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1 April 2014 © PHI Learning Private Limited New Delhi 1
Financial Accounting:A Managerial Perspective
Fifth Edition
Prepared by R. NarayanaswamyIndian Institute of Management Bangalore
1 April 2014 © PHI Learning Private Limited New Delhi 2
Chapter 1
Accounting, Markets, and Governance
1 April 2014 © PHI Learning Private Limited New Delhi 3
Understanding Business Organizations
� Merchandising organizations
� Manufacturing organizations
� Service organizations
� Business organizations as cash generating-cum-dispensing machines
1 April 2014 © PHI Learning Private Limited New Delhi 4
Business Organizations
1 April 2014 © PHI Learning Private Limited New Delhi 5
What is Accounting
� Accounting is the language of business
� Who should know accounting?
� Why accounting in MBA?
� The MBA Oath and financial reporting
� Accounting information and economic decisions
1 April 2014 © PHI Learning Private Limited New Delhi 6
The Accounting Information System
1 April 2014 © PHI Learning Private Limited New Delhi 7
Users of Accounting Information
� Investors
� Lenders
� Analysts and advisers
� Managers
� Employees and trade unions
� Suppliers and trade financiers
� Customers
� Government and regulatory authorities
� The public
1 April 2014 © PHI Learning Private Limited New Delhi 8
Financial Accountingand Management Accounting
� Financial accounting
� Management accounting
� How do they differ?
1 April 2014 © PHI Learning Private Limited New Delhi 9
Accounting Measurement Assumptions
� Reporting entity
� Going concern� Historical cost
� Periodicity
� Money measurement
1 April 2014 © PHI Learning Private Limited New Delhi 10
Generally Accepted Accounting Principles and the Accounting Environment
1 April 2014 © PHI Learning Private Limited New Delhi 11
Generally Accepted Accounting Principles and the Accounting Environment
� Accounting standards and policies� Accounting standards
� Accounting standard-setting arrangements
� Accounting policies
� Converging IGAAP with IFRS� IGAAP
� IFRS
� Ind AS
� Principles or rules?
1 April 2014 © PHI Learning Private Limited New Delhi 12
Forms of Business Organization
� Sole proprietorship
� Partnership
� Limited company� Listed
� Public
� Private
� Limited liability partnership
� Legal formalities for a limited company
1 April 2014 © PHI Learning Private Limited New Delhi 13
The Corporate Organization
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Accounting, Capital Market and Corporate Governance
� The lemons principle and the problem of adverse selection
� Signalling quality
� Moral hazard and corporate governance
1 April 2014 © PHI Learning Private Limited New Delhi 15
The Accounting Equation
� Economic resources = Claims
� Assets = Liabilities + Equity
� Assets: “own”
� Liabilities: “owe”
� Equity: “residual interest”
� Analyzing the effect of transactions
1 April 2014 © PHI Learning Private Limited New Delhi 16
Financial Statements
� Statement of profit and loss
� Statement of retained earnings
� Balance sheet
� Cash flow statement
� Statement of retained earnings
� How are the financial statements interrelated?
� Preview of financial statement analysis
1 April 2014 © PHI Learning Private Limited New Delhi 17
What do Accountants Do?
� Public accounting� Auditing
� Forensic accounting and risk management
� Tax services
� Advisory services
� Bankruptcy
� Small business services
� Private accounting� Management accounting
� Internal auditing
� Information systems
� Government accounting
� Not-for-profit accounting
1 April 2014 © PHI Learning Private Limited New Delhi 18
Accounting as an Academic Discipline
� Illustrative research areas� Accounting and stock prices
� Benefits of disclosure
� Usefulness of accrual and cash
� Reporting losses faster than gains
� Selection of accounting methods and disclosure levels
� Predicting future profits from past profits
� Disclosure and managerial behaviour
� Executive pay and financial performance
1 April 2014 © PHI Learning Private Limited New Delhi 19
Fraud and Ethical Issues in Accounting
� What leads to fraud and unethical accounting?
� Fraud-hit companies: e.g.� Satyam
� Enron
� WorldCom
� The Satyam case
� Resolving ethical dilemmas
� Whistle-blowing
1 April 2014 © PHI Learning Private Limited New Delhi 20
End of Chapter 1
Accounting, Markets, and Governance