1

M. Anil Kumar, Department of Humanities, Social Sciences and Management,National Institute of Technology-Karnataka

2

ACCOUNTING AND FINANCIAL MANAGEMENT

This course is designed to introduce students to the principles, concepts, and applications of financial accounting and management

This course presents the underlying framework and concepts of Financial Accounting in the context of how accounting fits into the overall business environment of contemporary society.

Financial accounting is the basic means of recording and reporting financial information in a business.

You will learn how accounting functions as an information development and communication system that supports economic decision making and provides value to entities and society.

You will discover the uses and limitations of financial statements and related information and apply analytical tools in making both business and financial decisions.

3

In Financial Management students are introduced to concepts and tools that enable them to think critically about the financial opportunities and challenges faced by an organization.

They learn how to use financial statements such as balance sheets, income statements, and statements of cash flow.

They prepare budgets, analyze investment options, and determine the best means offinancing business endeavors.

They discover ways of assessing both the return and the risk involved in a firm's financial decisions.

The focus of this course is on solving practical business problems similar to those encountered in the workplace.

4

5

-Elements of management accounting-I.M. Pandey, Vikas publishing house

-Financial Management-Khan & Jain, TMH Publications

- Financial Management-Prasanna Chandra, TMH Publications

- Financial Management policy- Van Horne James C., Prentice Hall of India

- Management Accounting 4th edition-Anthony & Alkinson, Robert S. Kalpan & S. Mark Young, Ther Robert Kalpan Series in Management Accounting

6

The Need for Accounting

A transaction is any event that affects the financial position of an

organization and requires recording.

7

Introduction• Accounting - a process of identifying, recording,

summarizing, and reporting economic information to decision makers in the form of financial statements

• Financial accounting - focuses on the specific needs of decision makers external to the organization, such as stockholders, suppliers, banks, and government agencies

8

ACCOUNTING

Accounting is the language of business. The affairs and the results of the business are communicated to others through accounting information, which has to be systematically recorded and presented.

9

In 1494, the first book on double entry. The author was an Italian friar, Luca Pacioli. His impact on accounting was so great that five centuries later, accountants from around the world gathered in the Italian village of San Sepulcro to celebrate the anniversary of the book's publication.

10

Identifies

Records

CommunicatesRelevant

Reliable

Comparable

Importance of Accounting

Accountingis a

system that

information

that is

to help users make better decisions.

11

Identifying Business Activities

Recording Business Activities Communicating

Business Activities

Accounting Activities

12

Why Accounting• Informational requirement of a number of stakeholders in the business

– Internal Stakeholder• Owners• Management• Employees

– External Stakeholders• Government/ Tax department• Investors• Banks/Lenders• Suppliers/Creditors• NGOs/ Industry associations• Researchers

• Accounting is the tool for providing financial information to various stakeholders

13

14

Users of Accounting Information

External Users

•Lenders•Shareholders•Governments

•Consumer Groups•External Auditors•Customers

Internal Users

•Managers•Officers•Internal Auditors

•Sales Staff•Budget Officers•Controllers

15

Users of Accounting Information

External Users

Financial accounting provides external users with financial

statements.

Internal Users

Managerial accounting provides information needs for internal

decision makers.

16

17

Business Activities Involving

Accounting• Financing activities provide necessary funds to start

a business and expand it after it begins operating.

• Investing activities provide valuable assets required to run a business.

• Operating activities focus on selling goods and services, but they also consider expenses as important elements of sound financial management.

18

Financial and Management Accounting• The major distinction between financial and

management accounting is the users of the information.– Financial accounting serves external users.– Management accounting serves internal users,

such as top executives, management, and administrators within organizations.

19

Opportunities in Accounting

Financial•Preparation•Analysis•Auditing•Regulatory•Consulting•Planning•Criminal investigation

Managerial•General accounting •Cost accounting•Budgeting•Internal auditing•Consulting•Controller•Treasurer•Strategy

Taxation•Preparation•Planning•Regulatory•Investigations•Consulting•Enforcement•Legal services•Estate plans

Accounting-related

•Lenders•Consultants•Analysts•Traders•Directors•Underwriters•Planners•Appraisers

•CBI investigators•Market researchers•Systems designers•Merger services•Business valuation•Entrepreneurs

20

Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP).

Generally Accepted Accounting Principles

Relevant Information Affects the decision of its users.

Reliable Information Is trusted by users.

Comparable Information

Used in comparisons across years & companies.

21

Business Entity Forms

Sole Proprietorship

Partnership Corporation

22

AssetsLiabilities &

Equity

Accounting Equation

Liabilities EquityAssets = +

23

Land

Equipment

Buildings

Cash

Vehicles

Store Supplies

Notes Receivable

Accounts Receivable

Resources owned or

controlled by a company

Assets

24

Taxes Payable

Wages Payable

Notes Payable

Accounts Payable

Creditors’ claims on

assets

Liabilities

25

Owner’sclaim on

assets

Dividends

Contributed Capital

Retained Earnings

Equity

26

Liabilities EquityAssets = +

Expanded Accounting Equation

Revenues ExpensesCommon

Stock Dividends_ + _

Retained Earnings

Liabilities EquityAssets = +

27

Transaction Analysis

Assets = Liabilities + Equity

Cash Supplies EquipmentAccounts Payable

Notes Payable

Common Stock

(1) 20,000$ 20,000$

20,000$ -$ -$ -$ -$ 20,000$

20,000$ = 20,000$

Manu invests $ 20,000 cash to start the business in return for stock.

28

Transaction Analysis

Purchased supplies paying $1,000 cash.Assets = Liabilities + Equity

Cash Supplies EquipmentAccounts Payable

Notes Payable

Common Stock

(1) 20,000$ 20,000$ (2) (1,000) 1,000$

19,000$ 1,000$ -$ -$ -$ 20,000$

20,000$ = 20,000$

29

Transaction Analysis

Assets = Liabilities + Equity

Cash Supplies EquipmentAccounts Payable

Notes Payable

Common Stock

(1) 20,000$ 20,000$ (2) (1,000) 1,000$ (3) (15,000) 15,000$

4,000$ 1,000$ 15,000$ -$ -$ 20,000$

20,000$ = 20,000$

Purchased equipment for $15,000 cash.

30

Transaction Analysis

Assets = Liabilities + Equity

Cash Supplies EquipmentAccounts Payable

Notes Payable

Common Stock

(1) 20,000$ 20,000$ (2) (1,000) 1,000$ (3) (15,000) 15,000$ (4) 200 1,000 1,200$

4,000$ 1,200$ 16,000$ 1,200$ -$ 20,000$

21,200$ = 21,200$

Purchased Supplies of $200 and Equipment of $1,000 on account.

31

M. Anil Kumar, Contact: 9916028219e-mail: anil.hm13f05@nitk.edu.in