Financial Accounting Business Management (B2) My name is Marco Mongiello and I am your tutor for Accounting. My aim is to make your learning experience effective and enjoyable, i.e. I will make every effort to help you to achieve this course s learning objectives and to appreciate that accounting can be enjoyable. This booklet will take you through the main aspects of the course to enable you to make the best out of it. Here you will find an overview of the course s contents, including: aims explained, main topics covered and the learning objectives that you should achieve, on completion of each week s activities. This year an important innovation is being implemented: your textbook has been tailored specifically around your needs for this course, i.e. the ad hoc textbook created for this course provides you with the contents and the activities you need for each of two week units of the length of the course. Each of the two week units comprises four areas as follows: Self study area Lecture area (two lectures) Support class area (one after each lecture) After lecture activity area You will read and complete the activities included in this area according to the course outlines. You will participate to (not just attend) the lectures. You will participate to the support classes by raising and addressing questions, and solving and discussing exercises. You will attempt the after lecture activities. Individual activity Collective activity Collective activity Informal group activity This structure has been conceived with the aim of enabling you to achieve the relevant knowledge and skill objectives in the most efficient and effective way. Each area is equally important for your learning and equally relevant for your assessment. They must be completed in the given sequence, to enable you to make sense of each week s contents. The adhoc textbook s units correspond to those of the respective two week units areas.
It is essential, for you to succeed in this course, that you carry out and participate to the course activities step by step, i.e. your time management must be regimented to match the rigid structure of this course. Also, you should continuously reflect on how what you learn can help you in taking decisions in your role as a manager after graduation. Anything you leave behind will make you struggle. If you keep pace, you will enjoy discovering the powerful interpretation tools provided by accounting. When something is not clear, or difficult to understand, or indeed contradicts your prior knowledge, you should consult the textbook and discuss with your fellow students. If the matter is still unclear, do not hesitate to bring it to my attention, individually or in group with other fellow students. I will be delighted to discuss the matter with you and try to clarify it. You can find me in Room 177 in the Tanaka Building. I am available for one to one or one to group tutorials; to ensure that we can allocate enough time and attention for our meeting, it is good practice that we always agree a slot of time for our appointments. My email is: m.mongiello@imperial.ac.uk Enjoy your accounting course! Marco
2. Outlines Aims The course aims to contribute to the development of the participant s managerial potential by explaining the techniques of financial and management accounting and examining their relevance to the broader issues of management evaluation and decision making in the generic manufacturing and service sectors. Knowledge Objectives During the course, participants should develop the ability to: - distinguish between the different users of accounting data and their informational requirements, including information about Corporate Social Responsibility and Governance, and business Sustainability - recognise and apply different accounting conventions, formats and practices - identify the uses and shortcomings of published financial accounts and command a basic knowledge of the underlying accounting information system - evaluate the costing principles underlying the classification and processing of cost accounting data - distinguish between the informational requirements of short run and long run financial decision techniques, and appreciate the contribution of management accounting data to the satisfaction of these requirements - specify the organisational context of management accounting, and evaluate strengths and limitations of management accounting data in improving organisational effectiveness. Skill Objectives Participants should develop the ability to: - read and make sense of companies annual reports and other published corporate material - evaluate the financial situation, performance and potential of an organisation using ratio and strategic analyses and interpretation of the annual report and other published corporate material, referring also to the company s impact on its environment - evaluate the impact of using different accounting policies (e.g. in depreciation, impairment and stock valuation) upon performance measurement - design budget processes and produce simple projected cash budgets - address essential issues regarding manufacturing and service firms performance - devise and apply appropriate techniques to the solution of simple short and long run financial decision problems by selecting and utilising relevant information (this must be seen in combination with the course of Finance)
Learning Objectives Upon completion of the course, participants will have developed: - critical skills in relation to the use of information for the purpose of organisational performance evaluation - the ability to participate in managerial decision processes where accounting based information may be an important input
Structure The module consists of five two week units, each structured in areas: self study (students own time), two two hour lectures, post lecture activities (students own time), two one hour support classes. Teaching Methods The course is based upon self study, lectures, support classes, course notes, group studying and further reading. Participants will be encouraged to use computers in practising their acquired skills and to work in groups. Formal assessment Coursework: A 50 minute multiple choice test. Examination: A combined paper with Economics.
3. Lecture schedule and overview First two week unit This unit aims at introducing the main topics of the course and the main financial documents that you should be able to interpret, on completion of the course. The accounting rules and regulations addressed in this week will serve as guidance for you to understand the meaning of the contents of companies annual reports and other corporate documents. We leave it to accounting specialised programmes to train for the preparation of financial documents. With a wider managerial perspective, this course aims at enabling you to interpret, evaluate and comment upon, companies documents. In other terms you will be able to create your own opinion about companies performance, financial situation and perspectives based on documents that firms accounting departments have prepared. The main topics are as follows: Who needs accounting? Self study Financial reporting evolution of the regulatory framework in the UK Financial reporting evolution of international standards Lecture 1 Lecture 2 A systematic approach to financial reporting: the accounting equation Financial statements from the accounting equation Published financial statements By the end of this unit, you should be able to (and will at some point be tested on your ability to): 1. Discuss who the users of accounting reports are and what they can and should expect from the reports 2. Build an informed opinion about how the accounting discipline has evolved and what its future directions could be (including the debate on principle and rule based accounting) 3. Discuss the main principles of accounting and their consequences on the informational value of the annual report (including the concept of accounting equation) 4. Discuss to what extent information about the company s Corporate Social Responsibility commitment, Business Ethics approach and Corporate Governance procedures are (or should be) included in the annual report
5. Identify on what accounting standards an annual report is based and use this information for its interpretation 6. Use the notes to the accounts that refer to accounting policies to support the interpretation of the accounts 7. Identify items of assets, liabilities, revenues and expenses in the accounts.
Second two week unit This unit aims at analysing the main characteristics of the financial statements and in particular how they affect the information about the financial situation of a company, i.e. how they are reflected in the components of the Balance Sheet. The Balance Sheet is the document that reports assets and liabilities of the firm, i.e. it is the main source of information for your evaluation of the company s financial situation. In this week you will learn what each item of the Balance Sheet means, how its value was obtained and what it represents. Also some major specific items will be addressed in some more details, as their meaning and treatment is special. What you learn from this week will be necessary for the application of more sophisticated techniques of analysis and interpretation, which will be addressed in other weeks later on in the course. The main topics are as follows: Self study Ensuring the quality of financial statements Non current (fixed) assets Lecture 3 Current assets Current liabilities Provisions and non current (long term) liabilities R&D; goodwill and intangible assets; brands Lecture 4 Ownership interest By the end of this unit, you should be able to (and will at some point be tested on your ability to): 1. Identify and explain the notes to the accounts that concern accounting policies with reference to items of the Balance Sheet 2. Explain the meaning of major items present in the balance sheet and their changes in value (including references to the current debate on fair value based accounting and its implications) 3. Discuss the difference between the book value and market value of a company 4. Compare the typology of items and the structure of the Balance Sheets of companies operating in different sectors 5. Explain what firm s events and information are relevant and therefore are likely to have influenced the preparation of the Balance Sheet.
Third two week unit This unit aims at analysing the information about companies performance, both in financial and non financial terms. Financial performance is represented through Income Statement and Cash Flow Statement. For what concerns the first, references are made to various forms of profit and how they are originated (segmental analysis), the second is read in terms of the three main managerial activities to which it refers: operating, investing and financing. For what concerns non financial performance, internal and external effects of the company s actions will be considered, in the context of its CSR and contribution to a sustainable economy. Also Corporate Governance will be addressed with their effects on performance and situation of a company in the medium and long term. The topics of this week will also enable you to use financial ratios for the analysis of the performance and situation of a company. Ratios are a powerful tool to obtain insights in companies accounts. However, in order to exploit their full potential their users must both have a strong knowledge of the meaning of the accounts and apply their own creativity and evaluation skills. This is because the analysis of each company should unravel as the results emerge and are evaluated. One aspect that is particularly highlighted in this week is that ratios must be used to depict the company as a whole, i.e. each of them on its own cannot give much valuable information but, in combination with others, it may contribute to reveal interesting inner aspects of the company. Also, how to comment on the chairman s statement and directors report will be addressed, enhancing your ability and confidence to compare your opinion about a company with those of the company s managers. The main topics are as follows: Self study Lecture 5 Reporting corporate performance (including considerations on CSR and sustainability) Corporate governance Leasing Ratio analysis [introduction] Earning per share Lecture 6 Cash flow statements [interpretation] Review of financial ratios analysis By the end of this unit, you should be able to (and will at some point be tested on your ability to): 1. Identify and interpret the narrative in the annual report that refers to financial and nonfinancial performance, including the influence of the company on its internal and external environment, its ethical implications and evaluate the Corporate Governance choices of a business 2. Identify and explain the meaning of different types of profit and what events affect them
3. Identify how the four documents (Balance Sheet, Income Statement, Statement of Changes in Equity and Cash Flow Statement) are linked 4. Select, combine and use ratios to form and support your personal judgement about a company s liquidity, profitability, solidity, market valuation and perspectives 5. Explain the limitations of your analysis and in general of any ratio analysis 6. Critically evaluate others opinions about the company s performance and situation, in particular those of chairman and directors 7. Evaluate internal and external sources of finance and the relevance of cash information for investors and managers decisions.
Fourth two week unit This unit aims at introducing management accounting, its purposes and its main concepts and techniques. In particular the techniques will be: cost analysis and cost volume profit analysis. The first enables to evaluate businesses cost structure, including implications on their risk. The second refers to techniques for short term analysis and decision making. One lecture of this week will also be devoted to questions and answers on the previous weeks topics. The main topics are as follows: Self study Lecture 7 Functions of management accounting Question and answer session on financial accounting Classification of costs Lecture 8 Breakeven analysis and short term decision making By the end of this unit, you should be able to (and will at some point be tested on your ability to): 1. Analyse the cost structure of a business and derive implications in terms of the effects of managerial decisions on volume and capacity 2. Devise the most appropriate costing approach and technique to calculate the cost attached to a product according to different informational needs 3. Provide the financial grounds for specific outsourcing decisions 4. Provide the financial grounds for short term production planning decisions.
Fifth two week unit This unit aims at enabling you to support decision making with a broader strategic perspective, i.e. you will be provided with essential tools for supporting strategic managerial decisions such as: keeping a product line or a service, or discontinuing it; focusing on certain customers or customer segments and neglecting others; managing operations and finance with the aim to enhance the firm s value. The cost analysis will carry on from the previous week, addressing firstly methods and approaches that are traditional and yet still in use, and then more contemporary and comprehensive techniques and approaches, e.g. Activity Based Costing and its managerial implications. You will be able to take part to (or indeed design and lead) budgeting processes in an effective way. Different techniques and approaches to budgeting are addressed and their respective merits and pitfalls are discussed. In particular you will learn what is expected from a budget and how to carry out the analysis of the variances between budgeted targets and actual results. This analysis is the basis for any investigation of causes and reasons for the firm to divert from its plans. Further, more comprehensive techniques of performance evaluation are explored. In particular multi indicator approaches such as balanced scorecard will be addressed on the grounds that the business strategy is at the core of planning and controlling, i.e. whether you are preparing the budget or you are evaluating the variances of the actual results from the budget; or again whether you are conceiving indicators and targets for a firm specific approach to performance evaluation or evaluating the firm s results against those targets, your reference point will be the firm s strategy. Finally business performance evaluation and management will be addressed in accounting and non accounting terms, i.e. with reference to the business strategy. This week s topics will close the loop opened with the first question posed in the first week of the course: who needs accounting? The main topics are as follows: Self study Product costs: materials, labour and overheads Prof. Chris Chapman Lecture 9 Guest speaker on Activity Based Costing and Management Lecture 10 Accounting for planning and control Performance evaluation and feedback reporting Self study The balanced scorecard Business strategy and management accounting
By the end of this unit, you should be able to (and will at some point be tested on your ability to): 1. Effectively utilise cost analysis for supporting strategic decisions 2. Explain and use Activity Based Costing techniques for managerial analysis and decision making 3. Discern among different budgeting approaches evaluating their merits and pitfalls 4. Devise general lines of budgeting processes and perform variance analysis starting from budget and actual accounts 5. Take part to the debate on the ability of balanced approaches to performance measurement, able to encompass various aspects of business strategy, including ethics and sustainability.
4. Main recommended texts Essential text Mongiello M. (complied by), Accounting, ad hoc textbook, Prentice Hall, 2008 Suggested background reading Atrill P. and E. McLaney, Management accounting for decision makers, Financial Times Prentice Hall, 5 th ed. 2007 Bhimani A., Contemporary Issues in Management Accounting, Oxford University Press, 2006 Drury C., Management Accounting for Business, Thomson, 3 rd ed., 2005 Elliott B. and J. Elliott, Financial accounting and reporting, Financial Times Prentice Hall, 11 th ed. 2007 Horngren C.T., S.M. Datar and G. Foster, Cost accounting a managerial emphasis, Financial Times Prentice Hall, 10 th ed., 2000 and 12 th ed., 2006 Solomon, J. Corporate Governance and Accountability, Wiley, 2 nd ed., 2007 de Waal A., Strategic performance management a managerial and behavioural approach, Palgrave McMillan, 1 st ed. 2007