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Lecture_1

The document outlines the importance of studying financial accounting for various stakeholders, including MBA students, managers, and entrepreneurs, emphasizing its role in decision-making and financial analysis. It covers key accounting concepts, the characteristics of useful financial information, major accounting assumptions, and the structure of basic financial statements such as the balance sheet and income statement. Additionally, it discusses the need for standardization in accounting practices and provides an overview of the accounting information system and its users.

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10 views27 pages

Lecture_1

The document outlines the importance of studying financial accounting for various stakeholders, including MBA students, managers, and entrepreneurs, emphasizing its role in decision-making and financial analysis. It covers key accounting concepts, the characteristics of useful financial information, major accounting assumptions, and the structure of basic financial statements such as the balance sheet and income statement. Additionally, it discusses the need for standardization in accounting practices and provides an overview of the accounting information system and its users.

Uploaded by

240010301046.aditi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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FIN 7701 – Accounting

Lecture 1
Reasons for studying Financial Accounting
• MBA student – “Accounting is in the curriculum, so I have no choice”
• “Accounting will help me understand what accountant is trying to say”
• “I want to be an investment banker. Accounting information will help me to
value firms.”
• “A manager has to analyse financial reports and make critical business
decisions.”
• “Start-up entrepreneurs should know financial accounting so that they can
manage the accounting and finance function of their business.”
• MBA Oath of Harvard Business School students – “I will report the performance
and risks of my enterprise accurately and honestly.”
Learning outcomes
• You should be able to :
– Explain the nature and roles of
accounting and finance;
– Identify the main users of financial information and
discuss their needs;
– Explain why an understanding of accounting and finance is
likely to be relevant to your needs;
– Understand accounting concepts and conventions.
Flavour of Accounting

• Good news, Bad news and the Stock Market

• Are Bollywood’s profits a fantasy?


100 CRORES MOVIE CLUB???
• Financial Statements: Smokescreen or Mirror?

• The Truth or One of Many Truths?

• Accounting, a party spoiler


“Accounting isn’t rocket science. Really?”
What is accounting?
Accounting is a service activity. It:
– collects
– organizes, analyses, and
– communicates financial information
• Its purpose is to provide quantitative information,
– primarily financial in nature,
– to be useful in making economic decisions.
• In short: Should we invest in MoneyScam Ltd, we will
need accounting to supply necessary information such
that we can make an informed decision.
Who are the users of accounting?
Owners Customers Competitors

Employees
Managers and their
representatives
Business

Lenders Government

Investment Community
Suppliers
analysis representatives
The characteristics that influence the usefulness of
accounting information
Materiality Cost/Benefit

Comparability

Characteristics
that make
Relevance financial Reliability
information
useful

Understandability

Necessary for Limitation to the


including application of
information in the the qualitative
financial statements characteristics
Major Accounting Assumptions

• Reporting entity / Accounting entity


• Going concern
• Periodicity
• Money measurement
Other concepts and conventions
• Historic Cost concept
• Dual aspect concept
• Matching concept
• Prudence / Conservatism convention
• Consistency convention
• Full disclosure convention
• Materiality convention
Accounting Standards (AS)
• AS are written policy documents issued by
expert accounting body or by government or
other regulatory body
• Objective:
– is to standardize the diverse accounting polices and
practices
– with a view to eliminate to the extent possible the
non-comparability of financial statements
– Add the reliability to the financial statements
Global Accounting
• Need for Harmonization & Standardization
• International Accounting Standards (IAS/IFRS)
• US GAAP Impairment Decline in Value of assets

• Machinery – 50,000 WDV Book value Mkt Value – 45000


• Fair Value – 47000 Loss – Impairment
The accounting information system
Information Information Information Information
identification recording analysis reporting

Managers
(internal
decision
makers)
Reports
information
Collects and processes to decision
financial information makers Investors and
Creditors
(external
decision
makers)
The Basic Financial Statements
• BALANCE SHEET – reports the amount of assets, liabilities,
and stockholders’ equity of an accounting entity at a point in
time. Statement of Financial Position
• INCOME STATEMENT – reports the revenues less the
expenses of the accounting period. Statement of Profit and
Loss and Other Comprehensive Income
• STATEMENT OF CASH FLOWS – reports inflows and outflows
of cash during the accounting period in the categories of
operating, investing, and financing.
• Statement of Changes in Equity Position
Components of financial statements

• Profit & loss account


• Balance sheet
• Cash flow statement
Balance sheet
• It is also known as a Position Statement of a firm highlighting
the financial position as on date.

• It summarizes the resources, and the claims to those


resources by owners and the creditors of the company.
Classification of Assets
• Fixed Assets

• Current Assets

• Tangible Assets

• Fictitious Assets

• Intangible Assets

• Quick assets

• Contingent Assets: Application for patent, Suit filed for legal battle.

• Working Capital
Classification of Liabilities

• Fixed Liabilities: Equity / share capital / owner’s fund


• Long Term Liabilities: Debt / external borrowing / Debenture
• Current Liabilities
• Contingent Liabilities – amount / occurrence
Structure
• Sequence of Elements (Marshalling)
– Permanence
– liquidity
As per Indian GAAP – Balance Sheet
Sources of funds Application of funds
Shareholder’s funds Fixed assets
Capital Gross block
Reserves and surplus - Less depreciation /
Loan funds amortization / depletion
Secured loans Net block
Unsecured loans Capital work in progress
Total Investment (trade and non-trade)
Current assets (net)
Inventories / debtors / cash & bank / other
CA / Loans & advances
- current liabilities & provision

Miscellaneous expenditure
P & L Accounts

• Also known as Income Statements which summarizes the


activities of an enterprise in a period by disclosing the
revenues earned and the expenses incurred.

• It represents the financial performance of the firm during a


particular financial year by measuring the net profit or loss.
As per Indian GAAP – Income statement
Net sales / operating income
Other income / non operating income
Total Revenue / income
Raw material consumed
Salary and wages , other expense
Profit before interest, depreciation and tax
Interest and finance charges
Depreciation and amortization
Profit before tax
Provision for various tax
Profit for the year
Balance brought forward
Profit available for appropriation
Various appropriation
Structure of business firms
• Sole-proprietorship
• Partnership
• Limited liability company
– Private limited co Home-Work
– (Public) limited co
• Publicly traded / listed
Assignment

• Scanning the annual report


Homework
– Content of annual report
– Aspects discussed in Director’s report
– Content of annexure to director’s report
– Who audited the financial statement, who appointed the auditors, what are the
matters on which auditors have reported
– Coverage of report on corporate governance
– Discussion on AGM – why and when?
– Listing information
End of Lecture

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