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1XIMR FA1 2010
Financial Accounting [FA] 1:
Introduction
S Krishnamoorthy: [email protected], Cell:9821461488
Introduction
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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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4Introduction XIMR FA1 2010
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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9Introduction XIMR FA1 2010
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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13Introduction XIMR FA1 2010
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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14Introduction XIMR FA1 2010
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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17Introduction XIMR FA1 2010
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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