Ximr Fa1 Intro 2010

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1XIMR FA1 2010

Financial Accounting [FA] 1:

Introduction

S Krishnamoorthy: [email protected], Cell:9821461488

Introduction

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2

Financial Accounting: Course Content*

Introduction XIMR FA1 2010

Sr No Topic

1 In t r o d u c t i o n t o F i n a n c i a l A c c o u n t i n g

2

A c c o u n t i n g t a n d a r d sA c c o u n t i n g C o n c e pt s

A c c o u n t i n g C o n ve n t i o n

A c c o u n t i n g Pe r io d

3 Do u bl e En t r s t e o A c c o u n t i n g

Bo o s o A c c o u n t

Po s t i n g o En t r i e s

Pr e pa r a t i o n o Tr i a l Ba l a n c e

5

Pr e pa r a t io n o :

Ba l a n c e e e tPr o i t & Lo s s A c c o u n t

C a s F u n d F lo w t a t e e n t

In ve n t o r Va l u a t i o n

7 De pr e c i a t i o n A c c o u n t i n g

Di e r e n c e be t we e n :

C a pi t a l & R e ve n u e Expe n s e s

De e r r e d Ta x A s s e t a n d De e r r e d Ta x Li a bi l i t

A c t u a l a n d C o n t i n g e n t Li a bi l i t /A s s e t s

No t e s a n d c e d u l e s t o A c c o u n t s

1 0 R e a d i n g a n d C o pa r i s i o n o F i n a n c i a l t a t e e n t s

* Pr o po s e d c o u r s e c o n t e n t s u bje c t t o c a n g e ba s e d

o n Pr e s c r ibe d l l a bu s & Le c t u r e c e d u l e

Assesment Pattern will be indicated in due

course

Financial Accounting: Proposed* Course Content

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3Introduction XIMR FA1 2010

asic Reference: Financial Accounting for Management y inesh Harsolekar

Financial Accounting- e t and Cases: eardon hattacharya Financial Accounting for Managers: Gosh

Financial Accounting- Re orting Analysis: Stice and iamond

Accounting

Financial Accounting: Ramaier arayanas amy

Full e t on Indian Accounting Standards: a man u lication

Additional Reference: Financial Accounting for usiness Managers: hattacharya Ashish K

Fundamental of Financial Accounting: hilli s, i y i y

Financial Accounting for on-finance Managers: roms Williams G

he McGra Hill 36 hour course in Financial Management for on-

finance Managers-2nd dition: Cook Ro ert A Accounting for Fi ed Assets: eterson Raymond R

Understanding alance Sheets: Friedlo George homas

he Analysis Uses of Financial Statements: White Gerald I

Accounting the asy Way: isen, eter J.

Financial Accounting: Reference ooks

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Finance

Financial ManagementFinancial Accounting

Accounting

ook Kee ing

Cost Accounting

Management AccountingAccounting Conce ts and Con entions

Accounting Criteria

Accounting olicies

Accounting Standards

erms and efinition

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Accounting Conce ts and Con entionsConce t

True & Fair View

Going Concern

Consistency

Prudence

Matching / Accrual

Con entionsHistorical Cost

Money Measurement

Separate Entity

Realization

Materiality

Terms and efinitions

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Accounting CriteriaUnderstanda ility

Rele ance

Consistency

Com ara ility

Relia ility

O ecti ity

Accounting olicies RegulationsIndian Com anies Act

Indian Income Ta Act

S I Regulations

ICAI

FAS

Accounting StandardsUS GAA

Indian GA

IAS

IFRS

Terms and efinitions

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It is a out money, markets and also eo le

It is the life lood of cor orate acti ity

The commercial acti ity of ro iding funds and ca ital

The management of money, in estments and other assets

The science that descri es the management of money, anking, credit,

in estments, and assets

Finance

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Concern the acquisition, financing management of assets ith some

o erall goal in mind

O erational acti ity for udicious selection and use of ca ital

ncom asses to core conce ts of resource management and finance

o erations

Is a ma or de artment and an acti ity that handles financial resources inan organization

A lication of lanning and control functions to the finance function

Financial decision making for harmonizing stakeholders and Firms goals

ffecti e Financial Management is key to cor orate success

Financial Management

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Book-keeping:

Is the recording of all financial transactions undertaken y an indi idualor organization

ookkee ing is the actual recording of the com any's transactions,

ithout any analysis of the information

Accounting:

The rocess of systematically recording, classifying, erifying andsummarizing usiness transactions, and resenting this information in

eriodic

Is the rocess of measuring economic information and communicating it

to the decision-makers and stakeholders in an organization

Accounting information is used y an organizations managers, in estors,

em loyees, and creditorsAccounting statements ro ide financial details concerning the o eration

of a usiness or other form of organization

ook Kee ing and Accounting

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A field of accounting that focuses primarily on reporting a company's

financial information to meet the needs of the company's external users

The process of collecting, summarizing and reporting financial information

of an entity according to established standards and principles

The preparation and presentation of financial reports showing business

cash flow, profit/financial performance and financial position

The objective of financial accounting is to provide the information that is

needed for sound economic decision making

The main purpose of financial accounting is to prepare financial reports

that provide information about a firm's performance to external parties

such as investors, creditors, and tax authorities

The analysis and interpretation of financial statements to help business

owners and managers make informed decisions about their business

Financial accounting is performed according to Generally Accepted

Accounting Principles (GAAP) guidelines

Financial Accounting

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A type of accounting that focuses on recording, defining, and reporting

costs associated with specific operating functions

A managerial accounting activity designed to help managers identify,

measure and control operating costs

Procedures used for rationally classifying, recording, and allocating

current or predicted costs that relate to a certain product or production

The discipline of estimating, tracking and controlling product and service

costs

Process of calculating the costs of production for a manufacturing

business and prepared cost budgets, production planning and reports

The process of identifying and evaluating costs, frequently used as a

managerial accounting activity to facilitate internal decision making

Accurate cost analysis helps provides the basis for make/buy decisions,

market entry and exit, product and process changes, and many other

measures and factors involved in organizational success

Cost Accounting

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Reporting designed to assist management in decision-making, planning,

and control

It is the preparation of financial statements and other data for managers

to support them in the decision-making process

It includes the analysis and manipulation of information summarized in

the accounting systems to help plan and make business decisions

Provides information about particular activities within a business,

including budgets, costing and evaluating business activities

Management accounts are internal documents and simply used for

information purposes within the firm

In contrast with financial accounting, managerial accounting is for

internal decision making and does not have to follow any rules issued by

standard-setting bodies

Management [Managerial] Accounting

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In dra ing u accounting statements hether they are e ternal Financial

Accounts" or internally-focused Management Accounts", a

clear o ecti e has to e that the accounts fairly reflect the true"su stance" of the usiness and the results of its o eration

The theory of accounting has therefore de elo ed the conce t of a True and

Fair View

The true and fair ie is a lied in ensuring and assessing hetheraccounts do indeed ortray accurately the usiness' acti ities

To su ort the a lication of the "true and fair ie ", accounting has

ado ted certain concepts and conventions which hel to ensure that

accounting information is resented accurately and consistently

Accounting Conce ts Con entions

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Four im ortant accounting conce ts under in the re aration of any set of

accounts:

1. Going Concern2. Consistency

3. Prudence

4. Matching or Accruals

1.Going Concern:

Accountants assume, unless there is e idence to the contrary, that a com anyis not going roke

This has im ortant im lications for the aluation of assets and lia ilities

2.Consistency:

Transactions and aluation methods are treated the same way from year to

year, or eriod to eriod Users of accounts can, therefore, make more meaningful com arisons of

financial erformance from year to year

Where accounting olicies are changed, com anies are required to

disclose this fact and e lain the im act of any change

Accounting Conce ts

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3.Prudence:Profits are not recognized until a sale has een com leted

In addition, a cautious iew is taken for future ro lems and costs of the

usiness

Costs losses are " ro ided for" in the accounts" as soon as their is a

reasona le chance that such costs losses will e incurred in the future

4.Matching or Accruals:Income should e ro erly "matched" with the e enses of a gi en

accounting eriod

Accounting Conce ts

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Historical Cost:The most commonly encountered con ention is the Historical cost

convention

This requires transactions to e recorded at the rice ruling at the time,

of transaction and for assets to e alued at their original cost

Under the historical cost con ention no account is taken of changing

rices in the economy

Monetary Measurement:Accountants do not account for items unless they can e quantified in

monetary terms

Items that are not accounted for (unless someone is re ared to aysomething for them) include things like workforce skill, morale, market

leadershi , rand recognition, quality of management etc

Accounting Con entions

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Separate Entity:

This convention seeks to ensure that private transactions and matters relating

to the owners of a business are segregated from transactions that relate to thebusiness

Realization:

With this convention, accounts recognize transactions (and any profits arising

from them) at the point of sale or transfer of legal ownership rather than just

when cash actually changes hands

For example, a company that makes a sale to a customer can recognize that

sale when the transaction is legal - at the point of contract. The actual payment

due from the customer may not arise until several days later if the customer

has been granted some credit terms

Materiality:

An important convention as the preparation of accounts involves a high degreeof judgments

The "materiality" convention suggests that this should only be an issue if the

judgment is "significant" or "material" to a user of the accounts

The concept of "materiality" is an important issue for auditors of financial

accounts

Accounting Con entions

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There is general agreement that, before it can be regarded as useful in

satisfying the needs of various user groups, accounting information should

satisfy the following Key Criteria:

Understandability:This implies the expression, with clarity, of accounting information in such a

way that it will be understandable to users - who are generally assumed to

have a reasonable knowledge of business and economic activities

Relevance:This implies that, to be useful, accounting information must assist a user to

form, confirm or maybe revise a view - usually in the context of making a

decision (e.g. should I invest, should I lend money to this business? Should I

work for this business?)

Consistency:This implies consistent treatment of similar items and application of

accounting policies

Accounting Criteria

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Comparability:

This implies the ability for users to be able to compare similar companies inthe same industry group and to make comparisons of performance over time.

Much of the work that goes into setting accounting standards is based

around the need for comparability

Reliability:

This implies that the accounting information that is presented is truthful,accurate, complete (nothing significant missed out) and capable of being

verified (e.g. by a potential investor)

Objectivity:This implies that accounting information is prepared and reported in a

"neutral" way. In other words, it is not biased towards a particular user groupor vested interest

Accounting Criteria

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Rules and guidelines of accounting

They determine such matters as the measurement of assets, thetiming of revenue recognition and the accrual of expenses

The Ground Rules for financial reporting are referred to as

Generally Accepted Accounting Principles [GAAP]

GAAP consist of four components: the requirements of law;judgments of various courts of law; pronouncements of the

governing body from time to time; and requirements of regulatory

Authority (Example: SEBI)

An accounting principle must have substantial authoritative

support such as promulgation of a Financial Accounting StandardsBoard [FASB] or Institute of Chartered Accountants of India [ICAI]

An example of accounting principle is Materiality Concept

Accounting Princi les

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Accounts which are intended to show a true and fair view must conform to certain

standards issued by the Accounting Standards Board

Conduct to be followed by Accountants as formulated by an authoritative body or by

law [ Example: Institute of Chartered Accountants of India (ICAI), Securities Exchange

Board Of India (SEBI), Indian Companies Act]

In the era of globalization and integration there is a strong need for legislation to bring

about uniformity, rationalization, comparability, transparency and adaptability in

financial statements and this purpose is sought to be achieved thru the stringentnorms for preparation and presentation of financial statements as prescribed by

accounting standards

Authorities and Types of Accounting Standards

US Financial Accounting Standards Board [FASB]: US GAAP

The Institute of Chartered Accountants of India [ICAI]: Indian GAAP

International Accounting Standards Board: [IASB] International Accounting Standards: [IAS]

International Financial Reporting Standards [IFRS]

Accounting Standards

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Accounting standards are necessary to romote high quality financial

re orting

Accounting standards came to e de elo ed from the mid si ties

onwards to romote the integrity of the accounting rofession y way of

ensuring uniformity in the way accountants re ort transactions in their

ooks and also in their re aration of the final accounts of usinesses

Accounting standards is aimed at oosting the confidence ofstakeholders, articularly shareholders and otential in estors in the

accounting rofession

Accounting standards ser e to romote the understanda ility ,

com ara ility, rele ance and relia ility of financial re orts

Accounting standards ring alue to the com any

Role of Accounting Standards

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Ximr Fa1 Intro 2010

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