Intro to FA

8/10/2019 Intro to FA

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References

Financial Accounting for Management byRamachandran & Kakani, 3e 2011Financial Accounting: A ManagerialPerspective by Narayanaswamy 4e


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Session Plan 2 credits/30hours


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Evaluation

AssignmentsQuizGroup- Case Study


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Introduction


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Definition of Accounting

According to the American Institute of CertifiedPublic Accountants (AICPA)

Accounting is the art of recording, classifying and

summarizing in a significant manner and in termsof money, transactions, and events, which are, in

part at least, of a financial character, andinterpreting the results thereof.


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Objectives of Accounting

Income determinationFor rational economic decision-making

Financial reportingSummarized as all those things of value ownedby the entity and all the claims against thesepossessions

Disclosure All the relevant & pertinent information is suppliedto the information users


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Purposes of AccountingInformation


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Users of Accounting Information

Stakeholders are the ones who have aninterest in what happens as a result of theentities activities

Stakeholders classified asInternal users viz. managersExternal users viz. creditors and equity investors,

government, society


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Stakeholders

Stakeholders Area of InterestGovernment Tax Liabilities

Unions and Staff Potential for Pay awardsand BonusPublic/Society Ethical/Environmental

activities of the firm

Lenders Long term future

Shareholders Profitability and shareperformance

Customers Ability to carry on providingthe service


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Type of Business Entities

SolePropreitorship

Partnership

LimitedLiabilityPartnership

Company

Examples M/s

Prabhudas &Sons; RaviPan Shop

S.R. Batliboi

&Co

ABC LLP XYZ Ltd.

Owner SoleProprietor

Partners Partners Shareholders

No of owners/shareholders

One Person Min: 2Max:20

Min: 2 Max: NoLimit

Min:7 Max: NoLimit

ManagementControl

Proprietor Partners DesignatedPartners

Board ofDirectors

Liability Unlimited Unlimited Limited Limited

LegalRegistration No Provision Voluntary Compulsory Compulsory


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Which entity is preferable?

Optimal Business Structure is importantFactors that enable owners to make theappropriate choice:

Size of Capital and its availabilityLegal Structure of a countryPurpose and scope of business

Size of Business operationTax structure of a country for differentorganisations


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Generally Accepted AccountingPrinciples

Combination of authoritative standards (set bypolicy boards) and the accepted ways of doingaccounting

Differs from country to country based on theaccounting principles and standards adoptedin that country

Rules that business entities are expected tofollow while preparing their financialstatements


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Interpreting GAAP and AccountingStandards

GAAP AccountingStandards

Accounting Practicesholding sway in a country

Authoritative Standards (setby policy boards)

Country Specific International Standards existIndian GAAP is to be followed in the pecking orderof:

IFRS, if applicable Accounting Standards laid down by ICAI, in

statutes such as Insurance ActsGuidance Notes issued by ICAIExpert Advisory opinions issued by ICAI


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Basic concepts of accounting accepted as principles

Business Entitythe entity is separate and distinct from the ownersand the entity is liable to the owner

Hence, in a limited liability company, theenterprise is liable to the owner (shareholder)based on the proportion of the capital investment(share capital) made by the latter


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Basic concepts of accounting accepted as principles

Going Concernentities have a life of infinite duration, unless factsare known that indicate otherwise

the basis of valuation of resources is influencedmore by their future utility to the business entitythan by their current market valuation

Money Measurement

Provides a simple measuring deviceRepresentation in a common denominator andamenable to summarization by addition &subtraction


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Concepts..

MatchingDetermining the profits after charging theexpenses of a period with the revenues earned inthe same period

RealizationDetermines the point of time when revenue andhence returns (or profits) can be recognizedobjectively, unbiased, and with certainty

ConsistencyOnce a choice is made for the treatment of atransaction, the same is consistently followed


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Concepts..

Diversity among Independent EntitiesThere are wide variations in the organization andoperations of entities

requirements and demands are differentConservatism

Anticipate no gains, but provide for all possiblelosses and if in doubt, write it off Results in an understatement of profits andvalues


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Concepts..

Dependability of Data Accounting entities ensure the standard of internalcontrols to ensure that the data used as the basis ofaccounting records are controlled to ensure theirquality

MaterialityNecessitated by practicability and feasibilityBalance between accuracy and costs for achieving it

Timeliness/PeriodicityThe idea of accounting periods is used so as toensure regularity and timeliness of reportingCompleteness of information


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Branches of Accounting


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Enterprise Accounting

Specifically addresses issues of measurementand valuation in the context of businessenterprises

Has evolved into two disciplinesFinancial Accounting

Providing financial information relating to the entity tooutsiders

Management/Cost AccountingReporting the activities of the entity to managers so asto enable them to plan and control the activities of theentity vis--vis other competing entities


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Illustration on using AccountingInformation

A firm sells three products P1, P2, P3. Profit ofthe firm is declining


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Illustration

The Problem:Decrease in profits during the period -as a resultof overall increase in the cost of goods sold

Now, which product is losing money?

Documents

Intro to FA