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117156
E.Fitt
Financial accounting information
This information is not only needed by management but also by the following stakeholders: shareholders,
government agencies, suppliers, banks and the owners (external).
Financial accounting provides the financial statements that inform outside parties such as shareholders and lenders
about the financial performance and position of a firm. In turn, auditing is the process used to assess the integrity of
the financial statements and/or operations, which culminates in a report providing assurances regarding that integrity.
At the end of the financial accounting period (ie. financial year end 1 March – 28 Feb) , the following 3 reports are
produced:
An Income statement
A Balance sheet
A Cash flow statement
Management accounting information
Managerial accounting provides accounting information to help managers make decisions

to manage the business. Management accounting is the process of identification,
measurement, accumulation, analysis, preparation, interpretation and communication of
information used by management to plan, evaluate and control within an entity and to
assure appropriate use of and accountability for its resources.
Management accounting information is often for internal use. This information is presented
on a monthly basis.
Examples of management accounting information are:
•• The monthly profit and loss statement
•• Cost variance analysis
•• Evaluation of capital projects in terms of their viability with regard to relevant costing
Fundamental accounting concepts
For the preparation of financial statements there are fundamental accounting concepts
(GAAP) that must be observed. These are:
The going concern concept
It is assumed that the enterprise will continue in operation for the foreseeable future. This is
important because stock is valued on the basis that it will be sold normally not at a
liquidation sale.
The matching concept
Revenue and cost are matched with one another to the period in which they relate.
The consistency concept
The financial information must be presented and dealt with in the same way from one year
to the next.
The prudence concept
Any expense or loss must be provided for whether the actual amount is known or not.
The Accrual basis
Transactions are recorded in the financial statements when they occur even if the money
has not been received or the payment made.
Choose the correct answer
Which of the following is NOT a current asset
a. Trading stock
b. Prepaid insurance
c. Light fixtures
Which of the following is a current liability

d. Trade Creditors
e. Debtors
f. A loan from the bank
Retained income forms part of Shareholders’ Equity

g. True
h. False
Working
capital cycle
(circulation of CA
and CL in business)
• Can the company pay its short-term debt?
…...here the liquidity ratios are calculated
using the balance sheet
Net Working capital = Current Assets –Current
Liabilities ; WC = CA –CL (ideally be positive (+ve)
• Liquidity refers to the ability of the

Company to meet its obligations in the
short-term.
The inventory turnover ratio, shows how quickly inventory is
sold and replaced in a certain time period. It is considered an
activity ratio as it measures the efficiency of the company in
using its resources. It would differ from industry to industry. For
example, a good stock turnover for a clothing store would be 4
as that would show stock would be getting bought and sold per
every different weather season. If it is too low, stock may
become obsolete, storage costs to keep stock may be high
Average collection period, the shorter the better as we want to

allow for good cash flow in our business.
The asset turnover ratio measures a company’s ability to

generate sales relative to its assets. It quantifies how efficiently
a company utilizes its assets to generate sales and indicates how
effectively management deploys its resources. A high ratio
suggests efficient asset utilization, while a low ratio may show
underutilization or inefficiencies.
TAT NB:
Total
sales /
Total
Assets
Solvency : the ability of a company to meet its long-term debts and other financial
obligations. It indicates whether a company has enough assets to cover its long-
term liabilities, providing a measure of financial health and stability.
Debt-to-Equity Ratio: This ratio compares a company's total debt to its total equity,
indicating the proportion of debt used to finance the company's assets. A lower
ratio is generally considered more favorable.

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117156

Managerial accounting provides accounting information to help managers make decisions

Which of the following is a current liability

Retained income forms part of Shareholders’ Equity

• Liquidity refers to the ability of the

Average collection period, the shorter the better as we want to

The asset turnover ratio measures a company’s ability to

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