ACCA Applied Knowledge · Business and Technology

Accounting and finance functions within business organisations: formula sheet

Full chapter guide

Key formulas

Financial accounting vs management accounting: users: Financial accounting → external users; Management accounting → internal managers; A very common objective test point. Shareholders, lenders and tax authorities are external; directors and department managers are internal.
Financial accounting vs management accounting: format: Financial accounting → required format and standards; Management accounting → no required format; Statutory accounts follow IFRS Accounting Standards and law. Management reports are designed to suit the user.
Financial accounting vs management accounting: time focus: Financial accounting → mainly historic; Management accounting → historic and future; Budgets and forecasts are management accounting.
Accounting vs finance (treasury): Accounting → record, report, control; Finance → raise funds, manage cash, manage risk; Raising a loan or investing surplus cash is a treasury task, not bookkeeping.
Purpose: Financial: stewardship and accountability to external users | Management: planning, control and decision-making; Financial accounting shows how management has looked after the owners' resources. Management accounting helps managers run the business.
Users: Financial: external (shareholders, lenders, tax authorities) | Management: internal (managers, directors); Directors also use financial statements, but the branch is defined by its main audience.
Format and regulation: Financial: set format, required by law, follows IFRS Accounting Standards | Management: no set format, not required by law; Management reports can be designed freely to suit the decision.
Time focus: Financial: mainly historic | Management: historic and future-looking; Budgets and forecasts are management accounting.
Detail and scope: Financial: whole entity, summarised, mostly money values | Management: parts of the entity, detailed, money and non-financial data; Management can report by product, department or customer.
Audit: Financial: usually audited | Management: not audited; Audit applies to financial statements, not to internal reports. Some small entities are exempt from audit under local law.
Qualities of good information: Relevant, accurate, complete, understandable, timely, cost-effective (benefit > cost); Use as a checklist when judging any report.
Working capital: Working capital = Current assets − Current liabilities; Positive means current assets exceed current liabilities. Too much can mean idle resources.
Current ratio: Current ratio = Current assets ÷ Current liabilities; Measures short-term liquidity. Compare with the industry rather than relying on a fixed ideal.
Quick (acid test) ratio: Quick ratio = (Current assets − Inventory) ÷ Current liabilities; Excludes inventory because it may be slow to turn into cash.
Role split: Controller = record, report, control; Treasurer = fund, invest, manage cash and risk; Use this to classify any duty in a question.
Matching principle for funding: Short-term needs → short-term funds; long-term needs → long-term funds; A guide, not a rule. Firms often fund part of permanent working capital with long-term funds.
Flow of financial information: Transactions → books of prime entry → ledgers → trial balance → adjustments → financial statements → statutory filing; Use this order to place any activity in the correct stage.
Payroll calculation: Net pay = Gross pay − tax deductions − other employee deductions; Employer costs such as employer contributions are extra cost to the business, not deducted from net pay.
Trial balance check: Total debit balances = Total credit balances; A balanced trial balance does not prove the records are free of error.
Internal audit: who, to whom, scope: Internal audit = employee or appointed by the organisation → reports to management or audit committee → scope set by the organisation; Not usually required by law. Focus is controls, risk, efficiency and compliance.
External audit: who, to whom, scope: External audit = independent of the organisation → reports to shareholders → opinion on true and fair view of the financial statements; Usually a legal requirement for larger companies. Gives an opinion, not a guarantee.
Fraud risk factors: Opportunity + Pressure + Rationalisation; Often called the fraud triangle. Controls mainly reduce opportunity.
Control types: Preventive (stop it) | Detective (find it) | Corrective (fix it); Classify each example control into one of these types.
Responsibility rule: Management: prepares statements and runs controls. Auditor: gives an opinion.; The external auditor does not prepare the accounts or prevent fraud.
Matching principle: Short-term needs → short-term finance; long-term needs → long-term finance; Mismatch creates risk (refinancing) or unnecessary cost.
Gearing (debt to equity form): Gearing = Debt ÷ Equity × 100%; One common measure; another uses Debt ÷ (Debt + Equity). State which one you use. Higher gearing means higher financial risk.
Shareholder wealth: Shareholder wealth = Dividends received + Increase in share price; The main financial objective for a listed company, as usually taught.
SMART objectives: Specific, Measurable, Achievable, Realistic, Time-bound; Test whether a financial objective is well written.

Quick revision

Financial accounting reports mainly to external users and follows legal and accounting standard requirements.
Management accounting serves internal managers, is forward-looking as well as historical, and has no required format.
Bookkeeping records transactions; financial reporting summarises them in financial statements.
Payroll calculates pay and deductions and must follow tax and employment rules.
Treasury manages cash, funding and financial risks such as interest rate and foreign exchange risk.
Cash management aims to keep enough liquidity without holding excess idle cash.
Financial control compares actual results with plans and budgets and prompts corrective action.
Internal audit is set up by the organisation and reviews controls, risk and efficiency.
External audit gives an independent opinion on whether financial statements give a true and fair view.
Short-term finance suits working capital; long-term finance suits non-current assets.
Equity carries no required repayment but dividends are not guaranteed; debt carries interest and repayment obligations.
Financial management objectives include profitability, liquidity and funding at suitable cost.

Common mistakes

Saying management accounting must follow accounting standards. Fix: Remember that standards and law govern financial accounts for external users. Management reports have no required format.
Treating the finance function as only bookkeeping. Fix: List the full range: record, report, plan, control, raise funds, manage cash and risk.
Saying management accounting is only about the future. Fix: Say management accounting covers past, present and future. It uses historic data too, for example to report actual costs and to compare with budget.
Saying financial accounting is only for external users. Fix: Say it is aimed mainly at external users. Directors and managers read financial statements too, but the format is designed for outsiders.
Assigning cash management to the financial controller. Fix: Remember that treasury handles cash, funding and risk, while the controller handles records and reports.
Saying treasury exists in every business. Fix: State that smaller firms often have no separate treasury and the duties are done by other finance staff.
Mixing up payables and receivables. Fix: Payables are what we owe. Receivables are what we are owed. Check who the other party is.
Treating bookkeeping as preparing financial statements. Fix: Bookkeeping records transactions. Financial reporting summarises them after adjustments.
Saying internal audit is independent in the same way as external audit. Fix: Internal auditors are part of or appointed by the organisation and report to management or the audit committee. Their objectivity is protected by reporting lines, but they are not independent in the legal sense that external auditors are.
Stating that the external auditor is responsible for preventing and detecting fraud. Fix: Management is responsible for preventing fraud. The auditor gives an opinion and plans work to have a reasonable chance of finding material misstatement.

Exam tips

Learn the financial versus management accounting comparison by user, format, time focus and frequency. Most objective questions test one of these four points.
In multiple response questions, select exactly the number the question asks for. Test each option separately against the key word.
In multi-task questions, tie every function to its user or department. A bare list of tasks earns less than a link to who benefits.
Watch for absolute words such as always and only. Statements using them are usually wrong.
If a question mentions cash, borrowing or currency risk, think of the treasury part of finance.
In Section A, the wording 'external users', 'required by law' or 'audited' almost always points to financial accounting. 'Planning', 'control' or 'forecast' points to management accounting.
For multiple response questions, select exactly the number stated. Check every option separately as true or false before choosing.
Beware options that overstate, such as 'only' or 'never'. Management accounting is not only forward-looking, and financial statements are not never read by managers.