Acca f3 Financial Accounting (int) Study Text

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1: Introduction to accounting   Part A  The context and purpose of financial reporting 

currently and as it is expected to be in the future. This is to enable them to manage the business 

efficiently and to make effective decisions. 

(b)

Shareholders of the company, ie the company's owners, want to assess how well the 

management is performing. They want to know how profitable the company's operations are and 

how much profit they can afford to withdraw from the business for their own use. 

(c)

Trade contacts include suppliers who provide goods to the company on credit and customers who 

purchase the goods or services provided by the company. 

Suppliers want to know about the company's 

ability to pay its debts; 

customers need to know that the company is a secure source of supply and is in 

no danger of having to close down. 

(d)

Providers of finance to the company might include a bank which allows the company to operate 

an overdraft, or provides longer-term finance by granting a loan. The bank wants to ensure that the 

company is able to keep up interest payments, and eventually to repay the amounts advanced. 

(e)

The taxation authorities want to know about business profits in order to assess the tax payable by 

the company, including sales taxes. 

(f)

Employees of the company should have a right to information about the company's financial 

situation, because their future careers and the size of their wages and salaries depend on it. 

(g)

Financial analysts and advisers need information for their clients or audience. For example, 

stockbrokers need information to advise investors; credit agencies want information to advise 

potential suppliers of goods to the company; and journalists need information for their reading 

public. 

(h)

Government and their agencies are interested in the allocation of resources and therefore in the 

activities of business entities. They also require information in order to provide a basis for national 

statistics.

(i)

The public. Entities affect members of the public in a variety of ways. For example, they may make 

a substantial contribution to a local economy by providing employment and using local suppliers. 

Another important factor is the effect of an entity on the environment, for example as regards 

pollution.

Accounting information is summarised in financial statements to satisfy the 

information needs of these 

different groups. Not all will be equally satisfied. 

4.3 Needs of different users

Managers of a business need the most information, to help them make their planning and control 

decisions. They obviously have 'special' access to information about the business, because they are able 

to demand whatever internally produced statements they require. When managers want a large amount of 

information about the costs and profitability of individual products, or different parts of their business, 

they can obtain it through a system of cost and management accounting. 

Question 

Information for managers 

Which of the following statements is particularly useful for managers? 

A 

Financial statements for the last financial year 

B 

Tax records for the past five years 

C 

Budgets for the coming financial year 

D 

Bank statements for the past year 

Answer

The correct answer is C. Managers need to look forward and make plans to keep the business profitable. 

Therefore the most useful information for them would be the budgets for the coming financial year. 

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Part A  The context and purpose of financial reporting 

  1:  Introduction to accounting

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In addition to management information, financial statements are prepared (and perhaps published) for the 

benefit of other user groups, which may demand certain information. 

(a) The 

national laws of a country may provide for the provision of some accounting information for 

shareholders and the public. 

(b)

National taxation authorities will receive the information they need to make tax assessments. 

(c) A 

bank might demand a forecast of a company's expected future cash flows as a pre-condition of 

granting an overdraft. 

(d) The 

International Accounting Standards Board (IASB) has been responsible for issuing 

International Financial Reporting Standards (IFRSs and IASs) and these require companies to 

publish certain additional information. Accountants, as members of professional bodies, are placed 

under a strong obligation to ensure that company financial statements conform to the requirements 

of IFRS/IAS. 

(e) 

Some companies provide, voluntarily, specially prepared financial information for issue to their 

employees. These statements are known as '

employee reports'.

The needs of users can easily be examined by means of a MCQ. For example, you could be given a list of 

types of information and asked which user group would be most interested in this information. 

5 The main elements of financial reports 

The principle financial statements of a business are the 

statement of financial position and the income

statement.

5.1 Statement of financial position 

The

statement of financial position is simply a list of all the assets owned and all the liabilities owed by a 

business as at a particular date. It is a snapshot of the financial position of the business at a particular moment. 

Monetary amounts are attributed to each of the assets and liabilities. 

5.1.1 Assets

An

asset is something valuable which a business owns or has the use of. 

Examples of assets are factories, office buildings, warehouses, delivery vans, lorries, plant and machinery, 

computer equipment, office furniture, cash and goods held in store awaiting sale to customers. 

Some assets are held and used in operations for a long time. An office building is occupied by 

administrative staff for years; similarly, a machine has a productive life of many years before it wears out.

Other assets are held for only a short time. The owner of a newsagent shop, for example, has to sell his 

newspapers on the same day that he gets them. The more quickly a business can sell the goods it has in 

store, the more profit it is likely to make; provided, of course, that the goods are sold at a higher price than 

what it cost the business to acquire them. 

5.1.2 Liabilities 

A

liability is something which is owed to somebody else. 'Liabilities' is the accounting term for the debts 

of a business. 

Examples of liabilities are amounts owed to a supplier for goods bought on credit, amounts owed to a 

bank (or other lender), a bank overdraft and amounts owed to tax authorities (eg in respect of sales tax). 

Some liabilities are due to be repaid fairly quickly eg suppliers. Other liabilities may take some years to 

repay (eg a bank loan). 

Key term 

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Key term 

Key term 

Exam focus 

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