Introduction to

Financial
Accounting
Session 2
Prof Ankur Mehra, PhD
Monsoon 2023 Semester
Office: B – 220F
E: ankur.mehra@snu.edu.in
School of Management & Entrepreneurship
Shiv Nadar IoE
Announcements
Tutorials Slots (Next Week Onward):

• T1: Wednesdays 4 pm to 5:30 pm

• T2: Wednesdays 6 pm to 7:30 pm

Office Hours (Next Week Onward):

• Tuesdays and Thursdays 12 pm to 1 pm

Introduction to Financial Accounting | Monsoon 2023 Semester | Shiv Nadar University 2

Agenda in Session 2
• What is Accounting?

• Business Goals & Activities

• Users of Accounting

• Communication with users – Financial Statements

• Other Elements of Annual Report

• Governance Structure

Introduction to Financial Accounting | Monsoon 2023 Semester | Shiv Nadar University 3

 In choosing the organizational form for your outdoor guide
service, you should consider the pros and cons of each. Identify each of the following
organizational characteristics with the organizational form or forms with which it is
associated.
1. Easier to raise funds.
2. Simple to establish.
3. No personal legal liability.
4. Tax advantages.
5. Easier to transfer ownership.

Solution
1. Corporation.
2. Sole proprietorship and partnership.
3. Corporation.
4. Sole proprietorship and partnership.
5. Corporation.

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 What is Accounting?
An information system that measures, processes, and communicates financial information
about an economic entity to help users make decisions

Financial
Business Statements
Goals • Balance
Business Sheet Users/
Data • Income For
Activities: Accounting Decision Makers
Statement
(Transactions) Measure, Process,
• Cash Flow Internal Users
Operating & communicate
Statement
Investing External Users
• Retained
Financing Earnings
Statement

Decisions/Actions
Accounting is a link between Business activities & Decision makers
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Business Goals & Activities
• A Business is defined as:
– An economic unit that aims to sell goods and services to customers at prices
that will provide an adequate return to its owners
• Business Goals
– Profitability : The ability to earn enough income to attract and hold investors.
– Liquidity: The ability to earn enough funds available (cash) to pay debts when
they are due.
• Business Activities used to achieve the goals:
– Financing
– Investing
– Operating
The accounting information system keeps track of the results of each of these
business activities.
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Financing Activities

Financing Activities – Includes obtaining

funds to begin operations and continue
operating
• Borrowings: Party to whom amounts are
owed are Creditors /Lenders.
Amounts owed/ obligations of business
are called Liabilities
• Issuing shares: Amounts paid by
stockholders to buy shares gives rise
to Common Stock. Payments to
stockholders are called Dividends

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Investing Activities

Investing Activities includes purchase of

resources a company needs to operate and
ensuring spending funds in productive ways
• Ex- Computers, delivery trucks, furniture,
buildings, etc. (property, plant, and
equipment).

• Resources owned by a business are called

assets.

• Investments are another example of an

investing activity.

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 Operating Activities
Once a business has the assets it needs, it can begin
its operations.
• Revenues - Amounts earned from the sale of products
(sales revenue, service revenue, and interest revenue).

• Employing & paying managers and workers, buying &

producing goods and services, paying taxes ‐ These are
Expenses

Net income – when revenues exceed expenses.

Net loss – when expenses exceed revenues.

If a business is making money, is it safe to assume that the

business has a lot of cash in the bank?

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 What is Accounting?
An information system that measures, processes, and communicates financial information
about an economic entity to help users make decisions

Financial
Business Statements
Goals • Balance
Business Sheet Users/
Data • Income For
Activities: Accounting Decision Makers
Statement
(Transactions) Measure, Process,
• Cash Flow Internal Users
Operating & communicate
Statement
Investing External Users
• Retained
Financing Earnings
Statement

Decisions/Actions
Accounting is a link between Business activities & Decision makers
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 Users of Accounting (1/2)
Accounting is a link between Business activities & Decision makers

Decision Makers/ Users

INSIDERS OUTSIDERS

Resources
Promotes Exchange of
Management/Cost Accounting:
Facilitates planning and control

Financial Accounting:
Management Those with Direct Financial Interest
•Human Resources • Investors
•Marketing • Creditors/Lenders
•Operations
Those with Indirect Financial Interest
•Production
•Tax Authorities
•Finance
•Regulatory Agencies
•Labour Unions
•Customers

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 Users of Accounting (2/2)

Questions by those with indirect financial interest?

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 Communicating with Users (1/4) • Income Statement reports
revenues and expenses
for a specific period of
Income Statement time.
Date reflects revenues • Past net income provides
and expenses incurred information for predicting
over a period of time
future net income.

• How about Dividends paid

and Investment received
from Shareholders?

Net income figure used to

prepare statement of retained
earnings

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 Communicating with Users (2/4) • Statement of Retained
Earnings shows amounts and
causes of changes in
Retained Earnings retained earnings during the
Income Statement Statement period.

• Time period is the same as

that covered by the income
statement.

• Ending retained earnings

represents net income since
the inception of the
business that has not been
paid out as dividends
Net income is needed to
• Users can evaluate dividend
determine the ending balance in
retained earnings. payment practices.

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 Communicating with Users (3/4)
• Balance Sheet Reports Balance Sheet Retained Earnings Statement
assets and claims to
assets at a specific point
in time.

• Assets = Liabilities +
Stockholders’ Equity

Ending balance in retained

earnings is needed in preparing
the balance sheet.

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 Communicating with Users (4/4)
Balance Sheet Statement of Cash
Flows Cash Flow Statement

• Where did cash come

from during the
period?

• How was cash used

during the period?

• What was the change

in the cash balance
during the period?

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 Inter-relationships Between Financial Statement (1/2)

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 Inter-relationships Between Financial Statement (2/2)

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 Review Question

Which of the following financial statements is prepared as

of a specific date?
a. Balance sheet.
b. Income statement.
c. Retained earnings statement.
d. Statement of cash flows.

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 Classify each item as an asset, liability, common stock,
revenue, or expense.
Solution
1. Cost of renting property. 1. Expense.
2. Truck purchased. 2. Asset.
3. Notes payable. 3. Liabilities.
4. Issuance of ownership shares. 4. Common stock.
5. Amount earned from providing service. 5. Revenue.
6. Amounts owed to suppliers. 6. Liabilities.

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Thank You
“Do you know what you are?
You are a manuscript of a divine letter.
You are a mirror reflecting a noble face.
This universe is not outside of you.
Look inside yourself;
everything that you want,
you are already that.”
― Rumi