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DAC 501: FINANCIAL ACCOUNTING

UNIVERSITY OF NAIROBI
SCHOOL OF BUSINESS
COURSE OUTLINE
COURSE
COURSE CODE:

TITLE:
DAC 501

FINANCIAL

ACCOUNTING.

LECTURERS: Mr. Herick Ondigo & Mr. Abdulatiff Essajee


SEMESTER: MAY- AUGUST 2012

COURSE OBJECTIVES:
To introduce students to the role of financial accounting in the economic decision making
process.
To develop a firm understanding of the basic concepts and methods used in the preparation of
financial statements for use by investors and other interested external users.
COURSE EMPHASIS
The emphasis throughout the course is on underlying concepts and on analysis of the problems
that arise in the application of concepts in preparing and communicating business information.
Appropriate attention is given to the use of accounting information as a basis for making
decisions by various interested parties.
REQUIRED TEXTS/READINGS:
No single textbook can be used to adequately cover all the topics to be discussed. Students are
therefore expected to refer to various sources. In addition to the class handouts that will be given
from time to time as a basis for discussion, additional readings will come from among other
sources, the texts listed below.

COURSE TEXT & CASE TEXT


Jan R. Williams, Susan F. Haka, Mark S. Bettner and Robert F. Meigs: Financial and
Managerial Accounting: The Basis for Business Decisions, Mc Graw Hill, Irwin, 13 th Edition,
2004.
COURSE CASE TEXT
Robert N. Anthony, David F. Hawkins, Kenneth. A, Accounting Texts and Cases, Tata
McGraw-Hill Publishing Company Limited, New Delhi, India, 11 th Edition, 2003

METHODOLOGY & EVALUATION


The course will be conducted mainly by way of lectures and class discussions. Students are
advised to read the relevant texts before topics are covered in class. This will enhance their
participation in the class discussions.
Assignments

20%

Tests

30%

Final Examination

50%

Total Mark

100%

TOPICS
1: INTRODUCTION TO ACCOUNTING
The nature and scope of accounting.
The objectives of accounting.
Accounting as an information system.
Users of financial statements and reports and their information needs.
The fields (specializations) of accounting.
Careers in Financial Accounting
2. FINANCIAL STATEMENTSContent & Formats
Statement of (comprehensive) income
Statement of changes in equity
Statement of financial position
Statement of cash flows.
Notes to the Financial Statements
3. ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS.
Objectives of analyzing financial statements and reports.
Standards of comparison.
Techniques of analysis.
Limitations of financial statement analysis.
4. CONCEPTUAL FRAMEWORK

Definition & Need for a conceptual framework


Structure (content) of The Framework
Objectives of financial reporting.
Qualitative characteristics of accounting information.
Elements of financial statements.
Measurement and recognition guidelines.

5.

Accounting assumptions, principles and constraints.

REGULATIONS AND INFLUENCES ON FINANCIAL REPORTING.

The legislation.
Accounting standards
Definition
The need for and objectives of standards.
Advantages and disadvantages of standards
Application of accounting standards
Arguments for and against regulation of the accounting profession.
Security exchange rules.

6.

RECORDING
TRANSACTIONS
ACCOUNTING DATA.

AND

EVENTS

AND

Business transactions and events and source documents


The Accounting Equation (MODEL)
Double entry system of record keeping.
The Accounting Cycle (PROCESS).
Analyzing business transactions and events
Journalizing the transactions and events
Posting to the general ledger
Preparing an unadjusted trial balance.
7. PERIODIC MEASUREMENT AND END OF PERIOD ADJUSTMENTS.

SUMMARISING

Cash versus accrual basis of accounting


End of period adjustments
Apportionment of recorded costs
Apportionment of recorded revenues
Accrual of unrecorded revenues
Accrual of unrecorded costs
Losses in asset values
Receivables
Inventories
Property, Plant & Equipment
8 PREPARATIONS OF FINANCIAL STATEMENTS
Statement of (comprehensive) of income
Statement of changes in equity
Statement of financial position
Statement of cash flows.
9. ETHICS FOR ACCOUNTANTS
The nature of business ethics
The role of ethics in modern business
The role of professional accounting ethics
The role of the accountant as a guardian of business ethics
The IFAC Code of Ethics for Professional Accountants
THE END OF COURSE
BEST OF LUCK IN THE COURSE

TOPIC1:
INTRODUCTION TO ACCOUNTING
Definitions of Accounting
The Accounting Standards Board, ASB (1991) on the other hand has defines accounting as the
provision of information about the financial position, performance and financial adaptability of an
enterprise that is useful to a wide range of potential users in making economic decisions.
Prof N.D Nzomo (1992) defines accounting as the art and science of recording transactions,
processing the recorded transactions into a comprehensible form and communicating the information
to interested parties.
The American Accounting (AAA) Association (1966) defines accounting as the process of
identifying, measuring and communicating economic information to permit informed judgments by
users of information.
Consensus Definition of Accounting
Key Features of Accounting Definition
Accounting as an Information system
Accounting as a social science lends itself easily to its analysis as an information system. It has
the attributes of a system;
It has a basic goal, which is to provide information,
It has clear and well defined elements in the form of people and equipment, and
It has the typical activities of a system, namely; input, process and output.
Accounting as an Information system c0nt
The first boundary is the filtering process by which the accountant selects data.
The second boundary is established by specific information needed of its users.
The output requirements determine the type of data selected as the input.

The output of the system is the financial statements and reports.

The task of the accountant is therefore to transform raw data into information; a form that has
meaning and is able to influence decisions.

DIAGRAMATIC PRESENTATION
Boundary I
INPUT

Boundary II
PROCESSES

OUTPUT

USER

Users of Accounting Information


Specific Users of Accounting information
1.
Investors (both existing stockholders and potential investors) need information concerning the
safety and profitability of their investment.
Profitability and financial soundness would, therefore, be matters of prime importance to them
Specific Users of Accounting information cont..
2.

Creditors (Lenders, suppliers)


They need information about the profitability and stability of the company to decide whether to
lend money to the company and, if so, what interest rate(s) to charge.
They are interested in information that enables them to determine whether the amounts owing to
them will be paid when due.
They will be concerned about the liquid assets of an enterprise relative to the amount of liability
falling due in the near future, and about the owners investment relative to outside funding.
To the lenders, suppliers and other creditors, owners investment serves as a protecting buffer
between lenders, suppliers and other creditors and any losses which may befall the enterprise.
Specific Users of Accounting information cont..

3. Employees and their representatives.


Employees and their representative groups are interested about the profitability and stability of
their employers.
They are also interested in information which enables them to assess the ability of enterprises to
provide remuneration, retirement benefits and employment opportunities.
Specific Users of Accounting information cont..
4.

Management.
Management requires accounting information to assist them in discharging their managerial
function.
The management process may be analyzed into three major functions planning, organizing and
controlling the activities of the enterprise.
These various management functions have one thing in common: they are all concerned with
making decisions.
Specific Users of Accounting information cont..

5. Governments and their agencies.


Governments and other regulatory agencies are interested in the allocation of resources and
therefore the activities of enterprises.
They also require information in order to regulate the activities of enterprises, determine taxation
policies and as a basis for national income and similar statistics.
These will include employment, provision of goods and services and the contribution of
enterprises to socio economic development.
Specific Users of Accounting information cont..
6.

Customers.
Customers have an interest in information of an enterprise indicating the continuance of an
enterprise especially when they have a long-term involvement with, or are dependent on the
entity.

Customers would also be concerned about the fairness of pricing policies, differential costs
between one product and another produced by the same firm at a different price.

Specific Users of Accounting information cont..


7.

Competitors.
Enterprises compare their performance with those of other enterprises.
They assess their position against their competitors.
Financial statements enable them to know profit margins, value of assets, and resource
utilization among other items of their competitors.
Specific Users of Accounting information cont..

8.

Public.
The general public requires information on the activities of enterprises in light of social benefits
and costs that accrue to the community.

9.

Others
Academicians, Researchers, New Investors (entrepreneurs), Financial Analysts etc ..
To obtain input data for analysis and decision making

Specializations of Accounting
To meet the varied needs of users of accounting information accounting has developed
specializations and sub-specializations.


These include the following specialized fields each with its own area of expertise, responsibility
as well as educational requirements;

1.Financial Accounting. 6. Human Resources Accounting


2.Managerial Accounting.

7. Social Accounting

3.Tax Accounting.

8. Environmental Accounting

4. Fund Accounting

9. Forensic Accounting

5. Auditing

10.Behavoiral Accounting

Two requirements that are shared by all these fields are a sound mathematical background and an
understanding of business and economic environment.

Specializations of Accounting cont


1. Financial accounting focuses on the development and communication of financial information
for external users.
This is the process of recording the financial activities of a business and reporting summarized
information to individuals or groups who are not involved in the day-to day operations of an
organization.

These individuals or groups include the owner(s), creditors, governmental agencies, or


prospective investors. The information is communicated primarily through general purpose
financial statements.

Financial statements describe the condition of the organization and the events that happened
during a period. Since the outside parties do not have direct access to business records, and must
rely on the authenticity of reports, there have been some standard practices established to be
followed by all accounting entities reporting to the outside parties
Specializations of Accounting cont
2. Management accounting is concerned primarily with financial reporting for internal users,
especially management.
Management accounting is concerned with the provisions and use of accounting information to
managers within an organizations, to provide them with the basis to make informed business
decisions that will allow them to be better equipped in their management and control functions.
Financial Vs. Management Accounting
In contrast to Financial Accounting information, Management Accounting information is:

usually confidential and used by management, instead of publicly reported;


forward-looking, instead of historical;
Pragmatically computed using extensive management information system and internal controls,
instead of complying with accounting standards.
Specializations of accounting cont
3.

Tax Accounting
This specialization deals with the process of establishing tax liability of an accounting entity,
preparing and submitting tax returns, reviewing returns with income tax auditors and planning for
the minimization of tax liabilities and payments.

A tax accountant is simply an individual who assists a taxpayer in preparing a tax return
(Hussey, 1999).

For businesses, the accounting system must also provide data for use in the completion of the
company's tax returns. This function is the concern of the tax accountant
Specializations of accounting cont
4.

Auditing
Auditing is process of thoroughly examining the financial records of an enterprise and the facts
on which they are based.
After an adequate investigation, the external auditor will give a statement of opinion as to
whether the accounting statements or reports reflect a true and fair view of the results of
operations, financial position and financial adaptability of an accounting entity. It extends to
ascertain that the business entity maintains and keeps proper books of accounts.
Internal auditors are employee of management who constantly check the records prepared in, and
the operating procedures of, each department or branch of the corporation and make
recommendations for improvements.
Specializations of Accounting cont

5.

Fund Accounting.
This specialization deals with accounting for non-profit making organizations.
These organizations include charitable organizations, philanthropic foundations, religious groups,
governmental agencies and schools.
The organizations set up different funds for their various activities. Each fund consists of assets,
liabilities, and a fund balance and constitutes a separate accounting entity created and maintained
for a specific purpose.
The inflow and outflow of each fund must be accounted for in such a way that they can be
compared with the approved or stipulated resource flows for the fund.
Specializations of Accounting cont

6.

Human Resources Accounting


"Human Capital/Resource" this is an accounting practice that treats people as machines with a
monetary value (e.g. dollar) attached to them as individuals, and not to their labor.
They involve accounting methods that recognizes a variety of human resources and shows them
on a company's financial statements.
Under human resource accounting, a value is placed on people based on such factors as
experience, education, and psychological traits, and, most importantly, future earning power
(benefit) to the company.
The idea has been well received by human-resource-oriented firms, such as those engaged in
accounting, law, and consulting. Practical application is limited, however, primarily because of
difficulty and the lack of uniform, consistent methods of quantifying the values of human
resources.
Specializations of Accounting cont

7.

Social Accounting
This is the process of communicating the social and environmental effects of organizations
economic actions to particular interest groups within society and to society at large.
Social accounting emphasizes the notion of corporate accountability.
It is "an approach to reporting a firms activities which stresses the need for the identification of
socially relevant behavior, the determination of those to whom the company is accountable for its
social performance and the development of appropriate measures and reporting techniques."
Specializations of Accounting cont

8.

Environmental/Green Accounting
Environmental accounting is a subset of social accounting, focuses on the cost structure and
environmental performance of a company.
It principally describes the preparation, presentation, and communication of information related
to an organizations interaction with the natural environment.
Although environmental accounting is most commonly undertaken as voluntary self-reporting by
companies, third-party reports by government agencies, NGOs and other bodies posit to pressure
for environmental accountability
Specializations of Accounting cont

9.

Forensic Accounting
The forensic Accountant is usually hired in:
Engagements relating to civil disputes may fall into several categories: calculating and
quantifying losses and economic damages, whether suffered through tort or breach of contract;
disagreements relating to company acquisitionsperhaps earn outs or breaches of warranties;
and business valuation.

Forensic accountants often assist in professional negligence claims where they are assessing and
commenting on the work of other
Forensic Accounting cont
Forensic accountants utilize an understanding of business information and financial reporting
systems, accounting and auditing standards and procedures, evidence gathering and investigative
techniques, and litigation processes and procedures to perform their work.
Forensic accountants are also increasingly playing more proactive risk reduction roles by
designing and performing extended procedures as part of the statutory audit, acting as advisers to
audit committees, fraud deterrence engagements, and assisting in investment analyst research.
Specializations of Accounting cont
10. Behavioural Accounting
This is an approach to accounting that stresses psychological considerations in decision making;
For example, a budget should be participative so departmental managers who are
involved with it will internalize the goals. Also profit centres engage a manager's ego
because the financial results of the entity are a direct reflection of the manager's
performance.
It rests on the theory that the management accounting function is essentially behavioural.
Theory states that the nature and scope of accounting systems is materially influenced by the
view of human behaviour that is held by the accountants who design and operate these systems.
Budgeting is a simple application of behavioural accounting.
THE END
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