MM 2.00 Understand Financial Analysis

1. MM 2.00Understand Financial Analysis 2.02 Acquire a foundational knowledge of accounting to understand its nature and scope.

2. What is financial information? • Financial information is information required to support financial decisions or to meet financial requirements. • Accounting is the activity within an organization that provides much of the raw financial information. • Accounting can be defined as: "The recording of financial transactions over a period of time and the communication of the resulting information to interested parties."

3. Financial Information Should Be… • Credible – provides true information • Transparent – fully disclosed and accurate • Timely (prepared daily, monthly, quarterly, annually) Also, timely information gives feedback showing what has happened and/or helps predict what will happen

4. Financial Information Should Be… • Understandable - logical, makes sense to readers • Comparable – information can be measured and reported in a similar manner to other businesses. • Reliable – gives the same result each time, presents what really happened.

5. Who is responsible for maintaining financial information? • CEO (Chief Executive Officer) • CFO (Chief Financial Officer) • Finance director • Finance department • Company accountant • Bookkeeper • Company secretary (small company)

6. How do managers use financial information? • Provides management with data needed to determine whether a business is at a loss or a profit, how much debtors owe, how much a business owes others, and other financial information. • Helps managers create: • Planning strategies • Executing strategies • Feedback from the execution of the strategy

7. How is financial information useful in identifying trends? Trend – The direction in which something is moving. • Types of trends that financial statements can show – growth and decline of sales, profit or loss, changes in costs and expenses, changes in assets and liabilities. • Helps a business see its current financial state and make predictions about its future

8. How is financial information useful in contracts? An important specific role of financial statements is that they are used in various contracts and agreements. • For example: • A limit to the amount that a company may borrow may be based on ratios taken from the financial statements. If such limits are breached, various consequences may arise including the debt being immediately repayable. • In an agreement for the sale or purchase of a subsidiary, the price to be paid may include an initial amount plus a further amount of contingent consideration that may be payable depending on the level of profits in the period (typically one to three years) after the sale. • Part of the remuneration of a director, manager or group of employees may be based on an accounting measure such as growth in (or absolute amount of) a measure of profit such as operating profit, pre-tax profit, post-tax profit or earnings per share.

9. How does financial data aid in accounting? • Business wants to know the profit earned or loss suffered during the year and its financial position at the end of the year. This is disclosed by income statements and the balance sheets. Book-keeping records provide necessary data for preparing these statements.

10. How does analysis of financial data aid in verifying information? • Financial information and data are needed for cost ascertainment, planning, budgeting and forecasting. Records maintained by book-keeping are the source of such information. • Book-keeping records are regarded by the tax authorities as authentic and reliable for determining tax liability.

11. How does financial data aid in determining variance? • It provides consistent data needed to compare figures. • It provides the data needed to determine the variance . • The variance is the difference in the planned financial outcomes (from the budget) and the actual financial outcomes.

12. How does financial data guide financial decision making? • The finance department of a company generates a variety of financial information that is helpful in decision making, including: • Profit and Loss accounts providing details of whether the business is making efficient use of financial resources. • Balance Sheet information providing details of a businesses assets and liabilities, as well as the liquidity of the business.

13. How does financial data guide financial decision making? • Sales and purchases information about particular types of trading and accounts with particular customers and suppliers. • Information about the purchase of assets and liabilities. • Information about the wages paid out by a business. • Information about costs.

14. How does financial data guide financial decision making? • By providing a steady and up-to-date flow of consistent information, a business is able to make appropriate decisions about: • how to reduce costs • how to increase sales • how to raise profitability • when to purchase new capital assets • the best sources of finance, and duration, etc.

15. Sources used: • http://www.rajputbrotherhood.com/knowledge-hub/accounting/what-are-the-importance-of-book-keeping.html • http://www.dwmbeancounter.com/tutorial/theorybook.html • http://www.york.ac.uk/enterprise/cetle/resources/WRCE/ryos/resources/NUFI.pdf • http://www.thetimes100.co.uk/theory/theory--financial-information-decision-making--121.php