Financial information provided by business: formula sheet

Key formulas

Purposes of financial information

Planning + Control + Decision making

The three uses inside a business. Link each example you give to one of these.

Data to information

Data + Processing + Context = Information

Information is data that has been processed so it is meaningful to the user.

Financial vs management information

Financial: external, past, rules-based. Management: internal, past and future, flexible.

Use these contrasts to answer any comparison question.

Qualities of good information

Relevant, accurate, complete, timely, clear, cost-effective

Test any piece of information against this list.

Financial accounting in one line

Past results → external users → mandatory → IFRS and law → fixed format

Use this as the checklist when a statement describes reports for shareholders or lenders.

Management accounting in one line

Past, present and future → internal users → optional → no set rules → flexible format

Budgets, forecasts and variance reports point to this branch.

Good information (ACCURATE)

Accurate, Complete, Cost-beneficial, User-targeted, Relevant, Authoritative, Timely, Easy to use

Useful for questions on the characteristics of good management information. Cost-beneficial means the benefit of the information exceeds the cost of producing it.

Accounting equation

Assets = Liabilities + Equity

This is the structure of the statement of financial position. It always balances.

Profit for the period

Profit = Income − Expenses

Measured on the accruals basis, not on cash received or paid.

Closing equity

Closing equity = Opening equity + Profit − Dividends + New share capital issued

A simple link between the profit statement and the position statement. Other items, such as revaluation gains, can also change equity.

Net change in cash

Net change in cash = Operating cash flow + Investing cash flow + Financing cash flow

The result reconciles opening cash to closing cash.

Time basis of each statement

Position: at a date. Profit or loss, cash flows: over a period

A common objective test point.

Prime cost

Prime cost = direct materials + direct labour + direct expenses

Total of all direct costs of a cost unit.

Total cost

Total cost = fixed costs + (variable cost per unit × activity level)

Also written y = a + bx, where a is fixed cost and b is variable cost per unit.

Variable cost per unit

Variable cost per unit = total variable cost ÷ units

Constant per unit within the relevant range.

Fixed cost per unit

Fixed cost per unit = total fixed cost ÷ units

Falls as units rise, rises as units fall.

High-low method

Variable cost per unit = (cost at high activity − cost at low activity) ÷ (high activity − low activity)

Then fixed cost = total cost at either level − (variable cost per unit × activity at that level). Use the highest and lowest activity levels.

ACCURATE qualities of good information

Accurate, Complete, Cost-beneficial, User-targeted, Relevant, Authoritative, Timely, Easy to use

Learn the eight words and one-line meaning of each. Questions usually describe a problem and ask which quality is missing.

Cost-benefit rule for information

Information is worth producing only if value of benefit ≥ cost of producing it

Benefits are often hard to measure, so this is a judgement, not a calculation.

Internal vs external

Internal = generated inside the organisation; External = obtained from outside it

Decide by where the information originates, not by who uses it.

Primary vs secondary

Primary = collected first-hand for this purpose; Secondary = collected by others for another purpose

This is a separate classification from internal and external.

Quick revision

• Financial information supports decisions, planning, control and accountability.
• Financial accounting reports mainly to external users and follows rules and accounting standards.
• Management accounting serves internal managers, has no set format and can look forward.
• The main statements are the statement of financial position, the statement of profit or loss and the statement of cash flows.
• Assets are resources controlled by the business; liabilities are present obligations; equity is the residual interest.
• Income increases equity; expenses decrease equity.
• Direct costs trace to a cost unit; indirect costs (overheads) do not.
• Fixed costs stay the same in total across a relevant range of activity; variable costs change in total with activity.
• Total cost is fixed cost plus variable cost per unit multiplied by units.
• Good information is relevant, accurate, complete, timely, understandable and worth its cost.
• Sources can be internal or external, and primary or secondary.

Common mistakes

• Saying shareholders and managers use the same information in the same form. Fix: Shareholders mostly get published financial statements. Managers get detailed internal reports that can be more frequent and cover parts of the business.
• Thinking financial statements are the only financial information. Fix: Remember management information such as budgets, cost reports and forecasts is also financial information, prepared for internal use.
• Saying management accounting is only about the future. Fix: Remember it covers past, present and future. Financial accounting is mainly historic.
• Thinking management accounting must follow IFRS. Fix: IFRS and company law apply to published financial statements. Management reports have no mandatory format.
• Treating profit as the same as cash. Fix: Remember credit sales and non-cash costs create gaps. Profit uses accruals, cash flow uses actual receipts and payments.
• Saying the statement of financial position covers a year. Fix: It is a snapshot at one date. Only profit or loss and cash flows cover a period.
• Saying fixed cost per unit is constant. Fix: Fixed means total is fixed. Per unit it falls as output rises. Variable is the opposite: total rises, per unit is constant.
• Treating all labour as direct and variable. Fix: Only labour that makes the product and is traceable is direct. Supervisors are indirect. A salaried worker may be fixed, while piece-rate pay is variable.
• Treating internal and primary as the same thing. Fix: Remember they answer different questions. Internal is about location of origin. Primary is about who collected it and why. A sales ledger is internal. Whether data is primary or secondary depends on whether it was collected first-hand for the current purpose. A competitor's report is external and secondary.
• Calling a published report on your own industry 'primary' because you are using it for your decision. Fix: If someone else collected it for another purpose, it is secondary, however useful it is to you.

Exam tips

• Link every user to a decision. This is how you separate similar answer options.
• Learn the user list: shareholders, lenders, suppliers, employees, customers, government, public and managers. Know one main need for each.
• In multiple response questions, select exactly the stated number. Read the question twice.
• For financial vs management information, use the contrasts: external or internal, rules or no rules, past or future.
• Watch for words such as 'primary', 'most likely' and 'not', which change the correct answer.
• BT Section A often tests this with a single table-style comparison. Match each feature to external or internal before looking at the options.
• Watch for words like 'only' and 'must'. Management accounting can include historic data, and financial statements can be used by managers.
• In Section B scenarios, name the user in your answer first, then give the reason. This keeps your answer short and relevant.