Accounting for

Managers

Dr. Rishi Taparia

 Accounting for Managers - Syllabus
• Unit I: Accounting Theory: Concept, Importance, Scope, Generally
Accepted Principles of Accounting, Indian Accounting Standards,
IFRS, Harmonization of Accounting Standards, Preparation of
Financial Statements, Corporate Balance Sheet – Terms, Contents,
Format and Analysis.
• Unit II: Depreciation Accounting and Inventory Valuation: Meaning
and Techniques of Depreciation, Methods employed by Indian
Companies, Inventory Valuation, Methods, Policies of Indian
Companies.
• Unit III: Presentation and Disclosure of Accounting Information:
Presentation of Financial Position. Financial Statements of Companies.
Analysis of Accounting Information: Financial Statement Analysis.
Interpretation of Accounting information,
• Unit IV: Cash Flow Statement, Preparing a statement of Cash Flows.
• Unit V: Responsibility Accounting and Divisional Performance
Measurement, Transfer Pricing: Definition, Objectives and Methods of
Transfer Pricing, Recent developments in the field of Accounting.
UNIT - I
Why Financial Accounting?
• Helps in understanding the various concepts, principles and procedures of
accounting.
• Helps in understanding and interpreting the financial statements of the company.
• Furnish accounting information to the management which helps them in taking
various financial management decisions.
 Why Financial Accounting?
• Helps in understanding the various concepts, principles and
procedures of accounting.
• Helps in understanding and interpreting the financial statements
of the company.
• Furnish accounting information to the management which helps
them in taking various financial management decisions.
• Assets: Economic resources that are owned or controlled by an
entity.

• Under US GAAP, the fundamental definition of an asset is as

follows: "Assets are probable future economic benefits obtained
or controlled by a particular entity as a result of past transactions
or events."
 Classification of Assets:
(A) Current assets
• Current assets are cash and other assets expected to be converted to
cash. These assets are continually turned over in the course of a
business during normal business activity.
There are 5 major items included into current assets:
• Cash - it is the most liquid asset, which includes currency, deposit
accounts, and negotiable instruments (e.g., money orders, checks, bank
drafts).
• Short-term investments - include securities bought and held for sale in
the near future to generate income on short-term price differences
(trading securities).
• Debtors - are the customers from whom the company has to receive
the payment.
• Receivables - usually reported as net of allowance for uncollectible
accounts.
• Inventory - trading these assets is a normal business of a company. The
inventory value reported on the balance sheet is usually the historical
cost or fair market value, whichever is lower. This is known as the
"lower of cost or market" rule.
• Prepaid expenses - these are expenses paid in cash and recorded as
assets before they are used or consumed (a common example is
insurance).
(B) Long-term investments
• Often referred to simply as "investments." Long-
term investments are to be held for many years
and are not intended to be disposed in the near
future. This group usually consists of four types of
investments:
• Investments in securities, such as bonds, common
stock, or long-term notes.
• Investments in fixed assets not used in operations
(e.g., land held for sale).
• Investments in special funds (e.g., sinking funds or
pension funds).
• Investments in subsidiaries or affiliated
companies.
(C)Fixed Assets
• Also referred to as PPE (property, plant, and equipment). Assets
which are purchased for continued and long-term use in earning
profit in a business. This group includes land, busildings,
machinery, furniture, tools, wasting resources (timberland,
minerals), etc. They are written off against profits over their
anticipated life by charging depreciation expenses (with exception
of land). Accumulated depreciation is shown in the face of the
balance sheet or in the notes.
 Depreciation
• Depreciation is a fall in the value of fixed assets.
• It is also known as spreading the cost of a fixed asset over its
estimated useful life.
• Depreciation does not affect CASH. How?
• Depreciation is a charge against the fixed assets due to the
following reasons:
• Wear & Tear: is a term for damage that naturally and inevitably
occurs due to normal use or aging.

• Efflux of time: is a time which has elapsed.

• Obsolescence: is a state of being which occurs when a person,

object, or service is no longer wanted, even though it may still
be in good working order.
 Calculation of Depreciation

Cost of fixed Salvage

Asset - Value
Depreciation =
No. of useful life in years

In accounting, the salvage value of an asset is its remaining value

after depreciation. This is also known as residual value. (See an
example)
• A company purchased a plant at a cost of Rs.80000 on January 01,
2006. The expected life is 8 years and the asset has expected
salvage value of Rs.8000. Compute the following:
i) amount of depreciation
ii) Book Value of fixed asset as on December 31, 2006
iii) The accumulated depreciation after 10 years.

• What is the Book Value of a fixed asset?

 Methods of charging
Depreciation
• Straight Line Method

• Diminishing Balance Method

• Double Declining Rate Method

• Sum-of-the-years’ digits method

(D) Intangible Assets
Intangible assets are those which are not physical in
nature. The most common intangible assets are
Goodwill, Copyright, Patent, Trademark, Preliminary
Expenses.

Goodwill: describes the value of a business entity not

directly attributable to its tangible assets and liabilities.
For example, a software company may have physical
assets of some desktop PCs, servers, office equipment etc
valued at $1 million, but the company's overall value
(including brand, customer, intellectual capital) is valued
at $10 million. Anybody buying that company would show
$10 million total assets comprising $1 million physical
assets, and $9 million in goodwill.
Copyright is a set of exclusive rights granted by
governments to regulate the use of a particular
expression of an idea or information. The symbol
for copyright is ©, and in some jurisdictions may
alternately be written (c).

Copyright may subsist in a wide range of creative,

intellectual, or artistic forms or "works". These
include poems, thesis, plays, and other literary
works, movies, choreographic works (dances,
ballets etc.), musical compositions, audio
recordings, paintings, drawings, sculptures,
photographs, software, radio and television
broadcasts of live and other performances.
Patent is a set of exclusive rights granted by a state to a
person for a fixed period of time in exchange for the
regulated, public disclosure of certain details of a device,
method, process or composition of matter (substance)
(known as an invention) which is new inventive, and useful
or industrially applicable.

A trademark or trade mark is a distinctive sign of some

kind which is used by a business to uniquely identify itself
and its products and services to consumers, and to
distinguish the business and its products or services from
those of other businesses.

Conventionally, a trademark comprises a name, word,

phrase, logo, symbol, design, image, or a combination of
these elements.
• Liability: is something that is owed to another party or an
obligation to pay money to another party.
• Liabilities are shown in the Balance Sheet.
• Liabilities are of two types:
Current Liabilities
Long Term Liabilities
 Classification of Liabilities
• Current Liabilities — these liabilities are
reasonably expected to be liquidated within a
year. They usually include creditors, bills
payables, bank overdrafts, outstanding
expenses, short term loans, Income received in
advance.

• Long Term Liabilities — these liabilities are

reasonably expected not to be liquidated within
a year. They usually include debentures, long-
term loans.
What is an Owner’s Equity?
• Owners' equity, also called capital, is any debt owed to the
business owners. For example, if you invest Rs.500,000 to start a
business, that amount is recorded in a capital account, also
referred to as an owners'-equity account.
• In other words, OE is the money contributed by the owner in the
business.
 OE is an Asset or a Liability?
• OE is a liability because it is a debt owed to the
business owners.
• Separate Entity Concept – Business and
Businessmen are two separate and distinct
entities.
• In case of liquidation or winding up of
operations, the company is legally liable to pay
off the capital to the owners after meeting its
other obligations like paying off to banks,
suppliers, employees, tax etc.
• OE = Paid-up Capital + Retained Earnings
+ Reserves & Surpluses
What is an Accounting
equation?
Assets = Liabilities + Owners’ Equity

Assets = L + OE + Profit / - Losses

FA + CA = STL + LTL + OE (+/-) Profit / Loss

 Problems on Accounting Equation
• The total assets of M Corporation at December 21,
2002 are Rs.380000 and its total liabilities are
Rs.150000 at the same date. What is the amount of M
Corporation’s Stockholders’ Equity at December 31,
2002.

• At January 1, 2002, Whiteboard Corporation had total

assets of Rs.500000 and total Owners’ equity of
Rs.280000. During 2002, total assets decreased by
Rs.40000 and total liabilities decreased by Rs.22000. A)
What was the amount of total liabilities at January 01,
2002? B) What was the total Owners’ equity as at
December 31, 2002?
 Definition of Accounting

The American Institute of Certified Public Accountants has defined

Accounting as:

“ an art of recording, classifying and summarising in a significant

manner and in terms of money transactions and events which are,
in part at least, of a financial character and interpreting the results
thereof ”.
 Basic Functions of an Accounting
System
 Interpret
and record
business
transactions.

Payment

Car
 Basic Functions of an Accounting
System
 Interpret  Classify
and record similar
business transactions
transactions. into useful  Summarize
reports.
and
communicate
information to
decision
makers.
Accounting Information System

Inputs Processing Outputs Users

Owners,
Business Accounting Financial
Investors,
Transactions Principles & Statements &
Banks,
and events Procedures Reports
Creditors
 Information
Information System
System

Cost
Cost&&Revenue
Revenue
Determination
Determination
Job
Jobcosting Decision
Information
Information costing DecisionSupport
Support
Process
Processcosting CVP
Users
Users costing CVPanalysis
analysis
Investors ABC
ABC Performance
Investors Performance
Creditors Sales
Sales evaluation
Creditors evaluation
Managers Assets Incremental
Managers Assets&& Incremental
Owners
Owners Liabilities analysis
analysis
Liabilities
Customers
Customers Plant Budgeting
Budgeting
Employees Plantand
and Capital
Employees equipment
equipment Capital
Regulatory
Regulatory Loans allocation
allocation
Loans&&equity
equity Earnings
agencies
agencies Receivables,
Receivables, Earningsper
per
-SEC
-SEC payables share
share
payables&&cash
cash Ratio
-IRS
-IRS Cash Ratioanalysis
analysis
-EPA CashFlows
Flows
-EPA From
Fromoperations
operations
From
Fromfinancing
financing
From
Frominvesting
investing
 Accounting Cycle
Step 1 Identify transactions or events to be recorded
B
A O Step 2
Objective: To gather information about the transactions or events from the source documents.
Journalise transactions and events
O
C K Step 3
Objective: To record the transactions and events in a journal.
Posting from journals to ledger
K Objective: To transfer the transactions recorded in the journal, in the respective accounts
C E Step 4
opened in the ledger.
Balancing ledger
E
O P
Objective: To ascertain the difference between the total of debit amount column and the total
of credit amount column of a ledge account.

I Step 5 Prepare Trial Balance

U N
Objective: To prepare list of item showing the balances of each and every account opened and
verifying whether the total of debit balance is equal to the total of credit balance.
G
N Step 6 Prepare Income Statement
Objective: To prepare Income Statement to ascertain the profit or loss for the accounting
period.

T Step 7 Prepare Balance Sheet

Objective: To prepare Balance Sheet to ascertain the final position of the company at the end
of the financial year.
I
N
G
 System of Accounting
• Cash System of Accounting
Recognises revenue when cash is received and recognises
expenses when cash is paid out. No entry is made when a receipt
or payment is due.
• Accrual System of Accounting
Recognises revenues when sales are made or services are
performed, regardless of whether cash is received or not. The
expenses are recognised, whether cash is paid out or not.
 Cash Accrual
system System

Revenues are As cash is As earned

recognised received (goods are
delivered or
services are
performed)

Expenses are As cash is As incurred to

recognised paid out produce
revenues
 Branches of Accounting

Financial Management Cost

Accounting (FA) Accounting (MA) Accounting (CA)
 Difference between FA & MA
• FA is constrained by GAAP.
MA is not constrained by GAAP.

• FA information is used by external as well as

internal agencies.
MA information is used by internal people to the
organisation.

• FA is past oriented i.e. historical in nature.

MA is future oriented.

• FA is usually for 01 year and less flexible.

MA is very flexible and varies from hourly to 10-15
years.
• FA prepares financial statements i.e. a summary reports concern
primarily with entity as a whole.
MA prepare detailed reports and primarily concern about details
of parts of the entity, products, departments etc.

• FA does not work on approximation. Exact figures are

considered.
MA considers approximate figures.
 Users of
Accounting
Information

Direct Users Indirect Users

Objectives of External Financial
Reporting
The
Theprimary
primaryexternal
external users
usersof
offinancial
financial
information
informationare
are investors
investorsand
and creditors.
creditors.

Cash Flow Prospects

Investors Creditors
Return on Periodic Periodic
Investment dividends interest
Sale of Repayment of
Return of ownership at a loan at a
Investment future date future date
Objectives of Financial Reporting
(Specific)
Information about economic resources,
claims to resources, and changes in
resources and claims.

Information useful in assessing amount,

timing and uncertainty of future cash flows.

Information useful in making investment and

credit decisions.
(General)
End of Workshop 1