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Introduction to Accounting and

Financial Management
Lecture 1
Learning Objectives
1. What is Financial Management?
2. Financial Management Decisions
3. The Role of the Finance Manager
4. What is Accounting?
5. Accounting vs. Finance
6. The Accounting Reports
What is Financial Management?
What is Financial Management?

Broadly speaking, financial management deals with

how to answer these 3 questions:

1. What
investments
should you
take?

2. How do you get 3. How to manage

the money to pay the everyday
for these financial
investments? activities?
Main Financial Goal of the Firm

But why are these 3 questions important?

In other words, what (financial) goals are achieved

when a firm successfully answers these questions?
Main Goal of the Firm
The answer:

Answering these 3 questions

successfully helps the owners
to maximize the current
value of the firm that they
own.
Main Goal of the Firm

And since owners benefit when their shares in the firm

increases in value (thereby becoming wealthier), therefore
the main financial goal of a firm is:

To “maximize shareholder
wealth” by maximizing the price
of the existing shares in the firm.
Financial Management Decisions
The Role of Finance in Business

▪ Knowledge of financial tools is relevant for decision

making in all areas of business (be it marketing,
production etc.).
▪ Decisions involve an element of time and uncertainty
– financial tools help adjust for time and risk.
▪ Decisions taken in business should be financially
feasible – financial tools help determine the financial
viability of decisions.

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Financial Management Decisions

Now, let’s look at the tools used to answer the 3

questions:
1. What 3. How to
2. How do you
long-term manage the
get the money
investments everyday
to pay for these
should you financial
investments?
take? activities?

Capital Capital Working Capital

Budgeting Structure Management
Financial Management Decisions
1. Capital Budgeting

▪ The main tool used to manage & plan a business’ long term
assets/investments.

▪ This tool helps you to identify investment opportunities

whose cash flow exceeds the cost of investment.
Financial Management Decisions
1. Capital Budgeting

▪ Different businesses will face different capital budgeting

decisions:

a) A retailer giant (like Giant or Carrefour) deciding whether to

open an additional store outlet.
Financial Management Decisions
1. Capital Budgeting

b) Microsoft deciding to develop a new Windows program.

c) A construction company deciding on a new shopping mall

construction project.
Financial Management Decisions
1. Capital Budgeting

▪ Remember, the decision on whether to go ahead with the

investment for these different businesses will depend on:

Investment Investment
Cash Inflows > Cost
Financial Management Decisions
2. Capital Structure

▪ Capital structure refers to the combination of debt and equity

that a business uses to fund the investment.

Equity
Financial Management Decisions
2. Capital Structure

▪ For example, if you have decided to invest in a RM50m office

building project, how much money would you borrow?

▪ Should you decide to borrow RM20m (debt), that means that

you are funding the rest, RM30m, with your own business’
money (i.e., equity).
Financial Management Decisions
2. Capital Structure

▪ Besides thinking about the debt/equity mixture, you also need

to think about the cost of funds.

▪ For example, how much interest do you need to pay (per year)
on the debt?

▪ Even equity (money provided by owners/shareholders) has a

cost, i.e. owners demand a certain % of return on their own
money.
Financial Management Decisions
2. Capital Structure

▪ You also need to think about where to raise these funds.

▪ For example, debt can be raised via bank loans, bond market
and also business partners/friends.

▪ Equity can be raised via personal savings, inviting new partners

to join your business and selling shares.
Financial Management Decisions
3. Working Capital Management (WCM)

▪ The term working capital refers to a business’ short-term

assets (e.g. inventory) and short-term liabilities (e.g. money
owed to suppliers).

▪ Managing working capital is a day-to-day activity that ensures

that a business has sufficient resources to run smoothly.
Financial Management Decisions
3. Working Capital Management

▪ Examples of WCM:

• How much money and inventory should we keep on hand?

• Should we sell to our customers/clients on credit? If so, on

what terms?

• How do we obtain short-term borrowings? Via bank overdraft?

Purchase inventories on credit?
Why Is Construction Financial Management
Different?
Project oriented:
▪ Greater variety of projects (products)
▪ Harder to determine the cost of projects
▪ Cannot stockpile completed work for future use
▪ Greater need for detailed job cost accounting

Decentralized:
▪ Must track equipment
Why Is Construction Financial Management
Different?
Payment terms:
▪ Progress payments
▪ Retention

Heavy use of subcontractors

Who Is Responsible for Construction
Financial Management?
Owners
General Managers
CFO (Chief Financial Officer)
Estimators
Project Managers
Superintendents
The Role of the Finance Manager
The Finance Manager

Depending on the size of the business, the 3

questions of financial management are dealt by
different people.

▪ In a small business, the owner will answer these

questions himself.

▪ In a large corporation, these questions/decisions are

passed on to the finance manager.
The Finance Manager

So what is the job of a finance manager?

It can be divided into 3 areas:

1. Raise funds from various sources such as lenders, investors,

etc.
2. Put those funds into (hopefully) profitable long-term
investments.
3. And, manage the day-to-day cash needs of the business.
The Finance Manager
Provide Finance Puts the
money to Manager money in

Investors & Business’

lenders investments,
projects, etc.

Finance Generates
Returns money, i.e.
Manager
money to income
Manages

Daily cash
needs
What Does a Finance Manager Do?

1) Accounting for financial resources

2) Managing costs and profits

3) Managing cash flows

4) Choosing among financial alternatives

1) Accounting for Financial Resources
Making sure costs are accurately tracked through the
accounting system

Ensuring that the construction accounting system is

functioning properly

Projecting the costs at completion for the individual

projects, including unbilled committed costs

Determining whether the individual projects are over- or

underbilled
1) Accounting for Financial Resources
Making sure that the needed financial statements have
been prepared

Reviewing the financial statements:

▪ In line with the rest of the industry
▪ Identify potential financial problems before they become a
crisis
2) Managing Costs and Profits
Controlling project costs
Monitoring project and company profitability
Developing and tracking general overhead budgets
Setting the minimum profit margin for use in bidding
Analyzing the profitability of different parts of the company
and making the necessary changes to improve profitability
Monitoring the profitability of different customers and making
the necessary marketing changes to improve profitability
3) Manage Cash Flows
Matching the use of in-house labour and subcontractors to the
cash available for use on a project

Ensuring that the company has sufficient cash to take on an

additional project

Preparing an income tax projection for the company

Preparing and updating annual cash flow projections for the

company

Arranging for financing to cover the needs of the construction

company
4) Choosing among Financial Alternatives
Selecting which equipment to purchase

Deciding which area of the business to invest the company’s

limited resources
What is Accounting?

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What is Accounting?
It is an information system:

Steps in the
accounting process

The accounting process includes

the bookkeeping function.
Accounting Information in Decision-Making

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Uses of Accounting Information
Example: A Toyota car dealer sold 10 Toyota
Camrys (each $100,000) during the month.

The accountant records the transaction (“sold 10

Camrys - $1 million”) and then reports it to the
branch manager.

The manager decides to order more Toyota

Camrys.

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Uses of Accounting Information
Besides assisting in decision-making, accounting is also
useful for evaluating business performance.

Example: The Toyota dealership made $350,000 profit

during the month. The owner thinks this is a good
result.

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Uses of Accounting Information
Lastly, accounting is used for discharging
accountability.

This means that accounting can be used to control

employees’ behaviour.

For example, most accounting systems can detect

fund thefts and this discourages employees from
defrauding the firm they work for.

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Financial vs. Managerial Accounting
Financial Accounting Managerial Accounting
• Provides information • Provides information
for external decision for internal decision
makers makers
– Investors – Managers
– Creditors – Shareholders, business
– Taxing authorities owners
– Mainly reports results of – Mainly provides
past activities information for making
decisions,
future-oriented

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Key Governing Organisations
The Companies
• The government agency that regulate all business
Commission of
and companies in Malaysia
Malaysia

The Malaysian • The technical body responsible for the development,

Accounting Standards review and the empowerment to issue accounting
Board standards in Malaysia

The International
• The technical body responsible for the development
Accounting Standards
of international accounting standards
Board

Malaysian Institute of • The professional accounting body formed under the

Certified Public Companies Ordinances by members of the
Accountants accounting profession

Malaysian Institute • The statutory accounting body established to regulate

of Accountants and develop the accountancy profession in Malaysia

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Finance vs Accounting

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 Finance vs. Accounting

1. What’s the main difference between accounting &

financial management?

2. And, how is accounting useful to financial

management?

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Finance vs. Accounting
For the first question – the main difference is:

Accounting Finance

•Involves decisions that

•Deals with the past. affect the future.
•Records what has VS •Example: which
happened. investment project to
take?

Past Future
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Finance vs. Accounting
As for the second question, accounting is useful to
finance because:

Accounting provides the necessary

(though not all) information to help
make financial management
decisions.

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Finance vs. Accounting
For example,

to decide which investment projects to take, a firm

may refer to accounting info of previous similar
projects for guidance, e.g., profit, cost, cashflow.

to decide how much funds to borrow for a project,

the firm also needs to look at how much debt it
already has (also an accounting info).

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The Accounting Reports

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 Who Uses Accounting Data?
Internal Users
Management IRBM

Human Investors
Resources
There are two broad
groups of users of Labour
financial information: Unions
Finance
internal users and
external users. Creditors
Marketing
SC
Customers External
Users
Who Uses Accounting Data?
Common Questions Asked User
1. Can we afford to give our
employees a pay raise? Human Resources
2. Did the company earn a
satisfactory income? Investors
3. Do we need to borrow in the
near future? Management
4. Is cash sufficient to pay dividends to
the stockholders? Finance
5. What price for our product will
maximize net income? Marketing
6. Will the company be able to pay
its short-term debts? Creditors
The Accounting Reports
Generally, accounting reports can be divided into 2
broad categories:

▪ External reports – those which are read by external and

internal users.

▪ Internal reports – only can be read by internal users. Also

called management reports.

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The Accounting Reports
The types of accounting reports:

Accounting
Reports

Internal External
Reports Reports

Income Cash
Budget Costing Statem Flow
s Balanc
Report ent Statem
e
s ent
Sheet

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Financial Statements
Income Statement

• Reports the revenues

and expenses for a
specific period of time.
• Net income – revenues
exceed expenses.
• Net loss – expenses
exceed revenues.
Basic Elements of the Income Statement
Revenues result from business activities entered into
for the purpose of earning income.
▪ Money derived from selling the company’s products or services

Expenses are the cost of assets consumed or services

used in the process of earning revenue.
▪ Related to marketing and distributing the products or services,
and administering the business
Financial Statements
Income Statement Owner’s Equity Statement

Net income is needed to determine the

ending balance in owner’s equity.
Financial Statements
Owner’s Equity Statement

• Statement indicates the

reasons why owner’s equity
has increased or decreased
during the period.
Financial Statements
Balance Sheet Owner’s Equity Statement

The ending balance in owner’s equity is

needed in preparing the balance sheet.
Financial Statements
Balance Sheet
• Reports the assets, liabilities,
and owner’s equity at a
specific date.
• Assets listed at the top,
followed by liabilities and
owner’s equity.
• Total assets must equal total
liabilities and owner’s equity.
Assets = Liabilities + OE
Basic Elements of the Balance Sheet
Assets
▪ Resources owned by the business.

Liabilities
▪ Money that has been borrowed from a creditor and must be
repaid at some predetermined date.
▪ Creditors – party to whom money is owed.

Owner’s Equity
▪ Owners’ investment in the firm.
Financial Statements
Balance Sheet Statement of Cash Flows
Financial Statements
Statement of Cash Flows
• Information for a specific
period of time.
• Answers the following:
1. Where did cash come
from?
2. What was cash used for?

3. What was the change in

the cash balance?
The Accounting Reports
Examples of internal reports include:

a) Budgets – explain what the firm expects to achieve in the

future.
For example: Firm A’s budget report forecasts that in 2017, it will
generate income and expenses of $6.2m and $3.8m respectively. This
means that the forecast profit is $2.4m ($6.2m – $3.8m).

b) Costing Reports – explain the cost details of a firm’s

operations.
For example: Firm A currently has 2 on-going construction projects.
The projects are 45% and 55% complete respectively and each has
incurred roughly $4+/-0.5m of cost so far.

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Using Accounting Reports
Since the financial manager is an internal user, he has
access to both internal and external reports.

For example,
▪ to decide on which investment project to take, he will study
the budget/forecast reports for each candidate project and
then select the most appropriate.

▪ to determine how much debt to borrow, she may refer to the

latest balance sheet to review the firm’s current debt load and
then assess the impact of borrowing the additional money (e.g.
increase in interest expense, etc.).

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Next Lecture

how accounting transactions are recorded

how financial statements are prepared

You will need to remember the concepts learned today

for the next lecture.
Self-study activities
Atrill, P. & McLaney, E., 2017, Accounting and Finance for
Non-Specialists, 10th ed, Harlow, England: Pearson, Ch 1

Peterson, S. J., 2013, Construction Accounting and

Financial Management, 3rd ed, Upper Saddle River, NJ:
Prentice Hall, Ch 1

Your own research of other sources.

Attempt all tutorial questions before class.