Accounting for Managers: Financial Performance and Regulations

This report offers a detailed exploration of accounting principles and practices for managers. It begins by defining accounting concepts and conventions, differentiating between financial and management accounting, and examining the roles of key stakeholders. The report then delves into the practical application of these concepts, demonstrating the preparation of financial statements, including journal entries, general ledgers, trial balances, and final accounts such as the income statement, balance sheet, and cash flow statement. Furthermore, it includes the application of adjustment entries. The report also covers the assessment of financial performance, including the calculation and categorization of financial ratios, with examples. Finally, it addresses the UK regulatory framework, outlining its role and the impact of international regulations on UK businesses. The report utilizes examples and practical applications to enhance understanding.

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Accounting for Managers
Contents
INTRODUCTION................................................................................................................................2
JOB 1....................................................................................................................................................2
1. Accounting Concepts and Conventions.............................................................................................2
1.1 Role and aim of financial and management accounting and accounting regulations.....3
1.2 Nature of business and accounting information...................................................................4
1.3 Users of Accounting and Financial Information....................................................................5
JOB 2....................................................................................................................................................6
2. Preparation of financial statements..................................................................................................6
2.1 BOOKS OF ORIGINAL ENTRY.............................................................................................6
A.JOURNAL ENTRIES......................................................................................................................6
B. GENERAL LEDGERS ACCOUNTS..................................................................................................8
2.2 TRIAL BALANCE...................................................................................................................10
2.3 FINAL ACCOUNTS/FINANCIAL STATEMENTS...............................................................11
A. INCOME STATEMENT...............................................................................................................11
B. BALANCE SHEET.......................................................................................................................11
C. CASH FLOW STATEMENT.........................................................................................................12
2.4 ADJUSTMENT ENTRY.........................................................................................................12
JOB 3..................................................................................................................................................13
3. Assessment of Financial Performance.............................................................................................13
3.1CALCULATION OF FINANCIAL RATIOS OF THE COMPANY.......................................13
3.2 CATEGORISATION OF FINANCIAL RATIOS..................................................................................13
3.3 FINANCIAL PERFORMANCE OF McDonald’s Corporation............................................14
JOB 4..................................................................................................................................................15
4. UK Regulatory Framework...............................................................................................................15
4.1 Role of UK Regulatory Framework in the field of Accountancy and Finance.................15
4.2 Impact of International Regulations on UK’s business Entities........................................16
Conclusion.....................................................................................................................................16
References.....................................................................................................................................18
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Accounting for Managers
INTRODUCTION
The concepts of accounting are usually employed by the management of every company, to
make relevant and informed decisions with nominal errors. There are various financial
records prepared by the accountants of an entity, to assist the stakeholders like creditors,
suppliers, employees, government etc. in drawing the proper conclusions. Also there are
various financial ratios which are calculated in order to understand the actual performance of
the company and plan accordingly. Current report will now study the significance of financial
accounting for the company.
JOB 1
1. Accounting Concepts and Conventions
The financial information needs to be well understood by the external users so that they can
make the required decision without any hurdle or difficulty. These information should be free
from biasness and unethical practices.
Generally Accepted Accounting Principles (GAAP) - GAAP came into the picture over
many years back. It is a collection of accounting rules and regulations the organisations have
to strictly follow while preparing their financial records. It tells us the way to represent the
financial information. There are certain concepts and conventions given by GAAP which
have been discussed below-
ACCOUNTING CONCEPTS AND CONVENTIONS-
i. Accrual Accounting- This convention says that revenue and expenses are recorded as
and when they are earned and incurred respectively, no matter whether or not the cash
has been actually received from the debtor or paid to the creditor.
ii. Business Entity- This convention says that business and the owner of the business are
two different entities. Hence, business should maintain a proper separate record of its
transactions.
iii. Consistency- According to this convention, the business entity should try to follow
the same accounting policies and methods from year to year.
iv. Historical Cost- This convention informs that whenever an asset is purchased by the
business it should be recorded at the actual price in the books of accounts that is, the
price at which it is purchased and not at the price it carries due to inflation, deflation
or any other factors.
v. Full Disclosure- As per this convention, no information should be hided from the
stakeholders which can resist the users from making a wise decision.
vi. Going Concern- This convention states that every business owner operates with the
view of carrying the business for indefinite period of time and has sufficient resource
to carry on the business successfully in future.
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Accounting for Managers
vii. Matching- This concept requires the business to make proper match between the
revenue earned and expenses incurred during the same year or period of time.
viii. Materiality- It states that those informations, which have a mere impact on making of
the financial statement and will actually not hamper the quality of decisions taken by
the external business users can be ignored.
ix. Revenue recognition- This makes the business to consider the revenue to be earned
only when the services/products have actually been delivered to the purchasing party.
x. Stable Monetary Unit- The monetary information should be communicated or
recorded in fixed unit of currency.
xi. Money Measurement- This concept says that only those transactions are recorded in
the books of accounts which could be easily stated in terms of money and non-
monetary transactions are not taken into account.
xii. Conservatism- This says that accountants are always pessimistic about their business
and therefore record for all possible losses and never record the possible gains in
forthcoming period of time.
xiii. Objectivity- This states that each transaction recorded should have supporting
document which may be, invoice, sales order, credit card receipt etc.
1.1 Role and aim of financial and management accounting and accounting regulations
Accounting is an orderly process of recording, classifying, analysing, summarising and then
reporting the end result to the stakeholders of the company for the better decision making.
The information fetched from the financial records aids the company in making efficient and
effective plans.
In short, accounting is the method which helps the organisation in achieving the ultimate
objective of earning profit.
Branch of Accounting
I. Financial Accounting- It is a way with the help of which companies record, classify,
analyse, summarise and report the financial information like income, expenditures,
accounts receivables to the external users of the company.
Roles & Aims of Financial Accounting-
i. It helps to uphold accuracy in recording with the help of double- entry
bookkeeping, wherein each transaction is recorded twice
ii. According to the Companies Act, every company is required to maintain a proper
record of their revenues and expenses and share the annual reports consisting of
financial information with the shareholders
iii. Tax laws also requires the detailed information of the company’s income and
expenditure
iv. It also helps the owner of the company to know the actual profit earned or loss
incurred on the capital invested
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Accounting for Managers
v. Financial accounting also helps in allocating the resources well
II. Management Accounting- This branch of accounting is carried out only for the
management of the company who are considered as internal users. The reports
prepared under management accounting are not available for the stakeholders of the
company.
Roles & Aims of Management Accounting-
i. It support the managers to take better internal decisions and contribute
effectively to the growth of organisation
ii. It facilitates the various divisions of the organisation to plan and forecast the
future requirements
iii. Financial plans like budgets can be smoothly framed out with the management
reports
iv. This makes management team to analyse whether the actual results are in
accordance with the planned one or not, after which proper measure are taken
in case of any abnormality
v. Controlling and supervising becomes easy with managerial accounting
(Annand, 2018).
Functions of IASB and SAC- The organisations of UK are controlled by two accounting
bodies which are IASB and SAC.
INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB) and STANDARD
ADVISORY COUNCIL (SAC)-
(ifrs.org, N.D.) IASB is board consist of the members having relevant understanding in
preparing financial reports, auditing, accounting education etc. It is a self-regulating
group of professionals which forms the standards of IFRS (International Financial
Reporting Standards). It also studies the conclusions of IFRS Standards formulated by
IFRS Interpretation Committee. The primary task of IASB board is to ensure
transparency in preparation of financial reports by the entities.
Those organisations having B Impact Rating System are being guided by the
professionals of SAC.
1.2 Nature of business and accounting information
There are number of accounting information which can be categorised as follows:
a. Information depicting financial performance and position - Company judge their
financial performance by calculating the net profit/loss by preparing profit and loss
account at the year end. This information can be used by shareholders for demanding
extra dividends, employees can expect a hike in their earnings/salaries, and investors
can plan to invest their money in order to yield return in future and so on.
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Accounting for Managers
Financial position can be known through preparation of Balance sheet. Balance sheet
of the company shows the total assets, liabilities and owner’s equity. This can be
studied by the stakeholders to review the actual position of the company which may
be either financially weak or strong.
b. Information relating to per unit cost and total cost- It becomes really important for
the managers to evaluate per unit cost and total cost for setting up the final sale price.
c. Information required for tax management- Here, those informations are composed
which are required for tax calculation. These informations are used by the Income Tax
Department. Example- Companies are required to calculate EBIT and dividend
distributed for computing income tax charged on the profit.
d. Corporate social responsibility related information- Big companies have been
mandated to show the informations related to the amount spent for the social cause.
Example- amount spent pollution control, women empowerment, commodity related
safety etc.
1.3 Users of Accounting and Financial Information
The accounting and financial informations plays an important role for the interested parties
of the company in making better and significant decisions. The users can be either external
user which includes suppliers, investors, creditors, debenture holders, customers etc. or
internal user which consists of management of the company, owners of the company,
different departments of the company etc. The roles of users are discussed below:
i. The managers and the owners of the company use the profit and loss account in order
to evaluate its performance at the year end
ii. Shareholders of the company always looks for the information relating to net
profit/net loss, in order to demand extra dividend and also to know, how their invested
amount is contributing towards the sales made by the company
iii. After evaluating the performance of the company, investors make their plans of
investment
iv. Employees expect a hike in their bonus or salary in case the company perform better
v. Income tax department looks at the EBIT of the company in order to levy tax
vi. Debenture holders and creditors uses the balance sheet to know the debt returning
capability of the company
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Accounting for Managers
JOB 2
2. Preparation of financial statements
2.1 BOOKS OF ORIGINAL ENTRY
A.JOURNAL ENTRIES
In the books of Juju Grez
Dat
e Particulars
L/
F
Amount
Dr.
Amount
Cr.
A
Cash A/c
Dr. 400000
To Capital A/c 400000
(Owner Started business with cash)
B
Rent A/c
Dr. 16000
To Cash A/c 16000
(Being rent paid)
C
Equipment A/c
Dr. 13000
To Accounts Receivable A/c 13000
(Being office equipment purchased)
D
Cash A/c
Dr. 33000
To Sales A/c 33000
(Being payment received from client for the service
given)
E
Accounts Payable A/c
Dr. 28000
To Sales A/c 28000
(Being service rendered to a client)
F
Equipment A/c
Dr. 9000
To Cash A/c 9000
(Being additional equipment purchased)
G
Salaries & Wages A/c
Dr. 7000
To Cash A/c 7000
(Being salaries and wages paid to employees)
H
Cash A/c
Dr. 16000
To Accounts Payable A/c 16000
(Being payment received from a debtor)
I Accounts Receivable A/c
Dr.
13000
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Accounting for Managers
To Cash A/c 13000
(Being payment made to creditors for equipment
purchased)
J
Drawings A/c
Dr. 600
To Cash A/c 600
(Being cash withdrawn by the owner for personal use)
K
Cash A/c
Dr. 50000
Accounts Payable A/c
Dr. 50000
To Sales A/c 100000
(Being 50% payment received from the debtor for the
service rendered)
L
Salaries & Wages A/c
Dr. 800
To Cash A/c 800
(Being salaries and wages paid to employees)
M
Building A/c
Dr. 5000
To Accounts Receivable A/c 5000
(Being Furniture purchased)
N
Cleansing Services
Dr. 100
To Cash A/c 100
(Being cash paid for office supplies)
TOTAL 641400 641400
B. GENERAL LEDGERS ACCOUNTS
I. Cash Account
Dr Cr
Particulars
Amoun
t Particulars
Amoun
t
Capital A/c 400000 Rent A/c 16000
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Accounting for Managers
Sales A/c 33000 Equipment A/c 9000
Accounts
Payables A/c 16000 Salaries & Wages A/c 7000
Sales A/c 50000 Accounts Receivable's A/c 13000
Drawings A/c 600
Salaries & Wages A/c 800
Cleansing Services
Dr. 100
Balance C/F 452500
Total 499000 Total 499000
II. Capital Account
Dr Cr
Particula
rs
Amou
nt
Particula
rs
Amou
nt
Balance
C/F 400000 Cash A/c 400000
Total 400000 Total 400000
III. Rent Account
Dr Cr
Particula
rs
Amou
nt
Particula
rs
Amou
nt
Cash A/c 16000
Balance
C/F 16000
Total 16000 Total 16000
IV. Equipment Account
Dr Cr
Particula
rs
Amou
nt
Particula
rs
Amou
nt
Creditor's
A/c 13000
Balance
C/F 22000
Cash A/c 9000
Total 22000 Total 22000
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Accounting for Managers
V. Accounts Receivables Account
Dr Cr
Particula
rs
Amou
nt
Particula
rs
Amou
nt
Cash 13000
Equipmen
t A/c 13000
Balance
C/F 5000
Furniture
A/c 5000
Total 18000 Total 18000
VI. Sales Accounts
Dr Cr
Particula
rs
Amou
nt
Particula
rs
Amou
nt
Balance
C/F
16100
0 Cash A/c 33000
Debtor's
A/c 28000
Cash A/c 50000
Debtor's
A/c 50000
Total
16100
0 Total
16100
0
VII. Accounts Payables Account
Dr Cr
Particul
ars
Amou
nt
Particul
ars
Amou
nt
Sales
A/c 28000 Cash A/c 16000
Sales
A/c 50000
Balance
C/F 62000
Total 78000 Total 78000
VIII. Salaries & Wages
Dr Cr
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Accounting for Managers
Particul
ars
Amou
nt
Particul
ars
Amou
nt
Cash A/c 7000
Balance
C/F 7800
Cash A/c 800
Total 7800 Total 7800
IX. Cleansing Services
Dr Cr
Particul
ars
Amou
nt
Particul
ars
Amou
nt
Cash A/c 100
Balance
C/F 100
Total 100 Total 100
X. Drawings Accounts
Dr Cr
Particul
ars
Amou
nt
Particul
ars
Amou
nt
Cash A/c 600
Balance
C/F 600
Total 600 Total 600
2.2 TRIAL BALANCE
Trial Balance for Juju grez
On 31st December,2018
Debit
Credi
t
Equipment 22000
Accounts
Payable 62000
Cash
45250
0
Capital
40000
0
Accounts
Receivables 5000
Drawings 600
Sales
16100
0
Rent 16000
Cleansing
Services 100
Salaries & 7800
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Accounting for Managers
Wages
Suspense A/c 5000
Total
56600
0
56600
0
2.3 FINAL ACCOUNTS/FINANCIAL STATEMENTS
A. INCOME STATEMENT
Income statement for the year ended 31st December, 2016
Particulars Amount
Revenue 161000
Less: COGS Nil
Gross profit 161000
Operating expenses
Prepaid Expenses Nil
Doubtful debts Nil
Administration expenses 74
Wages expenses 7800
Depreciation on Furniture and fixtures 0 Nil
Interest on investment 0 Nil
Interest paid 0 Nil
Total operating expenses 7874
Operating income 153126
EBIT NIL
Add: Depreciation NIL
Tax NIL
Net income 153126
B. BALANCE SHEET
Juju Grez Company
Balance sheet
As at 31st December 2018
ASSETS
CURRENT ASSETS
Cash 452500
Accounts Receivables 5000
Short term Investments 173226
Total Current Assets 630726
NON-CURRENT ASSETS
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Accounting for Managers
Non-Current Assets NIL
Total Non- Current Assets NIL
Total Assets
630726
LIABILITIES & SHAREHOLDER'S
EQUITY
CURRENT LIABILITIES
Accounts Payables 62000
Bank Overdraft 15000
Total Current Liabilities 77000
NON-CURRENT LIABILITIES
Non-Current Liabilities NIL
Total Non- Current Liabilities NIL
Total Liabilities
77000
SHAREHOLDER'S EQUITY
Capital 400000
Drawings 600
Net Income 153126
Total Liabilities and Shareholder’s equity
630726
C. CASH FLOW STATEMENT
Cash flow statement for 31st December 2018
Cash flow from operating activities
Net income 153126
Increase in accounts payable 62000
Net cash flow from operating
activities 215126
2.4 ADJUSTMENT ENTRY
Date Particulars
L/
F
Amoun
t Dr.
Amoun
t Cr.
A
Cash A/c
Dr. 15000
To Bank Overdraft A/c 15000
(Owner adjustment entry made)
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Accounting for Managers
JOB 3
3. Assessment of Financial Performance
3.1CALCULATION OF FINANCIAL RATIOS OF THE COMPANY
Financial Ratios of McDonald’s Corporation
Particulars Formula Calculation 2018
Liquidity ratios
Current ratio
Current assets / Current
Liabilities 4053200/2973500 1.36
Acid-test ratio Liquid assets / Current
liabilities where, Liquid Asset
= Current Assets-Inventories 4053200/2973500 1.36
Solvency ratios
Debt equity ratio Debt / Equity 31075300/-6258400 -4.1
Profitability ratios
Profit margin Net income / sales 5924300/21025200 0.28
Return on Owners' Equity
Net income / Shareholders'
Equity 5924300/-6258400 -0.94
3.2 CATEGORISATION OF FINANCIAL RATIOS
The financial ratios can be categorised as follows:
i. Liquidity Ratios- These are the ratios calculated by the organisations to analyse the
financial health of the company. It helps the external and internal users of the
company to understand the company’s potential to meet its short-term debts. There
are various procedures to study the liquidity position of the company. Few are as
follows:
a. Current Ratio: It shows the ability of a company to meet its obligations due for
meeting in less than one year. It helps to know the ability of current assets to meet
the current liabilities. A current ratio of 1 and above is considered to be ideal.
b. Acid Test Ratio: It helps the company to analyse its liquidity position in more
detail. Here, the assets which take time in conversion are not included in the
current assets such as inventories, prepaid expenses etc. In short, we can say it is a
harder test of liquidity as compared to current ratio.
c. Cash Ratio: It only considers cash and easily convertible securities for accessing
the organisation’s capacity to meet the short-term debts.
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Accounting for Managers
ii. Solvency Ratios- Solvency ratios are usually computed in order to know how much
debt the company has taken. It is often considered, the companies having more debt
should not be considered by the shareholders for buying its stocks. During the adverse
condition like bankruptcy, the debt holders are paid first over shareholders. So it may
even happen, that shareholders get nothing after the company has paid all the due
amounts to the debt holders.
Following are the ratios which are used to study the solvency of a company:
a. Debt- Equity Ratio: The debt- equity ratio studies how much loan or debt has been
taken by the company to finance itself and its operations. Those companies having
high debt- equity ratio are considered to be more riskier over those companies
having low debt-equity ratio.
b. Interest Coverage Ratio: Whenever a company borrows money from the outside
sources it has to pay some amount as interest to the debt holders. So it is always
praised if the company has a high interest coverage ratio. The ratio is calculated to
know how much interest expenses are met by the company through the total
income generated from its main source of business. Interest ratio equal or more
than one is considered to be ideal.
iii. Profitability Ratios- The questions like how profitable the company is, is the
company performing well as compared to the competitors, is the performance of the
company getting improved over the years etc. are very well answered by analysing
this ratio. Some of the ratios calculated under profitability ratios are as follows:
a. Gross Profit Margin: Here in this ratio the net sales is compared with the gross
margin in order to evaluate how profitably the inventories are sold by the
company.
b. Net Profit Margin: The Company here tries to evaluate how much profit or loss
they have earned or incurred after considering the variable costs like, salaries,
wages, raw materials, taxes etc.
c. Return on Assets: This ratio is calculated by the companies to access how
efficiently the assets are used in generating profit or we can say revenue.
d. Return on Equity: The companies calculate this ratio to get an idea about how
much return they are getting on the amount invested by the shareholders.
3.3 FINANCIAL PERFORMANCE OF McDonald’s Corporation
As per the current ratio of McDonald’s corporation which stands at 1.36 we can easily
interpret that company has enough current assets to meet its short-term obligations. It is good
news for the company as it has a strong liquidity position
Here, we can see the company has negative debt to equity ratio which informs the readers
that company’s value is negative in numbers. It is not pleasing from the company’s view
point as it simply means, its liabilities are actually more than the assets it has with them. A
company can have a negative shareholder’s equity because of many reasons which could be
borrowing excess money from the creditors, paying much more dividends to the shareholders
or it could even result from the accumulated losses.
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Accounting for Managers
Interest Coverage ratio is calculated to understand the loan repayment capability of the
company. Higher the ratio it is better and good sign for the company. In case of McDonald’s
Corporation, this ratio is going negative which depicts the bad health of financial position of
the company.
The profitability ratios such as profit margin and return on equity are calculated. McDonald’s
Corporation’s profit margin stands at 28% which states that company is able to earn proper
profit margin with an effective control over its expenditures which relates to operational
expenses, administration expenses and so on. Return on Equity help the users to understand
whether the company is able to effectively utilise the shareholder’s funds to earn proper profit
or not. In the case of McDonald’s Corporation this ratio is 94% which speaks about the
company’s efficiency in using the funds contributed by the shareholders.
JOB 4
4. UK Regulatory Framework
4.1 Role of UK Regulatory Framework in the field of Accountancy and Finance
UK’s banking and financial services industries are guided by the Financial Services Act,
2012. This Act consists of the UK’s regulatory structure according to which the banks and
other financial institution in UK functions.
There are three regulatory bodies formed under this Act-
i. Financial Policy Committee- The Financial Policy Committee can give directions to
Prudential Regulatory Authority and Financial Conduct Authority. Financial Policy
Committee can often be abbreviated as “FPC”. FPC is formed with the view of
looking at Macro-prudential matters and will also be looking at the UK Financial
system on a broader basis. Apart from this, the committee will be supporting the
Government in policy formulation. Recognizing, observing and elimination of
systematic risks will also come under the work umbrella of FPC.
ii. Prudential Regulatory Authority - Prudential Regulatory Authority is formed with
the view of looking at micro-prudential matter and confirming the welfare and
soundness of the entities. It can be abbreviated as “PRA”.
iii. Financial Conduct Authority- Financial Conduct Authority has taken over the
majority of roles of Financial Services Act. It is formed with the view of:
(1) Protecting the consumers
(2) Encourage efficiency and choice in the market for financial services
(3) Guarding the integrity of UK’s financial system (corpgov.law, 2013)
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Accounting for Managers
4.2 Impact of International Regulations on UK’s business Entities
There are various International regulations which impact the business in different countries.
However at present UK’s business are more or less affected by the news of UK leaving the
European Union. Few Impacts because of BREXIT referendum decision are listed as follows:
i. The pound hit the lowest point in the last 31 years on the currency Exchange Market
after it was announced that UK will get separate from European Union.
ii. Also because of the same reason, UK noticed that their Standard & Poor’s credit
rating fell from AAA to AA.
iii. Financial Technology Start-ups companies have noticed a fall in their funding by 34
per cent.
iv. Some companies are exiting because they lost their passport rights.
v. The other reasons are tariffs charged on import and export, international human
resources are going out etc. (ct.wolterskluwer.com, N.D.)
Conclusion
So here we can conclude that accounting is necessary for both companies and its stakeholders
in making wise and effective decision. Companies with the help of proper books of accounts
and financial statements can easily know how and where the owner’s capital is actually being
used. In the same way, managers of the company can be assisted by these prepared reports
and statements, in making future plans for meeting the organisational objectives for
efficiently and effectively. Stakeholders can use this information to decide whether they
should continue investing in the company or not.
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References
Annand, D. (2018) Introduction to Financial Accounting [online]. Canada: David Annand.
Available 10 April, 2019 https://business.athabascau.ca/assets/Intro-to-Fcl-Accounting-print-
format-TEXT-US-Edition-at-Sept-26_18-1.pdf
Ifrs.org, (N.D.).About the International Accounting Standards Board (Board).
[Online] Available 10 April, 2019 https://www.ifrs.org/groups/international-accounting-
standards-board/
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corpgov.law (2013).Financial Services Act2012: A New UK Financial Regulatory
Framework. [Online] Available 10 April, 2019
https://corpgov.law.harvard.edu/2013/03/24/financial-services-act-2012-a-new-uk-financial-
regulatory-framework/
ct.wolterskluwer.com (N.D.).How Brexit Is Effecting Companies In The U.K. [Online]
Available 10 April, 2019 https://ct.wolterskluwer.com/sites/default/files/How-Brexit-Is-
Effecting-Companies-in-the-UK.pdf
finance.yahoo.com (N.D.).Balance Sheet. [Online] Available 10 April, 2019
https://finance.yahoo.com/quote/MDO.F/balance-sheet?p=MDO.F
finance.yahoo.com (N.D.). Income Statement. [Online] Available 10 April, 2019
https://finance.yahoo.com/quote/MDO.F/financials?p=MDO.F
news.morningstar.com (N.D.). Profitability Ratios. [Online] Available 10 April, 2019
http://news.morningstar.com/classroom2/course.asp?docId=145093&page=6&CN=sample
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