ExpertAccounting and Finance Functions within Organisations
Learning outcomes
- Distinguish between financial accounting and management accounting.
- Understand the roles of treasury and internal audit.
Sub-divisions of Finance
The Finance department is split into several specialized areas:
- Financial Accounting: Prepares the annual financial statements (Income Statement, Balance Sheet). It is backward-looking (historical) and highly regulated by law. Used by external stakeholders (investors, tax authorities).
- Management Accounting: Prepares budgets, forecasts, and cost analyses. It is forward-looking and unregulated. Used internally by managers to make decisions.
- Treasury: Manages the company's cash, currency risk, and bank loans. Ensures the firm has enough liquid cash to survive.
- Internal Audit: An independent function within the firm that checks if internal controls and processes are working properly.
Which branch of accounting is primarily concerned with preparing historical financial statements for external shareholders?
Internal vs External Audit
Internal Audit works for the company (checking systems). External Audit works for the shareholders (checking if the financial statements are true and fair). They are completely different roles.
The Importance of Treasury
A company can be profitable but still go bankrupt if it runs out of cash. The Treasury department ensures cash flow is managed, foreign exchange risks are hedged, and surplus cash is invested.
A company needs to secure a £10 million bank loan and hedge against fluctuations in the US Dollar. Which department handles this?
Exam Focus
Memorize the users. Financial Accounting = External (Taxman, Investors). Management Accounting = Internal (CEO, Production Manager).
Which of the following is a characteristic of Management Accounting?
What is the primary purpose of the Internal Audit function?
A budget variance report showing that the marketing department overspent by £50,000 is produced by:
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