Importance of Financial Accounting Chapel Hill NC

Manchester United
What information might the board of directors of Manchester United report to shareholders and other users of the financial accounts?

Manchester United is both a football club and a thriving business. Indeed, the two go hand in hand. Playing success generates financial success and financial success generates playing success. Key issues for Manchester United’s shareholders and other user might be:

What are Manchester United’s annual sales from gate receipts, television rights, commercial sponsorship and merchandising?

What were the expenses for the year, especially the wages?

How much profit did Manchester United make?

What were the assets and liabilities of the football club and how much were the net assets?

What were the cash receipts and cash payments, and the overall cash flow?

Financial Accounting and Management Accounting
A basic distinction is between financial accounting and management accounting. Financial accounting is concerned with information on a business’s performance and is targeted primarily at those outside the business (such as shareholders). However, it is also used internally by managers. By contrast, management accounting is internal to a business and used solely by managers.

Financial Accounting
Financial accounting is the provision of financial information on a business’s recent financial performance targeted at external users, such as shareholders. However, internal users, such as management, may also find it useful. It is required by law. Essentially, it is backward-looking, dealing with past events. Transactions are initially recorded using double-entry bookkeeping (see Chapter 3). Three major financial statements can then be prepared: the profit and loss account (also known as the income statement), the balance sheet and the cash flow statement (see Chapters 4–8). These are then interpreted using ratios (see Chapter 9) by users such as shareholders and analysts. In Chapter 10, we then look at the management of working capital and sources of finance. The context of financial accounting is given in Section B with chapters on regulatory and conceptual frameworks (Chapter 11), measurement systems (Chapter 12), the annual report (Chapter 13), creative accounting (Chapter 14), and international accounting (Chapter 15).

Investment Analysts
‘Over-paid, under-qualified and inappropriately influential. That seems to be the conventional view of that rampaging beast, the city analyst.’ Source: Damian Wild, Accountancy Age, 21 October 2004, p. 14

Management Accounting
By contrast, management accounting serves only the internal needs of the business. It is not required by law. However, all organisations generate some sort of management accounting: if they did not they would not survive long. Management accounting can be divided into cost accounting and decision making.

Users of Accounts
The users of accounting information may broadly be divided into insiders and outsiders (see Figure 1.2). The insiders are the management and the employees. However, employees are also outsiders in the sense that they often do not have direct access to the financial information. The primary user groups are the management and shareholders. Shareholders or investors are often advised by professional financial analystswho work for stockbrokers or big city investment houses. These financial analysts help to determine the share prices of companies quoted on the stock exchange. However, sometimes, they are viewed with mistrust (see Real-Life Nugget 1.1).

Accounting information Insiders 1. Management 2. Employees Outsiders 1. Shareholders and analyst advisers 2. Lenders 3. Suppliers and other trade creditors 4. Customers 5. Government and agencies such as the tax authorities 6. Public

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