THE OPEN UNIVERSITY OF TANZANIA FACULTY OF BUSINESS MANAGEMENT FINANCIAL AND MANAGERIAL ACCOUNTING MODULE OUTLINE

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1 THE OPEN UNIVERSITY OF TANZANIA FACULTY OF BUSINESS MANAGEMENT DEPARTMENT OF ACCOUNTING AND FINANCE: MBA (cw) PROGRAMME OAF 612: FINANCIAL AND MANAGERIAL ACCOUNTING MODULE OUTLINE INTRODUCTION This course introduces you to the complex world of commerce by providing an overview of how the accounting information is assembled and used by managers in managerial decision-making. The course is divided into two main parts. The first part deals with Financial Accounting, which introduces students to basic principles and methods of financial accounting. The part emphasises on financial accounting system and reporting to external users. It provides insights into the role, potentials and limitations of accounting information. The second part deals with management accounting and emphasizes the practical and functional nature of business from the perspective of financial accounting, managerial costing and budgetary policies; investing and financing of business operations. MODULE AIMS The general aim of the module is to enable the graduates acquire knowledge and skills in analysing and interpreting accounting and cost information and come up with relevant information for the planning, controlling and decision making purposes and apply the same in various organizational performance processes in both public and private sectors. 1

2 OBJECTIVES The course objectives have been objectively outlined in each topic to enable the student to evaluate himself at the end of each topic on the general understanding of the subject matter. References have been provided at the end of each topic but students are advised to obtain more reading material from the books on Financial and Managerial accounting which contain the like topic coverage MODULE CONTENT PART I: FUNDAMENTALS OF FINANCIAL ACCOUNTING LECTURE 1: INTRODUCTION TO ACCOUNTING INFORMATION 1.1 Introduction The lecture introduces you to the users of accounting information, its purpose, uses and limitations. It then analyses its importance and role within a business context at a strategic, organizational and environmental level. 1.2 Objectives At the end of this lecture, you will be able to: Understand accounting and its roles; Identify the uses and users of accounting information; Describe the way in which accounting helps managers in making decisions; 2

3 1.3 Contents Definition of Accounting Recording, classifying, summarizing transactions observe monetary terms; interpretations & summary. Also, observe the quantitative aspects, the nature of the information and decision making aspect Purpose of accounting information Two levels can be identified individual and corporate levels. The purpose of accounting information differs between the two levels depending on the goals of the entity Users of accounting information These are internal and external users. Each user group has different needs for and application of accounting information Limitation of accounting information Identify the weaknesses of the accounting information Recommended Readings Kermit D Larson (1997), Essentials of Financial Accounting information for Business Decisions, Seventh edition, Irwin McGraw-Hill Chapter One; Aidan Berry & Robin Jarvis (1994), Accounting in a business context, Second Edition, Chapman & Hall Chapter One 3

4 Pam Powell (2000), Financial Reporting Analysis and Planning, Third Edition, Financial World Publishing Chapter One Section 5,6,7; 4

5 LECTURE 2: FINANCIAL STATEMENTS AND ACCOUNTING PRINCIPLES 2.1 Introduction You will learn about the kind of information accountants provide in financial statements to decision makers. In addition, you will learn, in details, some of the general principles, which guide accountants in developing the statements. 2.2 Objectives At the end of this lecture, you will be able to: Describe the information presented in financial statements and be able to prepare simple financial statements; Explain the accounting principles introduced in the chapter; Analyze business transactions to determine their effects on the accounting equation; 2.3 Contents Introduction to accounting principles These are the generally accepted accounting principled which guide accountants in preparation of the financial statements Introduction to Financial statements The accounting cycle/equation; The system of debit and credits double entry The adjusting entries and Trial balances 5

6 The closing entries and preparation of the financial statements -These are income statement, balance sheet, cash flow statements and statement of retained earnings. Each major item of these statements will be discussed. Preparation of the statements general presentation on the corporate view. Recommended readings; Kermit D Larson (1997), Essentials of Financial Accounting information for Business Decisions, Seventh edition, Irwin McGraw-Hill Chapter Two; Aidan Berry & Robin Jarvis (1994), Accounting in a business context, Second Edition, Chapman & Hall Chapter Three & Four; Pam Powell (2000), Financial Reporting Analysis and Planning, Third Edition, Financial World Publishing Chapter Two; The International Accounting Standards 6

7 LECTURE 3: SOME FINANCIAL REPORTING PERSPECTIVES 3.1 Introduction You will learn about various reporting perspectives on legal, conceptual and regulatory frameworks. There will be a detailed analysis of the financial statements and the elements making up individual statements. 3.2 Objectives At the end of this lecture, you will be able to: Understand the above frameworks; Understand better the presentation of the financial statements Analyze the financial statements and give detailed interpretation 3.3 Contents Conceptual framework Fundamental accounting concepts and financial statements Regulatory framework The setting of the required standards to regulate the operations of the financial statements and the need for audit Legal framework The accounting requirements as per the Company Act. 7

8 3.3.4 Analysis of financial statements Ratio analysis Recommended readings; Kermit D Larson (1997), Essentials of Financial Accounting information for Business Decisions, Seventh edition, Irwin McGraw-Hill Chapter Two; Aidan Berry & Robin Jarvis (1994), Accounting in a business context, Second Edition, Chapman & Hall Chapter Three & Four; Pam Powell (2000), Financial Reporting Analysis and Planning, Third Edition, Financial World Publishing Chapter Two; Bautista, I. V. (Sr.) & Assad, M. J. (1994) Introductory financial accounting. Dar es Salaam: DUP Press 8

9 PART II: MANAGERIAL ACCOUNTING LECTURE 4: DEFINITION AND SCOPE OF MANAGERIAL ACCOUNTING 4.1 Introduction Managerial accounting or management accounting is a segment of accounting that deals specifically with how accounting data and other financial information can be used in the management of business. It is designed to assist the internal management and therefore it is free from the restrictions imposed by regulatory bodies that prescribe how accounting information should be presented to the public. Although managerial accounting is largely free from restrictions, it does rely upon broad general concepts and certain applications that are most useful to management. 4.2 Objectives At the end of this lecture, you will be able to: Differentiate between management accounting; cost accounting and financial accounting;; Explain the factors involved in the decision making, planning and control process; Explain the role of management accounting in the management process; 4.3 Contents Scope of managerial accounting 9

10 Managerial accounting makes use of information that is drawn from financial accounting and may extend beyond the boundaries of accounting to draw upon economics, finance, statistics, operations research or other disciplines as necessary. Management accounting - an integral role in the overall decision process within an organization Objectives of Managerial accounting Evaluation of various cost systems for planning and control. Identify underlying cost behaviour or structure. Preparation of budgets and evaluation of business performance. Evaluation of the interdependency between organization structure, planning and control for operating decisions, achieving cost control, measuring performance, etc Method of management Management accomplishes its objectives by working with people the efforts of many individuals are combined in an organization. The top-level management assumes responsibility for overall planning and policy-formatting decisions that affect the business as whole are made in a corporate form of organization by the top management. 10

11 Recommended readings; Hongren, CT, Foster, G & Datar, SM (1999). Cost Accounting: A Managerial Emphasis International Edition, 10th Ed, Prentice Hall, Upper Saddle River NJ; Aidan Berry & Robin Jarvis (1994), Accounting in a business context, Second Edition, Chapman & Hall Chapter Thirteen; Colin Drury (1995), Management and Cost Accounting, Third Ed, Chapman & Hall Ltd 11

12 LECTURE 5: COST BEHAVIOUR 5.1 Introduction Management accounting serves the managers by providing information to help them in decision making, planning and control. In making their decisions, the element of cost is important as it identify the importance of making decision in situations where the factors are scarce, which in actual sense is the actual situation in today s world. 5.2 Objectives After completing this topic, you should be able to; - Describe the three purposes for which cost information is required; - Distinguish between job and process costing; - Understand and explain various cost categories; - Understand the relationship between costs, volumes of productions and Profits (CVP analysis) - Understand and calculate the break even point; - Prepare the income statement using the contribution approach 5.3 Contents Costs Objectives and classification - Costs for stock valuation (Period/product costs; manufacturing costs; job/process costs); - Costs for decisions making (cost behaviour; relevant/irreverent costs; avoidable/unavoidable costs; opportunity costs, sunk costs); 12

13 - Costs for control (controllable/uncontrollable) - In each of the costs there are possible method of cost classification (See C Drury Chap Two) CVP Analysis - Basic relationships between the three items - Relevant range - CVP assumptions - Break even Point and contribution approach - Other relationships preparation of income statement using contribution approach Decision making under spare capacity Decision making under uncertainty Decision Making under Limited Capacity Recommended readings; Hongren, CT, Foster, G & Datar, SM (1999). Cost Accounting: A Managerial Emphasis International Edition, 10th Ed, Prentice Hall, Upper Saddle River NJ; Aidan Berry & Robin Jarvis (1994), Accounting in a business context, Second Edition, Chapman & Hall; Colin Drury (1995), Management and Cost Accounting, Third Ed, Chapman & Hall Ltd Pam Powell (2000), Financial Reporting Analysis and Planning, Third Edition, Financial World Publishing 13

14 LECTURE 6: CAPITAL INVESTMENT APPRAISAL 6.1 Introduction Companies purchase new capital equipment on a regular basis, either to expand operations or to replace outdated equipment. All financial reports include a balance sheet, which records the value of the fixed assets held by a business. As it is with any investment, the new equipment must earn a return for the business. Investment appraisal is concerned with decisions about the renewal and replacement of those fixed assets. The methods of investments appraisal outlined in this topic, provide the framework for arriving at such decisions. 6.2 Objectives After completing this topic, you should be able to; - Understand what is the capital investment appraisal and capital budgeting; - Understand the investment appraisal cycle; - understand and apply the various methods of evaluating the projects - apply the results of investments appraisal into decision making process; 6.3 Contents Capital investment and capital budgeting Planning and Control - The meaning of capital investment/budgeting; - The investment process/cycle Projects Evaluations Background Information - The Future Values, Present Values, annuities and perpetuities; 14

15 - Methods and types of compounding - The nominal and real interest rates; Characteristics of capital investment - They involve payment now for an asset, which will generate returns in the future. - They involve decisions that involve the purchase of assets, which have a life extending beyond a single accounting period. - The sums involved in capital investments tend to be large Methods of investments Appraisal - Theoretically not correct methods - Payback method and Accounting Rate of return; - Theoretically correct method Internal Rate of Return and Net Present Value Methods - Decision Rules for each kind of method Recommended readings; Hongren, CT, Foster, G & Datar, SM (1999). Cost Accounting: A Managerial Emphasis International Edition, 10th Ed, Prentice Hall, Upper Saddle River NJ; Aidan Berry & Robin Jarvis (1994), Accounting in a business context, Second Edition, Chapman & Hall; Colin Drury (1995), Management and Cost Accounting, Third Ed, Chapman & Hall Ltd Pam Powell (2000), Financial Reporting Analysis and Planning, Third Edition, Financial World Publishing 15

16 LECTURE 7: PLANS FORECAST AND BUDGETS 7.1 Introduction Businesses are concerned with achieving financial goals. Investors require the company to meet profit targets, which will ensure that they receive the required dividends and see the share price rise over time. If goals are to be achieved planning needs to be detailed, and the performance monitored and controlled. This unit deals with the planning and controlling process, specifically, how budgets are used as a tool to assist management. The need to exercise caution in using budgets for control and performance measurement is also discussed. 7.2 Objective After completing this topic, you should be able to; - Understand the link between plans, forecasts and budgets; - Understand the budget management and control process; - understand the details and preparations of various types of budgets - prepare the budgeted financial statements 7.3 Contents The Link between Plans Forecasts and Budgets - A forecast is a prediction of what is thought likely to happen - A plan is a means by which a set objective (or what should happen ) will be achieved; - A budget is a tool, which is used in planning process to translate physical plans into financial terms 16

17 7.3.2 Budgeting and Management Control Limitations of Budgets as control mechanisms Advantages of Budgets - To compel planning. - Coordination of the different functions within organization - Communication - Provide a basis for responsibility accounting - Provide a basis for a control mechanism ; - Authorisation of expenditure; - A means to motivate employees to improve performance The Budget Process - This is the sequence of operations necessary to produce a budget for a particular organisation. The sequence of operations will depend upon the type of organization and its perceived requirements for planning and control The budget Period - The budget Period normally employed by organisation is one year. The reason for a period of a year appears to relate to the periodic reporting requirements for the published accounts regulated by company s act Preparation of Budgets - The master budget is extremely useful to management as it clearly sets out the objectives and the targets for the forthcoming budget period and is in a form 17

18 that is easy to comprehend. It also provides a basis for coordinating individual functional budgets. - For small organisations frequently the profit and loss account, balance sheet and cash budget will be sufficient for the organisation management requirements. The information contained in these three budgeted statements can provide management with a reasonable base to analyze the forthcoming period. Recommended readings; Hongren, CT, Foster, G & Datar, SM (1999). Cost Accounting: A Managerial Emphasis International Edition, 10th Ed, Prentice Hall, Upper Saddle River NJ; Aidan Berry & Robin Jarvis (1994), Accounting in a business context, Second Edition, Chapman & Hall; Colin Drury (1995), Management and Cost Accounting, Third Ed, Chapman & Hall Ltd Pam Powell (2000), Financial Reporting Analysis and Planning, Third Edition, Financial World Publishing Comments: To master this Module, you are expected to have working knowledge of arithmetic and algebra. In addition you are required to practice reading and computing on a daily basis You are expected to have computational devices such as calculators, text books, journals, international accounting standards, and Company Act

19 Assessment You will be assessed through a compulsory student progressive portfolio (ungraded), timed test (30%) and final examination (70%). Pass mark shall be 50%. Other Requirements Library visits, group discussions, use of other sources of information/materials including e-resources, and lectures where possible. Recommended readings: Aidan Berry & Robin Jarvis (1994), Accounting in a business context, Second Edition, Chapman & Hall Bautista, I. V. (Sr.) & Assad, M. J. (1994) Introductory financial accounting. Dar es Salaam: DUP Press Colin Drury (1995), Management and Cost Accounting, Third Ed, Chapman & Hall Ltd Hongren, CT, Foster, G & Datar, SM (1999). Cost Accounting: A Managerial Emphasis International Edition, 10th Ed, Prentice Hall, Upper Saddle River NJ; Kermit D Larson (1997), Essentials of Financial Accounting information for Business Decisions, Seventh edition, Irwin McGraw-Hill Pam Powell (2000), Financial Reporting Analysis and Planning, Third Edition, Financial World Publishing Robert, A., & Breitner L. (2006) Essentials of accounting. 9th edition. Prentice Hall The International Accounting Standards Tulsian, P. C. (2009) Financial accounting. 5th Edition. New Delhi: Pearson Education 19

20 Wood, F. & Sangster, A. (2005) Business accounting I. 10th Edition. Harlow: Prentice Hall. Web resources:

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