The Institute of Chartered Accountants of Bangladesh
Business and Finance
Chapter-06
Introduction to Financial Information
Presented By: Muhammad Mahbub Alam FCA
24th March , 2021
Importance of business finance
Why do business and managers need financial information? M-J’17
Businesses and managers require financial information for:
Planning
Controlling
Recording transactions
Performance measurement
Decision making
Classify the various types of information needed by managers for decision
making. M-J’17
Information can be classified as follows:
Planning information helps people involved in the planning process
Operational information helps people carry out their day-to-day activities, e.g. how many
operatives are needed on one shift
Tactical information helps people deal with short-term issues and opportunities, e.g.
monthly variance reports for the factory
Strategic information supports major long-term decision-making, e.g. can resources be
made available to expand production?
Qualities of good information
Information should be ACCURATE and complete. It should have a benefit that is in
proportion to its cost, and it should be targeted at its user. It should be relevant and from an
authoritative source. It should be provided at the time when it is needed, and it should be easy
to use.
Information of whatever type is of good quality if it has eight key characteristics, which are
easiest to remember if you use the mnemonic ACCURATE.
Accurate
Complete
Cost-beneficial
User-targeted
Relevant
Authoritative
Timely
Easy to use
Sources of data and information
Data (plural; singular is 'datum') : Distinct pieces of information, which can exist
in a variety of forms – as numbers or text on pieces of paper, as bits or bytes
stored in electronic memory, or as facts stored in a person's mind.
Information: The output of whatever system is used to process data. This may be
a computer system, turning single pieces of data into a report, for instance.
Useful data/information comes from both inside and outside the organization ,
from a variety of sources.
Internal sources include accounting records, payroll, machine log, computer
system, time sheets, staff information etc.
External sources- formal collection of data includes tax specialist reports, Legal
advisors reports, R&D Reports, Marketing managers reports.
External sources- informal gathering of information includes from the internet,
newspapers, television reports, meetings with business associates or the trade
press.
Information processing
Information processing: Data once collected is converted into information for
communicating more widely within the business. To be effective, information
processing should meet the following CATIVA criteria.
Completeness
Accuracy
Timeliness
Inalterability
Verifiability
Assessability
A system: A set of interacting components that operate together to accomplish a
purpose.
A business system: A collection of people, machines and methods organised to
accomplish a set of specific functions.
Information systems (IS): All systems and procedures involved in the
collection, storage, production and distribution of information.
Information technology (IT): The equipment used to capture, store,
transmit or present information. IT provides a large part of the
information systems infrastructure.
A system has three component parts: inputs, processes and
outputs. Other key characteristics of a system are the environment and
the system boundary.
In relation to financial information, the two information processing systems
are:
The transaction processing system, and
The management information system
Transaction processing system (TPS): A system which
performs, records and processes routine transactions.
Management information system (MIS): Converts data from
mainly internal sources into information (e.g. summary
reports, exception reports). This information enables
managers to make timely and effective decisions for planning,
directing and controlling the activities for which they are
responsible.
Expert systems: Expert systems allow users to benefit from
expert knowledge and information. The system will consist of
a database holding specialized data and rules about what to
do in, or how to interpret, a given set of circumstances.
Security of information
Information is a valuable commodity and therefore needs to be kept secure.
Security (in information management): the protection of data from accidental or deliberate
threats which might cause unauthorised modification, disclosure or destruction of data, and the
protection of the information system from the degradation or non-availability of services
Aspects of security:
Prevention
Detection
Deterrence
Recovery procedures
Correction procedures
Threat avoidance
Physical threats
Ensuring the security of information:
Physical access control
Security control
Integrity control
Logical control
The system should have a back-up and archive strategy, including:
Regular back-up of data (at least daily)
Archive plans
A disaster recovery plan including off-site storage
Users of financial information and their information needs
Different stakeholders use financial information for different purposes, and
require different amounts and types of information for these purposes. All
users use financial information to make economic decisions, such as
those to:
Decide when to buy, hold or sell shares on the basis of their risk and
return
Assess how effectively the business's management has looked after its
affairs (its stewardship) and decide whether to replace or reappoint
them
Assess a business's ability to provide benefits to its employees
Assess security for amounts lent to the business
Users of financial information and their information needs
Users of financial information: Shareholder, employees, customers,
suppliers and other business partners, lenders, govt. and its
agencies, public etc.
Financial information is useful to users when it:
Helps them to make economic decisions, and
Shows the results of management's stewardship of the resources entrusted to
them
For financial information to meet these two objectives it must be prepared on the basis
of two underlying assumptions:
i. Accrual basis of accounting
ii. Going concern
When users make economic decisions they need financial information to
evaluate:
A. The ability of a business to generate cash so as to
pay employees and suppliers
meet interest payments
repay loans and
pay dividends
B) The timing and certainty of cash flows
In order to make the evaluation as to whether the business can generate sufficient
cash on time the user needs information on the business's:
Financial position (its balance sheet)
Financial performance (its income statement) and
Changes in financial position (its cash flow statement)
Qualitative characteristics: The attributes that make information provided in
financial statements useful to users:
Understandability
Relevance
Reliability, and
Comparability
Two constraints on the relevance and reliability of information:
Timeliness
Balance of benefit and cost
Limitation of financial information in meeting user’s needs
Financial information may be of limited usefulness because its presentation is
conventionalized, it is backward-looking and it omits non-financial information.
The effects of poor financial information
To undermine the integrity of financial markets
To fail to serve the public interest
