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Financial Accounting:

A Managerial Perspective

Fourth Edition

Prepared by

R. Narayanaswamy Indian Institute of Management Bangalore

R. Narayanaswamy Indian Institute of Management Bangalore 2 5 J u n e 2 0 1

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Chapter 1 Accounting and Economic Decisions

Chapter 1 Accounting and Economic Decisions 2 5 J u n e 2 0 1 1

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Understanding Business Organizations
Understanding Business Organizations

Merchandising organizations Manufacturing organizations Service organizations Business organizations as cash dispensing machines

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What is Accounting
What is Accounting

Accounting is the language of business Who should know accounting? Why accounting in MBA? The MBA Oath and financial reporting Accounting information and economic decisions

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Users of Accounting Information
Users of Accounting Information

Investors Lenders Analysts Managers Employees and trade unions Suppliers and trade financiers Customers Government and regulatory authorities The public

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Financial Accounting and Management Accounting

Financial Accounting and Management Accounting Financial accounting Management accounting How do they differ? 2 5

Financial accounting Management accounting How do they differ?

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Accounting Measurement Assumptions
Accounting Measurement Assumptions

Reporting entity Going concern

Hi

i

l

stor ca cost

Periodicity Money measurement

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Generally Accepted Accounting Principles and the Accounting Environment, continued

and the Accounting Environment, c o n t i n u e d Institutions that influence

Institutions that influence Indian GAAP

Ministry of Corporate Affairs Securities and Exchange of India Institute of Chartered Accountants of India Income Tax Department Reserve Bank of India Insurance Regulatory and Development Authority

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Generally Accepted Accounting Principles and the Accounting Environment, continued

and the Accounting Environment, c o n t i n u e d Institutions that influence

Institutions that influence Indian

GAAP, continued

Comptroller and Auditor-General of India International Accounting Standards Board International Federation of Accountants International Organization of Securities Commissions

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Generally Accepted Accounting Principles and the Accounting Environment

Accounting Principles and the Accounting Environment Accounting standards and policies Accounting standards

Accounting standards and policies

Accounting standards Accounting standard-setting arrangements Accounting policies

Converging IGAAP with IFRS

IGAAP IFRS Ind AS

Principles or rules?

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Forms of Business Organization
Forms of Business Organization

Sole proprietorship Partnership Limited company

Listed Public Private

Limited liability partnership Legal formalities for a limited company

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The Corporate Organization
The Corporate Organization

Shareholders Board of directors Audit committee Independent directors Chief executive officer Chief financial officer Controller Treasurer

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Accounting, Capital Market and Corporate Governance

Accounting, Capital Market and Corporate Governance Raising capital The lemons principle and the problem of adverse

Raising capital The lemons principle and the problem of adverse selection Signalling quality Moral hazard

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The Accounting Equation
The Accounting Equation

Economic resources = Claims Assets = Liabilities + Equity Assets: “own” Liabilities: “owe” Equity: “residual interest” Analyzing the effect of transactions

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Financial Statements
Financial Statements

Profit and loss account Statement of retained earnings Balance sheet Cash flow statement Interrelationship among the financial statements

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Fields of Accounting Activity
Fields of Accounting Activity

Public accounting

Auditing

Forensic accounting

Tax services

Management advisory services

Bankruptcy

Small business services

Private accounting

Management accounting

Internal auditing

Information systems

Government accounting Not-for-profit accounting

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Accounting as an Academic Discipline
Accounting as an Academic Discipline

Academic research areas in accounting: e.g.

Accounting and stock prices Benefits of disclosure Usefulness of accrual and cash Selection of accounting methods and disclosure levels Predicting future profits from past profits Disclosure and managerial behaviour

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Fraud and Ethical Issues in Accounting
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 Resolving ethical dilemmas

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