Accounting and Finance for Managers

Questions: 1. Explain the different forms of business units(sole proprietorship, partnership, limited company) available, highlighting the benefits and limitations of each.2. Explain financial accounting and management accounting, highlighting the differences between the two strands of accounting.3. Assuming that you have not been given any information about the inheritance of the brothers. Explain the sources of finance available to a business owner, looking at Short-term sources, Medium-term sources and Long-term sources of finance giving examples of each. Answers: Introduction In starting up a business, there are various important decisions that are required to be undertaken. The most important decision is mainly with respect to the selection of appropriate business units. The type of business unit that must be considered in starting a business is crucial and there could be the selection of different important formats that could be possible such as sole proprietorship, partnership and limited company. Apart from the selection of sources of financing, it is also essential that appropriate decisions should be made with respect to the sources of financing that are available to the business. In starting a business, it is essential that appropriate financing sources should be selected so that the business operations can be managed in a highly efficient manner. This report is therefore aimed at analysing the different form of business units that are available to the two brothers that have considered for setting up a business. The analysis will focus on providing an in-depth analysis on the differences between financial accounting and management accounting so that the two brothers could understand its importance and apply them efficiently in managing organisations operations. Finally, the report will include an analysis of different important sources of financing that these two brothers would consider in performing the management of their business operations (Needles, Powers and Crosson, 2013). 1. Different forms of Business Units and their Benefits and Limitations There are different forms of business formats that are available to a business to consider. However different business formats are applicable in different situations depending on the nature of the business. There are mostly three different forms of business units that are available to an organisation to consider. These are mainly categorised as sole proprietorship, partnership and limited company. The role and importance of these different forms of business unit is crucial and it is therefore essential that a proper understanding of all such business formats including their advantages and limitations is essential. An analysis of all these important business formats including the analysis of their advantages and limitations is performed as follows: Sole Proprietorship: Sole proprietorship is an important business format which mainly implies the conduct of the business activities by a single owner of the firm. The sole proprietor is the single owner of a firm and he/she is responsible for the overall management of the organisation. As a result, the introduction of capital is also performed by the sole proprietor and he/she is responsible for the entire profit and loss from the firm. In simple words, the entire management of the firm is carried out by the sole proprietor and the responsibility for the results as achieved is therefore with the owner of the firm i.e. sole proprietor. There are certain important advantages associated with sole proprietorship. As for instance, the main advantage with the sole proprietor is that the sole proprietor is responsible for the entire management of the business. As a result, the entire control is mainly with respect to the sole proprietor. The sole proprietor can take decisions without any b urden, and there is no one to stop him/her from doing so. The disadvantage with sole proprietor is that the entire loss has to be borne by the sole proprietor himself, and there is no any division of risk (Brigham and Daves, 2015). Partnership: Partnership is another important form of business unit that could be utilised for the purpose of starting a business unit. In respect to partnership form of business, there are two or more than two partners that are responsible for the management of the entire business. Partnership business unit can be followed when there are two owners ready to perform the management of a business, and in this business form, the partners are responsible for the entire management of the business. However the share as contributed by each partner mainly determines their stake in the partnership firm and their share in the profits. Since there are two or more persons responsible for the management of the entire business, it provides flexibility in performing the management of the entire business. As a result, the main advantage associated with partnership is that it provides good flexibility in taking important decisions and the involvement of two or more persons allows for better ability i n taking important decisions. However, the disadvantage associated with partnership is that it leads to dilution of control, and secondly, the profits of the firm need to be shared. The individual partner cannot take decisions freely which they could undertake in respect to sole proprietorship firm (Longenecker, Petty, Palich and Hoy, 2011). Limited Company: Limited company is also an important form of business unit that could be considered by businesses in setting up their business. A limited company can be defined as a company whereby the liability of member is limited to the extent of investment as made by them in the company. The limited companies can be limited by shares or limited by guarantees. The companies limited by shares can further be divided into public companies and private companies. The limited companies are available all across the world and this is an important form of business unit that could be utilised by businesses in starting up their ventures. An analysis of the advantages of limited company indicates that this business format has the advantages such as the liability of the company is limited, but it is only to the extent of the investment as made by each individual contributor on the company. Another major advantage is that it is limited company has separate legal entity from its owners. This fo rmat of the business has advantage in the form of tax saving advantage, as it offers opportunities to save taxes over the profit. However, in respect to the disadvantage is concerned, this format of business unit can be considered as highly complex and there is limitation in respect to limited company which is in the form of restriction over the raising of capital. There has also been the dilution of power in respect to such limited company which can be regarded as another major limitation (Kieso, Weygandt and Warfield, 2011). On the basis of analysis of different business format and their advantages and disadvantages, the business format that is recommended to the two brothers is partnership form of business unit. 2. Financial Accounting and Management Accounting Financial accounting and management accounting are the important types of accounting and their knowledge is crucial in performing the efficient management of the business. An analysis of the concept of financial accounting and management accounting is that financial accounting is concerned with providing information to different stakeholders of the business such as creditors, shareholders, investors, and others. Financial accounting is concerned with assessing the overall performance of the business whereby the focus has been towards recording and measuring the financial performance of the business. It involves recording the business transactions, preparing financial statements so that the stakeholders of the company are informed about the entire performance of the business (Besley and Brigham, 2011). Contrary to the concept of financial accounting, the concept of managerial accounting is also an important concept and it is concerned with providing information regarding the organisations performance to the internal managers within organisation. Management accounting provides relevant information to the managers inside the organisation so that relevant decisions can be taken by them in leading the organisation to higher success levels. Management accounting is therefore the field of accounting that is concerned with analysing and providing information to the internal management with the main purpose of allowing them in planning, controlling and decision making process. In simple words, management accounting can therefore be defined as the identification, measurement, analysis, preparation, interpretation and communication of information so that management can make use of such information in taking relevant decisions (Needles, Powers and Crosson, 2012). An analysis of the differences between financial accounting and management accounting indicates that financial accounting is concerned with providing information about the organisations performance to the external stakeholders of the organisation whereas management accounting is concerned with providing information to the internal managers of the organisation. The objective of financial accounting is mainly to present the end results of a business such as its profitability or the financial position as at a particular date whereas the management accounting has the objective of providing information with a view to plan and set goals of the organisation. Further, there is no such legal requirement in respect to managerial accounting whereas in respect to financial accounting, it is legally required to disclose the financial performance of the organisation. These are the basic differences in respect to managerial accounting and financial accounting (Needles, Powers and Crosson, 2013). 3. Sources of Financing Businesses require adequate level of financing from different sources in meeting out their short term, medium term and long term need. The different financing sources along with their examples are analysed as follows: Long Term Financing Sources: Businesses need funds for long term purposes, and the important sources available to them can be classified as equity capital, debt and retained earnings. Equity is mainly the funding raised by way of inviting public to subscribe to the shares of the company and become its owners. Debt financing is mainly a kind of borrowing which could be done by businesses in the form of loans from bank or it could also be in the form of private lenders. Retained earning is known as the earnings of the firm that has been retained in the business, and it could be utilised in meeting out the long term business requirements for funding. These are the important financing sources in meeting out the business requirements for long term needs (Needles and Crosson, 2013). Medium Term Financing Sources: Apart from the long term financing sources, there is medium term financing sources that could also be utilised. The medium term financing sources as available to businesses are classified as term loans and leasing. Term loans are taken usually for period ranging from 2 to 5 years, and this medium term financing source is quite crucial in allowing organisation to meet out their business requirements efficiently. Apart from this, leasing is another important medium term financing source that could be utilised by businesses, and in this mode, the financier would purchase the equipment and it would then be leased for regular payments (Needles and Powers, 2013). Short Term Sources: There is funding needed by businesses in meeting out their daily business requirements, and this can be appropriately addressed through the application of short term financing sources. The important short term financing sources available to businesses include bank overdraft, trade credit etc. Bank overdraft is mainly the raising of funds from banks for the short term purpose whereby the business agrees to pay interest to the bank for the purchases. Apart from this, trade credit is the daily credit obtained from debtors whereby the funds from the credit purchases are being utilised in meeting out the business requirements (Bamber and Parry, 2014). These are the important sources of financing that are available to businesses in meeting out their short term, medium term and long term funding requirements. Conclusion In this report, a critical assessment has been carried out with respect to different forms of business, and also the sources of financing as available to business. The performance of analysis indicated that there are different important formats of business that could be considered by businesses and these include sole proprietorship, partnership and limited companies. These business formats have different roles and importance, and they are suitable under different circumstances. The analysis indicated that these sources have their own advantages and disadvantages. The different between financial accounting and management accounting is evaluated and it is identified that financial accounting is concerned with the financial performance of the organisation and it aims at meeting out the needs and expectations of the external stakeholders of the organisation whereas management accounting is aimed at providing information to the management within organisation for the purpose of allowing th em in making important decisions, and it is therefore considered as focused towards internal department of the organisation. Finally, different important sources of financing are identified which includes short term, medium term and long term financing, and they also have their own specification and importance. Recommendations: It is recommended that the two brothers should consider partnership format of starting business, and they should make use of the above identified financing sources in meeting out their long term, medium term and short term financing needs. References Bamber, M. and Parry, S. (2014), Accounting and Finance for Managers: A Decision-Making Approach, Kogan Page Publishers. Besley, S. and Brigham, E. (2011), Principles of Finance, 5th ed., Cengage Learning. Brigham, E. and Daves, P. (2015), Intermediate Financial Management, 12th ed., Cengage Learning. Kieso, D.E., Weygandt, J.J. and Warfield, T.D. (2011), Intermediate Accounting, Volume 1, John Wiley Sons. Longenecker, J., Petty, J., Palich, L. and Hoy, F. (2011), Small Business Management: Launching and Growing Entrepreneurial Ventures 16th ed., Cengage Learning. Needles, B., Powers, M. and Crosson, S. (2012), Principles of Accounting, 12th ed., Cengage Learning. Needles, B. and Crosson, S. (2013), Managerial Accounting, 10th ed., Cengage Learning. Needles, B. and Powers, M. (2013), Principles of Financial Accounting, Cengage Learning. Needles, B., Powers, M. and Crosson, S. (2013), Financial and Managerial Accounting, 10th ed., Cengage Learning.