Financial Accounting: A Managerial Perspective: Second Edition

Financial Accounting: A Managerial Perspective
Second Edition Prepared by R. Narayanaswamy Indian Institute of Management Bangalore
Prentice-Hall of India Private Limited, 2004. All rights reserved.
Accounting and Economic Decisions
Chapter 1
Prentice-Hall of India Private Limited, 2004. All rights reserved. 2
Chapter 1
The Aim of the Course

1. Appreciate the information needs of different categories of users of company financial reports. 2. Understand the significance of accounting principles and the systems and processes involved in preparing and presenting financial reports. 3. Analyse and interpret financial reports.
Chapter 1
The Approach in the Course

1. Understanding the economic basis of accounting 2. Connecting accounting to capital market and corporate governance 3. Emphasis on principles 4. Student-friendly presentation, easy-to-read style 5. Real-world applications 6. Integrating preparation and use of financial statements 7. Linking accounting theory, empirical research and practice
Chapter 1
Understanding Business Organisations

What do business organisations do?
e.g., Infosys Technologies, BHEL, Zee Telefilms, Amazon.com
Types of business organisations

Merchandising or trading Manufacturing Service
Business organisations are cash machines

Chapter 1
What is Accounting
Accounting is the language of business Accounting provides information for making decisions Accounting is an information system Accounting and economic decisions Why should managers and other decisionmakers know accounting?
The Accounting Information System

Inputs Processing Outputs
Financial statements and reports
Users
Investors, lenders, managers
Business Accounting transactions principles and events and procedures
Chapter 1
Users of Accounting Information

Investors Lenders Security analysts and advisers Managers Employees and trade unions Suppliers and other trade creditors Customers Government and regulatory agencies The public
Chapter 1
Major Branches of Accounting

Financial Accounting For external users Historical information Standardised format Laws and conventions Summarised Income statement; Balance sheet; Cash flow statement; Accounting policies Management Accounting For internal users Future-oriented Flexible format Context-specific More detailed Product cost statement; Standard costs; Budgets; Variances; Performance reports
Chapter 1
Accounting Measurement
Accounting records the effect of economic events Internal events External events: transactions
exchange (e.g., purchase of goods) one-way transfer (e.g., donations, thefts)
Other external events

no exchange or transfer (e.g., floods, earthquakes)
Chapter 1
Assumptions Underlying Accounting Measurement

Accounting Entity
Business is distinct from owner
Going Concern
Business is a continuing enterprise
Periodicity
Business activities divided into periods
Money Measurement
Money is a stable measurement unit
Chapter 1
Generally Accepted Accounting Principles and Accounting Standards

What is GAAP? Importance of GAAP Why does accounting practice differ? Accounting policies Need for accounting standards Standard-setting mechanism in India
Chapter 1
Institutional Environment
Institute of Chartered Accountants of India Department of Company Affairs
National Advisory Committee on Accounting Standards

Securities and Exchange Board of India Central Board of Direct Taxes Reserve Bank of India Comptroller and Auditor General of India International Organisations
International Accounting Standards Board International Organization of Securities Commission
Chapter 1
Forms of Business Organisation

Sole proprietorship
Single individual
Partnership
A few individuals
Limited company
Numerous individuals, often strangers Large business Limited liability
Legal formalities for a limited company The corporate organisation structure

Chapter 1
Accounting, Capital Markets, and Corporate Governance

The capital market: savers and entrepreneurs The lemons principle and market breakdown Signalling and capital market Corporate governance
Accounting disciplines managerial actions
Chapter 1
The Accounting Equation Economic Resources = Claims
Assets = Liabilities + Owners Equity
16
Chapter 1
Assets
Probable future economic benefits What a business owns Examples
Cash Investments Buildings Plant and machinery Patents and copyrights
Chapter 1
Liabilities
Probable future sacrifices of economic benefits What a business owes Contractual, statutory, or constructive Examples
Loans payable Warranty obligations Pensions payable Income tax payable
Chapter 1
Equity
Residual interest of owners Examples
Share capital Share premium Revenues Expenses Dividends Retained profit
19
Chapter 1
Financial Statements
Profit and loss account
Statement of financial performance
Balance sheet
Statement of financial position
Statement of cash flows

Statement of cash receipts and cash payments
20
Fields of Accounting Activity

Public accounting
Auditing Tax Management advisory services Small business services
Chapter 1
Private accounting
Management accounting Internal auditing Information systems
Government accounting
Central State Local
Not-for-profit accounting
Chapter 1
Ethical Issues in Accounting

Business and ethics Why do people bend the accounting rules GAAP is of little help Whistleblowing Ethical conduct brings success in the long term
22

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Financial Accounting: A Managerial Perspective

Second Edition Prepared by R. Narayanaswamy Indian Institute of Management Bangalore

Prentice-Hall of India Private Limited, 2004. All rights reserved.

Accounting and Economic Decisions

The Aim of the Course

The Approach in the Course

Understanding Business Organisations

 Types of business organisations

 Business organisations are cash machines

Prentice-Hall of India Private Limited, 2004. All rights reserved.

The Accounting Information System

Business Accounting transactions principles and events and procedures

Prentice-Hall of India Private Limited, 2004. All rights reserved.

Users of Accounting Information

Major Branches of Accounting

Prentice-Hall of India Private Limited, 2004. All rights reserved.

 Other external events

Assumptions Underlying Accounting Measurement

Generally Accepted Accounting Principles and Accounting Standards

Forms of Business Organisation

 Legal formalities for a limited company  The corporate organisation structure

Accounting, Capital Markets, and Corporate Governance

The Accounting Equation Economic Resources = Claims

Assets = Liabilities + Owners Equity

Prentice-Hall of India Private Limited, 2004. All rights reserved.

Prentice-Hall of India Private Limited, 2004. All rights reserved.

 Statement of cash flows

Prentice-Hall of India Private Limited, 2004. All rights reserved.

Fields of Accounting Activity

Ethical Issues in Accounting

Prentice-Hall of India Private Limited, 2004. All rights reserved.

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Types of business organisations

Business organisations are cash machines

Other external events

Legal formalities for a limited company The corporate organisation structure

Statement of cash flows