The role of financial information and analysis

Level 6 Advanced Finance for Decision-Makers

 

You have secured an internship with a major accountancy firm. Your mentor has set you a range of tasks to ensure you understand the connections between business decision making, risk assessment and financial information.

You are keen to do well as the internship may lead to an employed position and you have decided to create a file of information for present and future reference. The file must have the following sections.

 

Section 1 The role of financial information and analysis

Make detailed notes in preparation for a meeting with your mentor. You should:

 

• Examine and explain the factors that guide and drive business decision-making
• Assess the significance of financial factors in business decision-making
• Identify the characteristics of business risks that impact on financial and business decisions
• Summarise the financial priorities that need to be considered when making financial decisions.

AC (1.1, 1.2, 1.3, 1.4)

 

Section 2 Financial Statements

Your mentor has asked you to attend a meeting with him and a junior colleague who recently joined the business. The purpose of the meeting is for you to lead a discussion on financial statements and published accounts and the accountability for financial reporting. You have been asked to prepare a document for distribution at the meeting and this will form the second section in your file. In preparing the document you will need to use two sets of published accounts which you can find on the website of any major business.

 

In your document you should:

• compare the accrual and cash flow approaches to accounting and financial reporting and the implications of each for business decision-making
• explain the structure and content of final accounts and their uses for business decision making
• interpret the financial information in the financial statements you have obtained and illustrate differences between the sets of accounts (balance sheets, income statements and applications of funds statements)
• differentiate between financial decisions relating to capital expenditure and those relating to revenue expenditure
• calculate ratios from one set of published accounts and illustrate how they can be used to support business decision-making.
• examine the key requirements for published accounts of a public limited company (plc)

AC 2.1, 2.2, 2.3, 2.4, 2.5, 5.5

 

The meeting went well but in the discussions questions were raised about accountability for financial reporting. It was evident that you needed to do some work on this area and this will form Section 3 of the file

 

Section 3 Accountability for Financial Reporting

Prepare detailed notes which consider how accountability for financial reporting and the integrity of reporting are influenced by ethical, governance and accounting standards.

 

• Differentiate between business ethics, governance and accounting ethics as controls on business accountability
• Assess the role of the finance director/chief financial officer as a guardian of business ethics
• Analyse the key concepts and principles of corporate governance that may impact on business decisions
• Examine key national and international financial reporting standards that are relevant to business decisions

 

AC 5.1, 5.2, 5.3, 5.4,

 

Section 4 Sources of Finance

As part of your internship you have accompanied your mentor on a visit to a business which is planning a new business venture. Following the visit your mentor has asked you to prepare part of the induction materials used for new trainees. This will focus on new sources of finance for long term financing and working capital needs. In the materials you should:

 

• explain the difference between long-term financing needs and working capital needs for businesses
• compare sources of long term finance and working capital finance for businesses
• identify why access to working capital is critical to business continuity
• critically examine techniques needed to manage cash flow and the impact of cash flow on key business decisions
• evaluate – using illustrative examples – methods for making capital/investment decisions and criteria that may be used in the evaluation
• explain the benefits and drawbacks of off-balance sheet financing.

 

AC 3.1, 3.2, 3.3, 3.4, 3.5, 3.6

 

 

 

 

 

Section 5 Ownership Structures and Financial Performance

As part of your internship your mentor has asked you to produce a draft information guide for clients which looks at business structure and the financial implications of this. The guide should:

 

• analyse critically the financial implications of different business ownership structures
• analyse the corporate governance, legal and regulatory environments of different business ownership structures
• compare and contrast the stakeholder interests of owners and managers in decision making
• using examples evaluate the significance of Return on Capital Employed (ROCE) and other overall performance measures for the long-term sustainability of businesses
• using examples examine the importance of earnings per share (EPS) as a measure of business performance

 

AC 4.1, 4.2, 4.3, 4.4, 4.5

 

 

Suggested Resources

Mandatory reading

Atrill, P. and McLaney, E. (2013), Financial Accounting for Decision Makers. 7th edition, Harlow, Pearson

 

Elliott, B. and Elliott, J. (2013) Financial Accounting and Reporting. 16th edition. Harlow, Pearson

 

Further reading

Atrill, P., and McLaney, E., Accounting and Finance for Non-Specialists (Pearson, 2012)

 

International financial reporting standards (2013). IASB (see http://www.iasb.org/Home.htm)

 

Financial Times Newspaper

 

Maynard, J., Financial Accounting, Reporting and Analysis (OUP, 2013)

 

Weetman, P., Financial Accounting: An Introduction (Pearson, 2013)

Guidelines for assessors

The assignments submitted by learners must achieve the learning outcomes and meet the standards specified by the assessment criteria for the unit. The suggested evidence described below is how learners can demonstrate that they have met the required standards.

 

Activity number	ACs	Suggested evidence
1	1.1, 1.2, 1.3, 1.4	Learners must demonstrate an understanding of the importance of financial information and analysis in assessing risk and making decisions. In demonstrating this understanding learners will also need to examine a range of factors that impact on decision making and provide a balanced assessment of the significance of financial factors. They should clearly identify the features of different types of risks which businesses face and their impact on financial decision making. The summary must cover the main financial priorities.
2	2.1, 2.2, 2.3, 2.4, 2.5, 5.5	The document should show a good understanding of financial statements and how they can be analysed to provide information for decision making. The comparison must show that learners understand the difference between accrual and cash flow approaches and the implications of each. There should be a full explanation of the structure and content of final accounts and how they are used. The interpretation must be clear and cover all the stated elements. In differentiating learners should discuss the differences between financial decisions relating to capital and revenue expenditure. Learners need to calculate the main financial ratios and to differentiate between capital and revenue expenditure decisions. There should be a thorough examination of the requirements of published accounts for plcs.
3	5.1, 5.2, 5.3, 5.4	The notes must show that learners understand the influence standards have on financial reporting and accountability. Learners must clearly explain the differences between ethics and governance as controls on accountability and the role played by the Director of Finance in achieving the ethical standards. There must be a full and detailed analysis of corporate governance and its impact on decisions. And a thorough examination of the national and international reporting standards that impact on decisions.
4	3.1, 3.2, 3.3, 3.4, 3.5, 3.6	In the induction materials, learners need to show understanding of sources of finance. There must be a clear explanation of the differences between long term financing and working capital needs. The comparison should examine in detail the sources for different financing requirements. Learners should clearly show the importance of access to working capital. There must be a thorough investigation into the techniques of managing cash flow and how cash flow informs business decisions. The evaluation must consider the strengths and weaknesses of different methods for taking decisions and learners must identify the criteria which would be used in this evaluation. Learners should provide a balanced explanation of the benefits and drawbacks of off-balance sheet financing.
5	4.1, 4.2, 4.3, 4.4, 4.5	In completing this task learners must show an understanding of the interface between different ownership structures and finance. This must be demonstrated by a full and detailed analysis of the financial implications and the corporate governance, legal and regulatory environment of different business ownership structures. The comparisons should examine the stakeholder interests in detail, identifying similarities and differences. The evaluation of ROCE and other performance measures must be completed in full and be a balanced response. EPS should be carefully examined to show how it can be used in measuring business performance.

 

 

 

 

 

 

 

 

 

Learning outcomes The learner will:	Assessment criteria The learner can:
1 Understand the role of financial information and financial analysis in business risk assessment and decision-making	1.1 Examine the factors that guide and drive decision making in business 1.2 Assess the significance of financial factors in business decision making 1.3 Identify the characteristics of business risks that impact on financial and business decisions 1.4 Summarise financial priorities that should be considered in business decision making
2 Understand how financial statements and their structure provide a sound basis for business decision making	2.1 Compare the accrual and cash flow approaches to accounting and financial reporting and the implications of each for business decision making 2.2 Explain the structure and content of final accounts and their uses for business decision making 2.3 Interpret financial information in balance sheets, income statements and sources and applications of funds statements 2.4 Differentiate between financial decisions relating to capital expenditure and those relating to revenue expenditure 2.5 Calculate financial ratios from final accounts that can be used to support business decision making
3 Understand sources of finance and how businesses finance fixed assets and working capital	3.1 Differentiate between long-term financing needs and working capital needs for businesses 3.2 Compare the sources of long-term financing and working capital financing for businesses 3.3 Identify why access to working capital is critical to business continuity 3.4 Examine critically the techniques needed to manage cash flow and the key business decisions on which cash flow impacts 3.5 Evaluate methods for making capital expenditure or investment decisions and the criteria that may be applied in the evaluation. 3.6 Explain the possible benefits and drawbacks of off-balance sheet financing
4 Understand how different ownership structures influence financial performance	4.1 Analyse critically the financial implications of different business ownership structures 4.2 Analyse the corporate governance, legal and regulatory environments of different business ownership structures 4.3 Compare and contrast the stakeholder interests of owners and managers in decision making 4.4 Evaluate the significance of Return on Capital Employed (ROCE) and other overall performance measures for the long-term sustainability of businesses 4.5 Examine the importance of Earnings Per Share (EPS) as a measure of business performance
5 Understand how accountability for financial reporting and the integrity of reporting are influenced by ethical, governance and accounting standards	5.1 Differentiate between business ethics, governance and accounting ethics as controls on business accountability 5.2 Assess the role of the Director of Finance or the Chief Financial Officer as a guardian of business ethics 5.3 Analyse the key concepts and principles of corporate governance that may impact on business decisions 5.4 Examine the key national and international financial reporting standards relevant to business decisions 5.5 Examine the key requirements for published accounts of a Public Limited Company (PLC)