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Financial Accounting [FA] 1: Introduction

S Krishnamoorthy: krisna_om@rediffmail.com, Cell:9821461488

Introduction

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Financial Accounting: Course Content*
Financial A ccounting: Proposed* Course Content Sr No T opic 1 In t r o d u c t i o n t o F i n a n c i a l A c c o u n t i n g A c c o u n t in g ta n d a r d s A c c o u n t i n g C o n c e pt s A c c o u n t i n g C o n ve n t i o n 2 A c c o u n t i n g Pe r i o d 3 Do u bl e En t r s te o A c c o u n t in g Bo o s o A c c o u n t Po s t i n g o En t r i e s Tr i a l Ba l a n c e Pr e pa r a t i o n o Pr e pa r a t i o n o : e e t Ba l a n c e Pr o i t & Lo s s A c c o u n t F u n d F lo w ta te e n t 5 C a s I n ve n t o r Va l u a t i o n 7 De pr e c i a t i o n A c c o u n t i n g Di e r e n c e be t we e n : C a pi t a l & R e ve n u e Expe n s e s De e r r e d Ta x A s s e t a n d De e r r e d Ta x Li a bi l i t A c t u a l a n d C o n t i n g e n t Li a bi l i t /A s s e t s No t e s a n d c e d u le s t o A c c o u n t s 1 0 R e a d in g a n d C o pa r i s i o n o F in a n c ia l ta te e n ts

* Pr o po s e d c o u r s e c o n t e n t s u bje c t t o c a n g e ba s e d o n Pr e s c r i be d l l a bu s & Le c t u r e c e d u le A ssesment Pattern will be indicated in due course

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Financial Accounting: Reference ooks 
asic Reference: 
     Financial Accounting for Management y inesh Harsolekar Financial Accounting- e t and Cases: eardon hattacharya Financial Accounting for Managers: Gosh Financial Accounting- Re orting Analysis: Stice and iamond Accounting Financial Accounting: Ramaier arayanas amy Full e t on Indian Accounting Standards: a man u lication 

Additional Reference: 
       Financial Accounting for usiness Managers: hattacharya Ashish K Fundamental of Financial Accounting: hilli s, i y i y Financial Accounting for on-finance Managers: roms Williams G he McGra Hill 36 hour course in Financial Management for onfinance Managers-2nd dition: Cook Ro ert A Accounting for Fi ed Assets: eterson Raymond R Understanding alance Sheets: Friedlo George homas he Analysis Uses of Financial Statements: White Gerald I Accounting the asy Way: isen, eter J.

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erms and

efinition 

Finance Financial Management Financial Accounting 
Accounting  ook Kee ing 

Cost Accounting Management Accounting Accounting Conce ts and Con entions Accounting Criteria Accounting olicies Accounting Standards

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Terms and 
Conce t

efinitions 

Accounting Conce ts and Con entions 
True & Fair View Going Concern Consistency Prudence Matching / Accrual 

Con entions 
Historical Cost Money Measurement Separate Entity Realization Materiality

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Terms and

efinitions 

Accounting Criteria 
Understanda ility Rele ance Consistency Com ara ility Relia ility O ecti ity 

Accounting olicies Regulations 
Indian Com anies Act Indian Income Ta Act S I Regulations ICAI FAS 

Accounting Standards 
US GAA Indian GA IAS IFRS

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Finance 
    It is a out money, markets and also eo le It is the life lood of cor orate acti ity The commercial acti ity of ro iding funds and ca ital The management of money, in estments and other assets The science that descri es the management of money, anking, credit, in estments, and assets

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Financial Management 
Concern the acquisition, financing o erall goal in mind management of assets ith some 

O erational acti ity for udicious selection and use of ca ital  ncom asses to core conce ts of resource management and finance o erations Is a ma or de artment and an acti ity that handles financial resources in an organization A lication of lanning and control functions to the finance function 

Financial decision making for harmonizing stakeholders and Firm¶s goals  ffecti e Financial Management is key to cor orate success

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ook Kee ing and Accounting 
Book-keeping: 
Is the recording of all financial transactions undertaken y an indi idual or organization  ookkee ing is the actual recording of the com any's transactions, ithout any analysis of the information 

Accounting: 
The rocess of systematically recording, classifying, erifying and summarizing usiness transactions, and resenting this information in eriodic Is the rocess of measuring economic information and communicating it to the decision-makers and stakeholders in an organization Accounting information is used y an organizations managers, in estors, em loyees, and creditors Accounting statements ro ide financial details concerning the o eration of a usiness or other form of organization

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Financial Accounting 
A field of accounting that focuses primarily on reporting a company's financial information to meet the needs of the company's external users The process of collecting, summarizing and reporting financial information of an entity according to established standards and principles The preparation and presentation of financial reports showing business cash flow, profit/financial performance and financial position The objective of financial accounting is to provide the information that is needed for sound economic decision making The main purpose of financial accounting is to prepare financial reports that provide information about a firm's performance to external parties such as investors, creditors, and tax authorities The analysis and interpretation of financial statements to help business owners and managers make informed decisions about their business Financial accounting is performed according to Generally Accepted Accounting Principles (GAAP) guidelines
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Cost Accounting 
A type of accounting that focuses on recording, defining, and reporting costs associated with specific operating functions A managerial accounting activity designed to help managers identify, measure and control operating costs Procedures used for rationally classifying, recording, and allocating current or predicted costs that relate to a certain product or production The discipline of estimating, tracking and controlling product and service costs Process of calculating the costs of production for a manufacturing business and prepared cost budgets, production planning and reports The process of identifying and evaluating costs, frequently used as a managerial accounting activity to facilitate internal decision making Accurate cost analysis helps provides the basis for make/buy decisions, market entry and exit, product and process changes, and many other measures and factors involved in organizational success
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Management [Managerial] Accounting 
Reporting designed to assist management in decision-making, planning, and control It is the preparation of financial statements and other data for managers to support them in the decision-making process It includes the analysis and manipulation of information summarized in the accounting systems to help plan and make business decisions Provides information about particular activities within a business, including budgets, costing and evaluating business activities Management accounts are internal documents and simply used for information purposes within the firm In contrast with financial accounting, managerial accounting is for internal decision making and does not have to follow any rules issued by standard-setting bodies

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Accounting Conce ts

Con entions

In dra ing u accounting statements hether they are e ternal ³Financial Accounts" or internally-focused ³Management Accounts", a clear o ecti e has to e that the accounts fairly reflect the true "su stance" of the usiness and the results of its o eration The theory of accounting has therefore de elo ed the conce t of a ³True and Fair View³  The true and fair ie is a lied in ensuring and assessing hether accounts do indeed ortray accurately the usiness' acti ities To su ort the a lication of the "true and fair ie ", accounting has ado ted certain concepts and conventions which hel to ensure that accounting information is resented accurately and consistently

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Accounting Conce ts 
1. 2. 3. 4. Four im ortant accounting conce ts under in the re aration of any set of accounts: Going Concern Consistency Prudence Matching or Accruals

1.Going Concern:  Accountants assume, unless there is e idence to the contrary, that a com any is not going roke  This has im ortant im lications for the aluation of assets and lia ilities 2.Consistency:  Transactions and aluation methods are treated the same way from year to year, or eriod to eriod  Users of accounts can, therefore, make more meaningful com arisons of financial erformance from year to year  Where accounting olicies are changed, com anies are required to disclose this fact and e lain the im act of any change

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Accounting Conce ts
3.Prudence: Profits are not recognized until a sale has een com leted In addition, a cautious iew is taken for future ro lems and costs of the usiness Costs losses are " ro ided for" in the accounts" as soon as their is a reasona le chance that such costs losses will e incurred in the future 4.Matching or Accruals: Income should e ro erly "matched" with the e accounting eriod

enses of a gi en

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Accounting Con entions 
Historical Cost: 
The most commonly encountered con ention is the ³Historical cost convention³ This requires transactions to e recorded at the rice ruling at the time, of transaction and for assets to e alued at their original cost Under the historical cost con ention no account is taken of changing rices in the economy 

Monetary Measurement: 
Accountants do not account for items unless they can e quantified in monetary terms Items that are not accounted for (unless someone is re ared to ay something for them) include things like workforce skill, morale, market leadershi , rand recognition, quality of management etc

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Accounting Con entions 
Separate Entity: This convention seeks to ensure that private transactions and matters relating to the owners of a business are segregated from transactions that relate to the business Realization: With this convention, accounts recognize transactions (and any profits arising from them) at the point of sale or transfer of legal ownership rather than just when cash actually changes hands  For example, a company that makes a sale to a customer can recognize that sale when the transaction is legal - at the point of contract. The actual payment due from the customer may not arise until several days later if the customer has been granted some credit terms Materiality: An important convention as the preparation of accounts involves a high degree of judgments The "materiality" convention suggests that this should only be an issue if the judgment is "significant" or "material" to a user of the accounts The concept of "materiality" is an important issue for auditors of financial accounts
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Accounting Criteria
There is general agreement that, before it can be regarded as useful in satisfying the needs of various user groups, accounting information should satisfy the following Key Criteria: 

Understandability: 
This implies the expression, with clarity, of accounting information in such a way that it will be understandable to users - who are generally assumed to have a reasonable knowledge of business and economic activities 

Relevance: 
This implies that, to be useful, accounting information must assist a user to form, confirm or maybe revise a view - usually in the context of making a decision (e.g. should I invest, should I lend money to this business? Should I work for this business?) 

Consistency: 
This implies consistent treatment of similar items and application of accounting policies

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Accounting Criteria 
Comparability:
This implies the ability for users to be able to compare similar companies in the same industry group and to make comparisons of performance over time. Much of the work that goes into setting accounting standards is based around the need for comparability 

Reliability:
This implies that the accounting information that is presented is truthful, accurate, complete (nothing significant missed out) and capable of being verified (e.g. by a potential investor) 

Objectivity:
This implies that accounting information is prepared and reported in a "neutral" way. In other words, it is not biased towards a particular user group or vested interest

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Accounting Princi les 
Rules and guidelines of accounting They determine such matters as the measurement of assets, the timing of revenue recognition and the accrual of expenses The Ground Rules for financial reporting are referred to as Generally Accepted Accounting Principles [GAAP] GAAP consist of four components: the requirements of law; judgments of various courts of law; pronouncements of the governing body from time to time; and requirements of regulatory Authority (Example: SEBI) An accounting principle must have substantial authoritative support such as promulgation of a Financial Accounting Standards Board [FASB] or Institute of Chartered Accountants of India [ICAI] An example of accounting principle is Materiality Concept

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Accounting Standards 
Accounts which are intended to show a true and fair view must conform to certain standards issued by the Accounting Standards Board Conduct to be followed by Accountants as formulated by an authoritative body or by law [ Example: Institute of Chartered Accountants of India (ICAI), Securities Exchange Board Of India (SEBI), Indian Companies Act] In the era of globalization and integration there is a strong need for legislation to bring about uniformity, rationalization, comparability, transparency and adaptability in financial statements and this purpose is sought to be achieved thru the stringent norms for preparation and presentation of financial statements as prescribed by accounting standards Authorities and Types of Accounting Standards US Financial Accounting Standards Board [FASB]: US GAAP The Institute of Chartered Accountants of India [ICAI]: Indian GAAP International Accounting Standards Board: [IASB]  International Accounting Standards: [IAS] International Financial Reporting Standards [IFRS]

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Role of Accounting Standards 
Accounting standards are necessary to romote high quality financial re orting Accounting standards came to e de elo ed from the mid si ties onwards to romote the integrity of the accounting rofession y way of ensuring uniformity in the way accountants re ort transactions in their ooks and also in their re aration of the final accounts of usinesses Accounting standards is aimed at oosting the confidence of stakeholders, articularly shareholders and otential in estors in the accounting rofession Accounting standards ser e to romote the understanda ility , com ara ility, rele ance and relia ility of financial re orts Accounting standards ring alue to the com any

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