© Prentice-Hall of India Private Limited, All rights reserved.1 Financial Accounting: A Managerial Perspective Second Edition Prepared by R. Narayanaswamy Indian Institute of Management Bangalore

© Prentice-Hall of India Private Limited, All rights reserved.2 Accounting and Economic Decisions Chapter 1

© Prentice-Hall of India Private Limited, All rights reserved.3 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

© Prentice-Hall of India Private Limited, All rights reserved.4 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

© Prentice-Hall of India Private Limited, All rights reserved.5 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

© Prentice-Hall of India Private Limited, All rights reserved.6 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 decision- makers know accounting? Chapter 1

© Prentice-Hall of India Private Limited, All rights reserved.7 The Accounting Information System Inputs Processing Outputs Users Business Accounting Financial Investors, transactions principles statements lenders, and events and procedures and reports managers

© Prentice-Hall of India Private Limited, All rights reserved.8 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

© Prentice-Hall of India Private Limited, All rights reserved.9 Major Branches of Accounting Chapter 1 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

© Prentice-Hall of India Private Limited, All rights reserved.10 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

© Prentice-Hall of India Private Limited, All rights reserved.11 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

© Prentice-Hall of India Private Limited, All rights reserved.12 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

© Prentice-Hall of India Private Limited, All rights reserved.13 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

© Prentice-Hall of India Private Limited, All rights reserved.14 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

© Prentice-Hall of India Private Limited, All rights reserved.15 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

© Prentice-Hall of India Private Limited, All rights reserved.16 The Accounting Equation Economic Resources = Claims Assets = Liabilities + Owners’ Equity Chapter 1

© Prentice-Hall of India Private Limited, All rights reserved.17 Assets  Probable future economic benefits  What a business “owns”  Examples  Cash  Investments  Buildings  Plant and machinery  Patents and copyrights Chapter 1

© Prentice-Hall of India Private Limited, All rights reserved.18 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

© Prentice-Hall of India Private Limited, All rights reserved.19 Equity  Residual interest of owners  Examples  Share capital  Share premium  Revenues  Expenses  Dividends  Retained profit Chapter 1

© Prentice-Hall of India Private Limited, All rights reserved.20 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 Chapter 1

© Prentice-Hall of India Private Limited, All rights reserved.21 Fields of Accounting Activity  Public accounting  Auditing  Tax  Management advisory services  Small business services  Private accounting  Management accounting  Internal auditing  Information systems  Government accounting  Central  State  Local  Not-for-profit accounting Chapter 1

© Prentice-Hall of India Private Limited, All rights reserved.22 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 Chapter 1