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Financial Accounting for Managers

Trimester 1 - MBA
Christ University Institute of Management
INTRODUCTION TO ACCOUNTING
Units 1 & 2
LEARNING OBJECTIVES
Understanding the business organisations
Role of accounting in making economic and business decisions
Uses of accounting information
Assumptions underlying accounting measurement & their
significance
Common forms of business organisation
Role of accounting in capital markets and corporate governance
Accounting equation and effects of transactions on the equation
Four major financial statements and their inter-relationship
Importance of ethics in accounting
2 Source: Financial Accounting a Managerial Perspective-4
th
edition, Prof. R Narayanaswamy
What is Accounting
Accounting is the language of business
Who should know accounting?
Accounting information and economic decisions

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UNDERSTANDING BUSINESS
ORGANISATIONS
Business organizations provide products and services. They can
be either
Merchandising organizations
Manufacturing organizations
Service organizations
Business organizations perform complex operationsbut
ultimately they are Cash dispensing machines



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BUSINESS ORGANISATIONS
COMPANY / ORG. NAME
Amazon.com
Apollo Hospitals
Apple Computers
Bharti Airtel
Boeing
Deloitte
Hindustan Unilever
Infosys
L & T
ONGC
Tata Motors
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BUSINESS ORGANISATIONS
COMPANY / ORG. NAME PRODUCTS / SERVICES
Amazon.com Internet retail in products
Apollo Hospitals Healthcare
Apple Computers Computing, communications and entertainment
Bharti Airtel Telecom
Boeing Civilian and military aircraft
Deloitte Accounting, auditing and business advice
Hindustan Unilever Toothpaste, soaps and detergents
Infosys Software products and services
L & T Designing and building roads and flyovers
ONGC Exploring and extracting petroleum
Tata Motors Passenger cars and commercial vehicles
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Accounting information system
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INPUTS
Business transactions
External events (e.g. fire,
earthquake, changes in tax laws
etc.)
PROCESSING
Accounting principles
Accounting standards
Management estimates
Law and regulations
Transaction processing
conventions
Accounting records
OUTPUTS
Income statement
Balance sheet + Expl. Notes
Cash flow statement
Management commentary
Special reports and analysis
Tax & regulatory filings
USERS
Shareholders, Bankers,
Employees, Suppliers,
Customers
Govt., Regulators
Security analysts, Rating
agencies, Media (TV channels
& Newspapers

ACCOUNTING
PRINCIPLES
Historical cost
Accrual
Matching
Disclosure
ACCOUNTING
ASSUMPTIONS
Accounting
entity
Going concern
Periodicity
Money
measurement
ACCOUNTING
CONSTRAINTS
Estimates &
Judgments
Materiality
Consistency
Conservatism
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Accounting is governed by
Accounting
Standards &
Policies:
e.g. Indian
GAAP, US
GAAP, IAS,
IFRS
Forms of Business Organisation
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BUSINESS
ORGANISATIONS
Unlimited
liability
Sole
Proprietorship
Partnership
Limited
liability
LLP

Company
Private
limited
Public limited
Listed Unlisted
ACCOUNTING, CAPITAL MARKET &
CORPORATE GOVERNANCE
Signaling quality of accountants / managers has an impact on
the performance of a stock in the capital market. They include

Paying higher dividends
Giving credible guarantees of higher returns
Appointing a reputed accounting firm to audit its financial
statements
Having eminent outsiders as independent directors on the
companys broad of directors
Conforming to superior standards of of accounting and disclosure
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Fraud and Ethical issues in Accounting
What leads to fraud and unethical accounting?
Fraud-hit companies: e.g.
Satyam
Enron
World Com
The Satyam case

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Satyam Case
On January 07, 2009, the then CMD of Satyam Computers stunned the world by
disclosing that he had manipulated the companys financial statements for
several quarters. The total size of the manipulation was Rs. 70 bn. As an example,
in the quarter ended Sep 30, 2008. Satyam reported a revenue of Rs 27 bn and
and operating margin of Rs 6.5 bn (24 per cent of revenue), as against the actual
revenue of Rs 21 bn and an operating margin of Rs0.61 bn (3 per cent of revenue).
This resulted in reporting fictitious cash of nearly Rs 6 bn in that quarter alone.
Significantly, the company was listed in the NYSE (besides India) and audited by a
member of big four accounting firms and had an impressive-looking board of
directors its independent directors were eminent individuals with long
experience in Govt., ( a retired cabinet secretary), industry ( the investor of the
Pentium chip), and academics (a professor of accounting at a top US business
school, dean of leading business school in India, and a retired director of a top
engineering school in India). CMD stated, it was like riding a tiger, not knowing
how to get off without being eaten. This is the key point about any accounting
fraud. It is easy to start a fraud but impossible to exit without being caught. A fraud
often unravels in the wake of an industry downturn, a family dispute, a
disgruntled employee blowing the whistle, or a problem with the political
establishment. At the time of writing, the Satyam trial is on.
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Financial Frauds broad three reasons
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Pressure
Opportunity
Rationalization
Financial Statements
Income Statement / Profit and Loss statement /
Profit and Loss Account
Statement of Retained Earnings
Balance Sheet
Cash Flow Statement
Identify the components in the financial
statements using Annual reports
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THE ACCOUNTING EQUATION
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ASSETS
(Economic resources)
Resource which is / are
1. Controlled by the entity
2. Expected to provide future
economic benefits

LIABILITIES
(Claims others)
Requires payment of cash to
outsiders

OWNERS EQUITY
(Claims owners)
Residual interest in the assets of
the entity after deducting all
liabilities.

Classify the following into Asset, Liability & Owners Equity
Name of the account Asset Liability OE
Cash
Capital brought in by the owner initially
Furniture
Loan taken
Bank
Purchases or Supplies
Suppliers account / Creditor (normally
associated with a name)
Customers account / Debtor (normally
associated with a name)
Sales / Revenue
Insurance premium
Rent
Salary
Commission
Drawings
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Classify the following into Asset, Liability & Owners Equity
Name of the account Asset Liability OE
Cash
Capital brought in by the owner initially
Furniture
Loan taken
Bank
Purchases or Supplies
Suppliers account / Creditor (normally
associated with a name)

Customers account / Debtor (normally
associated with a name)

Sales / Revenue
Insurance premium
Rent
Salary
Commission
Drawings
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THE ACCOUNTING EQUATION
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ASSETS
(Economic resources)
Resource which is / are
1. Controlled by the entity
2. Expected to provide future
economic benefits
E.g.
a. Physical assets like Land,
Buildings, Plant & Equipment,
Inventory etc.
b. Intangible assets like
Receivables, Investments,
Legally enforceable claims on
others
Should result into Cash at some
point in time in future
LIABILITIES
(Claims others)
Requires payment of cash to
outsiders
E.g.
Payables, Salaries, Loans repayable,
Expenses payables etc.
OWNERS EQUITY
(Claims owners)
Residual interest in the assets of
the entity after deducting all
liabilities.
Owners Equity = [Share capital +
Income Expenses Drawings
Dividends]
EFFECTS OF TRANSACTIONS
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ASSETS
(Economic resources)
LIABILITIES & OE
(Claims Owners & others)
1 + +
4 No effect + & - (Net impact Nil)
2 + & - (Net impact Nil) No effect
3 - -
Difference between Financial & Management
accounting
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Financial Accounting Management Accounting
Users of Info. Primarily External Internal
Regulations Compliant to Accounting
Standards and local statutes &
GAAP
Voluntary
Data source &
Information
i. Financial transaction based
accounting system
ii. Highly summarized form
I. Financial & Non-Financial
transactions from accounting,
non- accounting, market,
Industry etc.
II. Information is very detailed
Nature of Info. Historic, Objective, Auditable,
Not timely, Not always relevant,
Highly aggregated
Historic & Current, Future
Oriented, Subjective, Relevant,
Timely, Supplied at various level
of details to suit managers
specific needs
End of Units 1 and 2
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Numericals
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