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Financial Reporting

Financial Reporting is an introductory subject to Corporate Reporting. Its a subject that gives the accountant an idea of what to do in practice.

Becoming a Business Leader and a Professional Accountant in the 21st Century has become a key field of study which requires people not only with the Certification but also with pragmatic experiences to stay within the Corporate World and become the best in such a Competitive industry.

However, Becoming a Professional Accountant is not something that one rises up and do overnight. It requires Commitment, Discipline and most importantly Time management over a long period of time which significantly becomes a lifestyle.

With a lot of business books written in this field of study, only a few really addresses the subject matter and give guidelines to students and practitioners. This has resulted into a lot of students failing the subject over several sittings and also not equipping them enough to practice what they study in the Corporate World.

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Corporate ReportingFinancial ReportingManagement Accounting




Cost Accounting can be defined as the application of accounting and costing principles, methods and techniques in the ascertainment of cost and the analysis of saving and/or excess as compared with previous experience or with standard.


Financial Accounting concerns itself with the recording of transactions between a business and its stakeholders such as customers, suppliers, employees, owners, etc and the preparation of income statement, statement of financial position and statement of cash flow, at least, once every year for the stakeholders.


Financial Accounting, therefore, ensures that the assets and liabilities of a business are properly accounted for, and provides information about profit and so on to stakeholders.


Management Accounting is an integral part of management concerned with identifying, presenting and interpreting cost and financial accounting information used for planning ,decision making and controlling as well as the optimum use of resources. The source of information is the financial and cost accounts.

Differences between Financial, Cost and Management Accounting

Financial Accounting Cost Accounting Management Accounting
1.      It shows the financial performance and position of a business. 1.      It is used to establish the cost of a product, an activity or a department. 1.      It aids management to plan, control and make decisions for a business.

2.      It is required by law especially for limited companies.


2.      There is no legal requirement to prepare cost accounts.



2.      There is no legal requirement to prepare management accounts.


3.      Format for presentation of information is determined by law or accounting standards. 3.      Format of cost accounts is at management discretion. 3.      Format of management accounts is at management discretion.
4.      It covers the business as a whole.


4.      May focus on specific areas of a business. 4.      May focus on specific areas of a business.
5.      It is for external use.


5.       It is for internal use. 5.      It is for internal use.
6.      It prepares statements in summaries or aggregates.



6.      Statements prepared may be aggregate or detail.


6.      Statements prepared may be aggregated or detailed.

7.      It is of monetary in nature.




7.      Information is both monetary and non monetary. 7.      Information is both monetary and non monetary.
8.      It is historical.



8.      It is both historical and forward-looking. 8.      It is both historical and forward-looking.

9.      Statements are normally prepared annually.

9.      Statements prepared cover shorter periods i.e. daily etc. 9.      Statements prepared covers shorter periods such as monthly management accounts, etc.


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Corporate FinanceFinancial ManagementFinancial Reporting




We may analyse ROCE by looking at the kinds of interrelationships between ratios used in ratio who’, we mentioned earlier

We can thus find out why the ROCE is high or low, or better or worse than last year. Profit margin and asset turnover together explain the ROCE, and if the ROCE is the primary profitability ratio, these other two are the secondary ratios. The relationship between the three ratios is as follows.

Profit margin x asset turnovers = ROCE

(PBIT/ Sales revenue) x (Sales revenue/ Capital employed) = PBIT /Capital employed

It is also worth commenting on the change in revenue (turnover) from one year to the next. Strong sales growth will usually indicate volume growth as well as revenue increases due to price rises, and volume growth is one sign of a prosperous company.

Remember that capital employed is not just shareholders’ funds. It is shareholders’ funds plus long-term liabilities.

  • Return on equity

Another measure of the firm’s overall performance is return on equity. This compares net profit after tax with the equity that shareholders have invested in the firm.

Return on equity = Earnings attributable to ordinary shareholders / Shareholders’ equity

This ratio shows the earning power of the shareholders’ book investment and can be used to compare two firms in the same industry. A high return on equity could reflect the firm’s good management of expenses and ability to invest in profitable projects. However, it could also reflect a higher level of debt finance (gearing) with associated higher risk.

Note that shareholders’ equity includes reserves and is not limited to the ordinary share account.



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Corporate FinanceFinancial ManagementFinancial Reporting




A company ought of course to be profitable if it is to maximise shareholder wealth, and obvious checks on profitability are:

(a) Whether the company has made a profit or a loss on its ordinary activities

(b) By how much this year’s profit or loss is bigger or smaller than last year’s profit or loss

Profit before taxation is generally thought to be a better figure to use than profit after taxation, because there might be unusual variations in the tax charge from year to year which would not affect the underlying profitability of the company’s operations.

Another profit figure that should be considered is profit before interest and tax (PBIT). This is the amount of profit which the company earned before having to pay interest to the providers of loan capital. This is also a good measure of operating profit, the profit that the company is making from its business operations. By providers of loan capital, we usually mean longer term loan capital, such as debentures and medium-term bank loans.

  • Profitability and return: the return on capital employed

You cannot assess profits or profit growth properly without relating them to the amount of funds (the capital) employed in making the profits. The most important profitability ratio is therefore return on capital employed (ROCE) also called return on investment (ROI).

Return on capital employed — PBIT /Capital employed

Capital employed = Shareholders’ funds plus long-term liabilities = Total assets less current liabilities.

  • Evaluating the ROCE

What does a company’s ROCE tell us? What should we be looking for? There are three comparisons that can be made.

(a) The change in ROCE from one year to the next

(b) The ROCE being earned by other companies, if this information is available

(c) A comparison of the ROCE with current market borrowing rates. (Warning. This needs to be interpreted with care as ROCE will often reflect higher risk than borrowing rates.)

(i) What would be the cost of extra borrowing to the company if it needed more loans, and is it earning a ROCE that suggests it could make high enough profits to make such borrowing worthwhile?

(ii) Is the company making a ROCE which suggests that it is making profitable use of its current borrowing?


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