Financial Accounting:

A Managerial Perspective
Second Edition

Prepared by
R. Narayanaswamy
Indian Institute of Management Bangalore

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Accounting and Economic
Decisions

Chapter 1

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 Chapter 1
The Aim of the Course
1. Appreciate the information needs of
different categories of users of company
financial reports.
2. Understand the significance of accounting
principles and the systems and processes
involved in preparing and presenting
financial reports.
3. Analyse and interpret financial reports.

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 Chapter 1
The Approach in the Course
1. Understanding the economic basis of accounting
2. Connecting accounting to capital market and
corporate governance
3. Emphasis on principles
4. Student-friendly presentation, easy-to-read style
5. Real-world applications
6. Integrating preparation and use of financial
statements
7. Linking accounting theory, empirical research and
practice
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 Chapter 1
Understanding Business Organisations
 What do business organisations do?
 e.g., Infosys Technologies, BHEL, Zee
Telefilms, Amazon.com
 Types of business organisations
 Merchandising or trading
 Manufacturing
 Service
 Business organisations are “cash
machines”
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 Chapter 1
What is Accounting
 Accounting is the language of business
 Accounting provides information for
making decisions
 Accounting is an information system
 Accounting and economic decisions
 Why should managers and other decision-
makers know accounting?

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The Accounting Information System

Inputs Processing Outputs Users

Business Accounting Financial Investors,

transactions principles statements lenders,
and events and procedures and reports
managers

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 Chapter 1
Users of Accounting Information
 Investors
 Lenders
 Security analysts and advisers
 Managers
 Employees and trade unions
 Suppliers and other trade creditors
 Customers
 Government and regulatory agencies
 The public
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 Chapter 1
Major Branches of Accounting
Financial Accounting Management Accounting
 For external users  For internal users
 Historical information  Future-oriented
 Standardised format  Flexible format
 Laws and conventions  Context-specific
 Summarised  More detailed
 Product cost statement;
 Income statement;
Standard costs; Budgets;
Balance sheet; Cash flow Variances; Performance
statement; Accounting reports
policies

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 Chapter 1
Accounting Measurement
 Accounting records the effect of economic
events
 Internal events
 External events: transactions
 exchange (e.g., purchase of goods)
 one-way transfer (e.g., donations, thefts)
 Other external events
 no exchange or transfer (e.g., floods,
earthquakes)

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 Chapter 1
Assumptions Underlying Accounting
Measurement
 Accounting Entity
 Business is distinct from owner
 Going Concern
 Business is a continuing enterprise
 Periodicity
 Business activities divided into periods
 Money Measurement
 Money is a stable measurement unit

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 Chapter 1

Generally Accepted Accounting

Principles and Accounting Standards
 What is GAAP?
 Importance of GAAP
 Why does accounting practice differ?
 Accounting policies
 Need for accounting standards
 Standard-setting mechanism in India
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 Chapter 1
Institutional Environment
 Institute of Chartered Accountants of India
 Department of Company Affairs
 National Advisory Committee on Accounting
Standards
 Securities and Exchange Board of India
 Central Board of Direct Taxes
 Reserve Bank of India
 Comptroller and Auditor General of India
 International Organisations
 International Accounting Standards Board
 International Organization of Securities Commission
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 Chapter 1
Forms of Business Organisation
 Sole proprietorship
 Single individual
 Partnership
 A few individuals
 Limited company
 Numerous individuals, often strangers
 Large business
 Limited liability
 Legal formalities for a limited company
 The corporate organisation structure

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 Chapter 1

Accounting, Capital Markets, and

Corporate Governance
 The capital market: savers and
entrepreneurs
 The “lemons principle” and market
breakdown
 Signalling and capital market
 Corporate governance
 Accounting disciplines managerial actions

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 Chapter 1
The Accounting Equation

Economic Resources = Claims

Assets = Liabilities + Owners’ Equity

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 Chapter 1

Assets
 Probable future economic benefits
 What a business “owns”
 Examples
 Cash
 Investments
 Buildings
 Plant and machinery
 Patents and copyrights

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 Chapter 1
Liabilities
 Probable future sacrifices of economic
benefits
 What a business “owes”
 Contractual, statutory, or constructive
 Examples
 Loans payable
 Warranty obligations
 Pensions payable
 Income tax payable

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 Chapter 1
Equity
 Residual interest of owners
 Examples
 Share capital
 Share premium
 Revenues
 Expenses
 Dividends
 Retained profit

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 Chapter 1
Financial Statements
 Profit and loss account
 Statement of financial performance
 Balance sheet
 Statement of financial position
 Statement of cash flows
 Statement of cash receipts and cash payments

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 Chapter 1
Fields of Accounting Activity
 Public accounting
 Auditing
 Tax
 Management advisory services
 Small business services
 Private accounting
 Management accounting
 Internal auditing
 Information systems
 Government accounting
 Central
 State
 Local
 Not-for-profit accounting
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 Chapter 1
Ethical Issues in Accounting
 Business and ethics
 Why do people bend the accounting rules
 GAAP is of little help
 Whistleblowing
 Ethical conduct brings success in the long
term

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