first chapter I have included some really interesting information that will engage students immediately alongside some more mundane factual information which, in my experience, tends to turn students off. I have typically found that students like to know what accountants do and who uses the information we produce! They enjoy hearing examples of our work and the impact/role that it has/plays in corporate development and capital markets, the types of organization we work in, the differences between management accounting and financial accounting, the types of professional accounting qualifications that exist and the differences between them, and so forth. Therefore I have placed this central and up front in the chapter. Students typically, however, do not like hearing about the conceptual and regulatory framework. Yet this is essential. To this end, I have made this section both brief and as interesting as possible. This brings me to an interesting and important aside. I think a critical distinction between teaching this as a first-year undergraduate (or open) unit and teaching this as a post- graduate unit is the level of academic research you bring into your teaching. There is a growing demand that we make our teaching research-led. I think it is also important for researchers to be guided by practice and reality. I have kept academic references to a minimum in the main text but I would strongly recommend that those teaching postgraduates point their students towards the academic debate(s). Here follows a list of useful references, but this is far from complete or exhaustive: Barth, M E (2007) Standard-setting measurement issues and the relevance of research, Accounting and Business Research, 37 (sup1), pp 7–15 Bryer, R A (1999) A Marxist critique of the FASB’s conceptual framework, Critical Perspectives on Accounting, 10 (5), pp 551–89 Christensen, J (2010) Conceptual frameworks of accounting from an information perspective, Accounting and Business Research, 40 (3), pp 287–99 © Matt Bamber and Simon Parry, 2014 These resources accompany the publication of Accounting and Finance for Managers (2014), Kogan Page, London. For more information, visit www.koganpage.com/accountingfm  Introduction to Accounting 3 Fogarty, T J (1993) Financial accounting standard setting as an institutionalized action field: constraints, opportunities and dilemmas, Journal of Accounting and Public Policy, 11 (4), pp 331–55 Hendriksen, E S and Van Breda, M F (1992) Accounting Theory (5th edn), Editora Irwin Incorp, Boston, USA Hines, R D (1989) Financial accounting knowledge, conceptual framework projects and the social construction of the accounting profession, Accounting, Auditing & Accountability Journal, 2 (2), pp 72–92 Hines, R D (1991) The FASB’s conceptual framework, financial accounting and the maintenance of the social world, Accounting, Organizations and Society, 16 (4), pp 313–31 Maines, L A et al (2003) Evaluating concepts-based vs. rules-based approaches to standard setting, Accounting Horizons, 17 (1), pp 73–89 Macve, R (2010) Conceptual frameworks of accounting: some brief reflections on theory and practice, Accounting and Business Research, 40 (3), pp 303–08 Meeks, G and Swann, G P (2009) Accounting standards and the economics of standards, Accounting and Business Research, 39 (3), pp 191–210 Peasnell, K V (1982) The function of a conceptual framework for corporate financial reporting, Accounting and Business Research, 12 (48), pp 243–56 Power, M (2010) Fair value accounting, financial economics and the transformation of reliability, Accounting and Business Research, 40 (3), pp 197–210 Rayman, R A (2007) Fair value accounting and the present value fallacy: the need for an alternative conceptual framework, The British Accounting Review, 39 (3), pp 211–25 Richardson, A J and Eberlein, B (2011) Legitimating transnational standard- setting: the case of the international accounting standards board, Journal of Business Ethics, 98 (2), pp 217–45 Solomons, D (1983) The political implications of accounting and accounting standard setting, Accounting and Business Research, 13 (50), pp 107–18 Sutton, T G (1984) Lobbying of accounting standard-setting bodies in the UK and the USA: a Downsian analysis, Accounting, Organizations and Society, 9 (1), pp 81–95 Tutticci, I, Dunstan, K and Holmes, S (1994) Respondent lobbying in the Australian accounting standard-setting process: ED49 – a case study, Accounting, Auditing & Accountability Journal, 7 (2), pp 86–104 Whittington, G (2008) Harmonization or discord? The critical role of the IASB conceptual framework review, Journal of Accounting and Public Policy, 27 (6), pp 495–502 Zeff, S A (2013) The objectives of financial reporting: a historical survey and analysis, Accounting and Business Research, 43 (4), pp 262–327 © Matt Bamber and Simon Parry, 2014 These resources accompany the publication of Accounting and Finance for Managers (2014), Kogan Page, London. For more information, visit www.koganpage.com/accountingfm 4 Accounting and Finance for Managers Additional Resources The second half of Chapter 1 introduces some essential accounting terminology. Account­ing is a subject rich in jargon, and breaking down this barrier to entry is important for students’ learning. Simply introducing phrases into your teaching is one way to do it. Another way is to provide key terms and examples of these. The latter approach is adopted in this text. The temptation is that you make this self- study on the basis that there is little you feel you can add over and above the text. This is not the case, however, and students commonly need you to hold their hand through this jargon-busting process. It would be awful for you to get to the end of the year and a student to ask you, for instance, what the difference is between a sole trader, partnership and company. We must be aware that these everyday phrases are only everyday for us. Also, there are a small number of fundamental financial accounting definitions which need to be discussed, for example asset, liability, equity, gain, loss. The defini- tions on their own mean very little without some illustrations. Therefore, I have de- signed a couple of exercises which you can use to help communicate the differences. I have always found that breaking the definitions down into their sub-clauses really helps classes to understand, for example, that an asset is (1) a resource controlled by an entity, (2) as a result of past events, and (3) from which economic benefits are expected to flow to the entity. If you want to illustrate some of the complexities that the International Account­ ing Standards Board (IASB) faced in arriving at their definitions, you might like to refer students to papers such as Barker and McGeachin’s (2013) review of liability accounting or Barker’s (2010) look at gains and losses: Barker, R and McGeachin, A (2013) Why is there inconsistency in accounting for liabilities in IFRS? An analysis of recognition, measurement, estimation and conservatism, Accounting and Business Research, 43 (6), pp 579–604 Barker, R (2010) On the definitions of income, expenses and profit in IFRS, Accounting in Europe, 7 (2), pp 147–58 The chapter concludes by taking a look at Tesco’s position and performance. This will undoubtedly be a difficult exercise for students who are completely new to accounting. They need to deal with new terminology, presentational idiosyncrasies and so forth. The key for educators is to make sure that: they are not overwhelmed by the complexity and yet appreciate that it is there; they are not bamboozled by the jargon, but understand broadly what is meant by the major sub-headings; they are not stunned into silence, but are willing to discuss the information which they are being shown. At the end of the session(s), be sure to recap on the key information. Stress to the class that accounting – and in particular, financial accounting – is a building-block process. By and large, your group must understand (the majority of) the first moment to be able to engage with the second and so forth. In this light, my final piece of advice is: don’t be scared of going too slowly. © Matt Bamber and Simon Parry, 2014 These resources accompany the publication of Accounting and Finance for Managers (2014), Kogan Page, London. For more information, visit www.koganpage.com/accountingfm  Introduction to Accounting 5 Additional questions Question 1 The management of Bob’s Climb plc, a rope manufacturer, have become increasingly concerned about the level of investment that is required in non-current assets in order to boost future financial performance. Required: (i) What is meant by the terms ‘asset’ and ‘non-current asset’? (ii) Provide three examples of current assets which Bob’s Climb plc might hold. (iii) Provide three examples of non-current assets which Bob’s Climb plc might require. (iv) What do you think is meant by the term ‘financial performance’? (v) In what format is Bob’s Climb plc required to present its annual financial performance to its shareholders? (vi) In what format is Bob’s Climb plc required to present its financial position to its shareholders? Question 2 The Arete Limited, a small family-run greengrocer, needs to borrow some money to pay its most recent rent, rates and utilities bill. Each family member, of whom there are five, has agreed to lend the business £5,000. The agreements show that the balances will be paid off in equal annual instalments over the next four years. Required: (i) Define what is meant by a liability. (ii) Define what is meant by a non-current liability. (iii) Are the loans made by the family current or non-current liabilities? (iv) The rent, rates and utilities are overdue. How do you think you would account for these at the period-end? (v) What is meant by the accruals principle? Question 3 This question relates to the introduction to the accounting regulatory system and the way it has shaped the informational content of financial statements. Required: (i) What are the names and main purposes of the bodies that make up the International Accounting Standards Foundation? (ii) Describe the main phases of the standard-setting process. (iii) List and describe the qualitative characteristics, analysing them according to those which are deemed fundamental and those which are enhancing. © Matt Bamber and Simon Parry, 2014 These resources accompany the publication of Accounting and Finance for Managers (2014), Kogan Page, London. For more information, visit www.koganpage.com/accountingfm 6 Accounting and Finance for Managers Additional Resources Question 4 Arsenal Football Club plc is a listed company and therefore produces a publicly available annual report (available at: http://www.arsenal.com/the-club/corporate-info/ arsenal-holdings-financial-results). Extracts from the annual report for 2012/13 are shown in Figures 1.1 and 1.2. F i g u r e 1.1 Consolidated profit and loss account for Arsenal Holdings Plc 2013 © Matt Bamber and Simon Parry, 2014 These resources accompany the publication of Accounting and Finance for Managers (2014), Kogan Page, London. For more information, visit www.koganpage.com/accountingfm  Introduction to Accounting 7 F i g u r e 1.2 Balance sheet for Arsenal Holdings Plc 2013 © Matt Bamber and Simon Parry, 2014 These resources accompany the publication of Accounting and Finance for Managers (2014), Kogan Page, London. For more information, visit www.koganpage.com/accountingfm 8 Accounting and Finance for Managers Additional Resources Required: Looking at the GROUP accounts: (i) How much operational revenue did Arsenal generate during the financial years 2012 and 2013? (ii) What profit did the club make on player trading during 2013 compared to 2012? (iii) What was the level of earnings per share in 2013 compared to 2012 and, in simple terms, how would you explain the change? (iv) What was the value of tangible fixed assets held at the end of 2013? (v) How much retail merchandise did the club own at the end of 2012? (vi) What level of cash and cash equivalents did Arsenal hold on its balance sheet (statement of financial position) as at the end of 2013? Question 5 There are various options available to business owners when establishing their entity. What are the key differences between a sole trader, a partnership and a limited company? Question 6 List and explain four key problems commonly associated with financial statements. Suggested solutions Question 1 (i) An asset is defined as: a resource controlled by an entity as a result of past events and from which economic benefits are expected to flow to the entity. While current assets are assets which are typically expected to be realized in the next 12 months (foreseeable future), non-current assets are those which will continue to be used within the normal operating cycle of a business for a period greater than one year. (ii) Examples of current assets include inventories, trade receivables and cash held at bank and in hand. (iii) Examples of tangible non-current assets include property, plant and equipment, motor vehicles, fixtures and fittings. There are also intangible non-current assets such as goodwill, patents, royalties and so forth. (iv) There are many different ways to measure financial performance. Broadly speaking, this term refers to a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. This © Matt Bamber and Simon Parry, 2014 These resources accompany the publication of Accounting and Finance for Managers (2014), Kogan Page, London. For more information, visit www.koganpage.com/accountingfm  Introduction to Accounting 9 term is also used as a general measure of a firm’s overall financial health over a given period of time, and can be used to compare similar firms across the same industry or to compare industries or sectors in aggregation. (v) The financial performance of a firm is summarized in two ways: an accruals approach through the statement of comprehensive income (income statement); and a cash approach through the statement of cash flows. Note that the financial position is summarized in the statement of financial position. A reporting entity will typically also have a series of key performance indicators which are regularly reported to stakeholders. These will be made up of a combination of financial and non-financial measures. (vi) As stated above, the financial position is summarized at period-ends (typically year-ends) in the statement of financial position, also known as the balance sheet. This statement presents details of assets, liabilities and equity. There are also several other communication methods which firms might use (including the key performance indicators described above), but the financial statements contained within the annual report are an accepted mode of information distribution. The financial statements have the advantage over other sources of financial information of being highly regulated in terms of both format and content. This makes comparability between and within entities a simpler exercise for stakeholders. Question 2 (i) A liability is defined as a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. (ii) A non-current liability fits the same definition as above, except that rather than being due within one year it is due in more than one year. An example of a current liability might be an amount you owe to a supplier for goods or services received, invoiced but unpaid (ie trade payables). An example of a non-current liability might be a mortgage (ie a loan taken out to finance the purchase of property). (iii) This is a bit of a trick question! As the loans are being paid off in equal annual instalments, you need to work out, at each period, first, how much of the loan is outstanding, and second, how much is due within one year. The amount due within one year would be presented on the face of the statement of financial position as a loan due within one year (ie current liability) and the remainder would be disclosed as a non-current liability. This classification might be important for investors who are looking to gauge a company’s working capital position or long-term solvency. A misclassification will either inflate or deflate one or more key ratios. © Matt Bamber and Simon Parry, 2014 These resources accompany the publication of Accounting and Finance for Managers (2014), Kogan Page, London. For more information, visit www.koganpage.com/accountingfm 10 Accounting and Finance for Managers Additional Resources (iv) These are expenses incurred during the period but which remain unpaid. Therefore they meet the definition of a liability and you will have to accrue for them. Note: the account ‘accruals’ is sometimes confused by students with the term ‘accruals accounting’ or the ‘accruals principle’. Tutors might like to rename this account ‘other payables’ (or ‘other creditors’) until they feel comfortable that this confusion will not be an issue. (v) The accruals principle (also known as the matching principle) describes a method of accounting. This accounting method measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur. The general idea is that economic events are recognized by matching revenues to expenses (the matching principle) at the time at which the transaction occurs rather than when payment is made (or received). This method allows the current cash inflows/outflows to be combined with future expected cash inflows/outflows to give a more accurate picture of a company’s current financial condition. Question 3 (i) A link to the IFRS Foundation website shows neatly who the organization is and what it does: http://www.ifrs.org/The-organization/Documents/ WhoWeAre_JAN-2014_ENG.PDF. A summary of its activities, purpose and bodies is as follows (taken from www.IFRS.org): The IFRS Foundation is an independent, not-for-profit private sector organization working in the public interest. The principal objectives of the IFRS Foundation are: to develop a single set of high quality, understandable, enforceable and globally accepted International Financial Reporting Standards (IFRSs) through its standard-setting body, the International Accounting Standards Board (IASB); to promote the use and rigorous application of those standards; to take account of the financial reporting needs of emerging economies and small and medium-sized entities (SMEs); and to promote and facilitate adoption of IFRSs, being the standards and interpretations issued by the IASB, through the convergence of national accounting standards and IFRSs. The governance and oversight of the activities undertaken by the IFRS Foundation and its standard-setting body rests with its Trustees, who are also responsible for safe­ guarding the independence of the IASB and ensuring the financing of the organization. The Trustees are publicly accountable to a Monitoring Board of public authorities. Standard-setting The IASB (International Accounting Standards Board) The IASB is the independent standard-setting body of the IFRS Foundation. Its members (currently 16 full-time members) are responsible for the development and publica- tion of IFRSs, including the IFRS for SMEs and for approving Interpretations of IFRSs © Matt Bamber and Simon Parry, 2014 These resources accompany the publication of Accounting and Finance for Managers (2014), Kogan Page, London. For more information, visit www.koganpage.com/accountingfm  Introduction to Accounting 11 as developed by the IFRS Interpretations Committee (formerly called the IFRIC). All meetings of the IASB are held in public and webcast. In fulfilling its standard-setting duties the IASB follows a thorough, open and transparent due process of which the publication of consultative documents, such as discussion papers and exposure drafts, for public comment is an important component. The IASB engages closely with stake­ holders around the world, including investors, analysts, regulators, business leaders, accounting standard-setters and the accountancy profession. The IFRS Interpretations Committee The IFRS Interpretations Committee is the interpretative body of the IASB. The Interpretations Committee comprises 14 voting members appointed by the Trustees and drawn from a variety of countries and professional backgrounds. The mandate of the Interpretations Committee is to review on a timely basis widespread account- ing issues that have arisen within the context of current IFRSs and to provide author­ itative guidance (IFRICs) on those issues. Interpretation Committee meetings are open to the public and webcast. In developing interpretations, the Interpretations Com­ mittee works closely with similar national committees and follows a transparent, thorough and open due process. (ii) The standard-setting process follows through a series of key phases. International Financial Reporting Standards (IFRSs) are developed through an international consultation process, the ‘due process’, which involves interested individuals and organizations from around the world. The due process comprises six stages, with the Trustees having the opportunity to ensure compliance at various points throughout: (i) setting the agenda; (ii) planning the project; (iii) developing and publishing the discussion paper; (iv) developing and publishing the exposure draft; (v) developing and publishing the standard; (vi) after the standard is issued. If you are interested and wish to find out more, follow this link: http://www. ifrs.org/How-we-develop-standards/Pages/How-we-develop-standards.aspx. (iii) The fundamental characteristics Relevant financial information is capable of making a difference in the decisions made by users. Information may be capable of making a difference in a decision even if some users choose not to take advantage of it or are already aware of it from other sources. Financial information is capable of making a difference in decisions if it has predictive value, confirmatory value or both. Financial reports represent economic phenomena in words and numbers. To be useful, financial information must not only represent relevant phenomena, but it must also faithfully represent the phenomena that it purports to represent. To be a perfectly faithful representation, a depiction would have three characteristics. It would be complete, neutral and free from error. © Matt Bamber and Simon Parry, 2014 These resources accompany the publication of Accounting and Finance for Managers (2014), Kogan Page, London. For more information, visit www.koganpage.com/accountingfm 12 Accounting and Finance for Managers Additional Resources The enhancing characteristics Users’ decisions involve choosing between alternatives; for example, selling or holding an investment, or investing in one reporting entity or another. Consequently, information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date. Comparability is the qualitative characteristic that enables users to identify and understand similarities in, and differences among, items. Verifiability helps assure users that information faithfully represents the economic phenomena it purports to represent. Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation. Quantified information need not be a single-point estimate to be verifiable. A range of possible amounts and the related probabilities can also be verified. Timeliness means having information available to decision-makers in time to be capable of influencing their decisions. Generally, the older the information the less useful it is. However, some information may continue to be timely long after the end of a reporting period because, for example, some users may need to identify and assess trends. Financial reports are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyse the information diligently. Classifying, characterizing and presenting information clearly and concisely make it understandable. Question 4 Arsenal Football Club plc is a listed company and therefore produces a publicly available annual report (available at: http://www.arsenal.com/the-club/corporate- info/arsenal-holdings-financial-results). Extracts from the annual report for 2012/13 are shown in Figures 1.1 and 1.2. Looking at the GROUP accounts: (i) The group’s operating turnover after the allocation of revenue attributable to the joint venture was: 2013: £278,776,000 2012: £240,112,000. (ii) In 2013: £1,563,000 In 2012: £26,038,000. (iii) In 2013: £93.30 per share In 2012: £475.64 per share. The major difference seems to be that player trading has yielded lower profits. Other variables remain fairly constant between years. A rise in © Matt Bamber and Simon Parry, 2014 These resources accompany the publication of Accounting and Finance for Managers (2014), Kogan Page, London. For more information, visit www.koganpage.com/accountingfm  Introduction to Accounting 13 operating revenue of 16% (£38.6 million) is matched by a comparable (although higher) increase in operating expenses of 20.5% (£44.6 million). (iv) At the end of 2013, tangible fixed assets had a carrying value of £421,539,000. This is approximately £5.5 million less than the previous year. For those interested, you can delve deeper by visiting note 11 to the financial statements and seeing what this difference is attributable to. (v) The club held £1,618,000 of retail merchandise at the end of 2012. The statement of financial position (aka balance sheet) says that this is ‘stock’. This is another term for inventories and will commonly appear in UK- based companies’ annual reports. (vi) We refer to ‘cash and cash equivalents’ rather than other, less exact terms, such as ‘cash held at bank’ or ‘petty cash’. This allows internal management and external analysts to be able to distinguish between forms of financing. For example, you might want to categorize some short-term investments (three months or less) as cash rather than a longer-term asset. In this case, Arsenal has aggregated its cash and short-term deposits into one heading. If you wanted to follow up and see the amount of cash it holds in the bank, for example, you simply need to turn to note 17. The value of cash and cash equivalents held at the end of 2013 was £153,457,000. Question 5 Sole trader As the name suggests, a sole trader is someone opting to work for themselves. As seen in the example above – Climb On! – we put ‘you’ in the position of running your own business. The business is not incorporated (ie it is not a limited liability company). You do not share the ownership of the business with anyone else (ie you have no business partner(s)). This doesn’t mean that you cannot have any employees; it is just not common. Businesses of this type are normally quite small in terms of assets, liabilities, revenues and expenses. There are many everyday examples of people going into business on their own, such as plumbers, electricians, hairdressers, private tutors, artists, photographers and so forth. The financial accounting information a sole trader is required to produce is limited. It is normally required to satisfy tax authorities’ purposes. Occasionally, financial institutions might request specific information, particularly for lending purposes. Establishing oneself as a sole trader, therefore, is frequently the first step for many entrepreneurs. The main advantage of this business vehicle is the retention of control. The owner is solely responsible for all decision making. The other key advantage is the reduced accounting and legal regulatory burden. The major disadvantage is the unlimited liability! In other words, a sole trader is wholly responsible for all liabili- ties of the business. © Matt Bamber and Simon Parry, 2014 These resources accompany the publication of Accounting and Finance for Managers (2014), Kogan Page, London. For more information, visit www.koganpage.com/accountingfm 14 Accounting and Finance for Managers Additional Resources Partnership A partnership occurs when two or more people decide to run a business together. As with establishing a business as a sole trader, the regulatory burden is low, especially in comparison with limited companies. Partnerships range considerably in size. It is probably more common that they have low assets, liabilities, revenues and expenses; however, they can be huge global businesses. Examples again include hairdressers, plumbers, tutors and so forth. They also include businesses such as medical practices, legal practices and accounting practices. The advantage of forming a partnership is that you can share responsibility and the burdens of ownership. It is also likely that the skill set available will be more varied and expertise could be easier to channel towards specific projects. In an accounting partnership, for example, you might want the skills of both a financial accountant and a tax accountant; it is rare that one person is an expert in both. The disadvantages largely stem from behavioural issues. Sharing ownership often places significant burdens on pre-existing well-functioning relationships. Also, there are some people who simply like making all the decisions, not sharing this role! Limited company In the UK, a privately held business is referred to as a limited company; this is com- monly abbreviated to ‘Ltd’. The term used for a private company equivalent in Australia is Proprietary Limited Company (abbreviated to Pty Ltd). In India and Pakistan the designation Pvt Ltd (Private Limited) is used for all private limited com- panies. In South Africa the term Pty Ltd is used. In the United States, the expression ‘corporation’ is preferred to limited company and it is common to see the abbrevia- tion Inc. (as in ‘incorporated’), but in many states Ltd is also permitted. The word ‘limited’ relates to the level of financial exposure. An entity can be incorporated as a limited liability company, at which point, in law, it becomes a separate legal entity. Therefore, while sole traders and partners are personally re- sponsible for the amounts owed by their businesses, the shareholders of a limited liability company are responsible only for the amount to be paid for their shares. A limited liability company conducts all activities in the name of the entity; for example, invoices are issued in the company’s name, bank accounts need to be set up in the company’s name (not directors’ or managers’ names). Note, however, that it is not uncommon for lenders and trading partners to ask the directors of com­ panies for personal guarantees, which, of course, negates much of the advantage associated with incorporation. As with partnerships, companies can range in size from small to huge. Most com- panies which are household names are public limited companies (plcs). © Matt Bamber and Simon Parry, 2014 These resources accompany the publication of Accounting and Finance for Managers (2014), Kogan Page, London. For more information, visit www.koganpage.com/accountingfm  Introduction to Accounting 15 Question 6 As stated in the body of the text, there are many issues that impair the usefulness of financial statements. Some of these are as follows: There are necessary trade-offs between the qualitative characteristics, especially between the enhancing characteristics. Financial statements generally suffer from not providing timely information because of the date on which they are made available (for plcs the filing date is up to three months after the year-end and for limited companies this increases to nine months after the year-end). It is sometimes the case that the costs of preparing the required financial reporting information outweigh the benefits derived from its provision. There are a wide range of users and the potential for conflict between them is vast. Accounting standards underpin financial statement production but standard- setting is a complex process where full agreement between all stakeholders is (very!) unlikely. It is not straightforward to know what value to use to measure an asset or liability either on initial recognition or on subsequent remeasurement. Indeed, the accounting standards permit different measurement methods for different classes of assets and liabilities. In certain cases, this might mean that sophisticated users of financial information are at an information advantage because they know the measurement, recognition and presentation rules. © Matt Bamber and Simon Parry, 2014 These resources accompany the publication of Accounting and Finance for Managers (2014), Kogan Page, London. For more information, visit www.koganpage.com/accountingfm